CUADERNO DE DOCUMENTACION

MINISTERIO DE ECONOMIacuteA Y HACIENDA

SECRETARIA DE ESTADO DE ECONOMIacuteA

SECRETARIacuteA GENERAL DE POLIacuteTICA ECONOacuteMICAY ECONOMIacuteA INTERNACIONAL SUBDIRECCIOacuteN GENERAL DE ECONOMIacuteA INTERNACIONAL

Nuacutemero 90ordm ANEXO III

Alvaro Espina Vocal Asesor

1 de Marzo de 2010

BACKGROUND PAPERS 1 Too Little of a Good Thing The New York Times by Paul Krugmanhellip11 2 Growth And jobs the lesson of the Clinton years The Conscience of a

Liberal hellip12 3 If a deficit falls in the forest The Conscience of a Liberal hellip 13 4 Supply-side ideas turned upside down The New York Times by Gregory

Markiwhellip14 5 Can Citigroup carry its own weight The New York Times by Andrew

Martin and Gretchen Morgensonhellip16 6 Depression diary when the banks went dark by Benjamin Rothhellip22 7 Vienna Initiative Western European Banks pledge continued support to

eastern European subsidiaries in hardest hit countries RGE Monitorhellip25 8 Game over for Blair Eurointelligencehellip27 9 US economy returned to positive growth in Q3 2009 as policy measures

boosted private demand RGE Monitorhellip29 10 Regulatory reform in the US assessing the draft law on systemically

important institutions RGE Monitorhellip33 11 Contingent debt-to-equity swaps against too-big-to fail a viable tool

RGE Monitorhellip35 12 Raise interest rates to increase lending Financial Times by FThellip37 13 Norwayrsquos Central Bank first to raise interest rates in Europe Bank

signals steeper rate path RGE Monitorhellip34 14 El siglo maacutes largo El Paiacutes por Joaquiacuten Estefaniacuteahellip42 15 Banesto pone a la venta 1200 viviendas con rebajas del 40 El Paiacutes-

EFEhellip45 16 Bruselas exige a Espantildea que suprima las ayudas fiscales a las fusiones El

Paiacutes por Andreacute Misseacutehellip45 17 El Santander afirma que Espantildea es la mayor amenaza para su negocio

El Paiacuteshellip46 18 Los impagos en el alquiler suben un 12 entre enero y junio El Paiacutes

Agenciashellip48 19 Nouriel Roubini RGE Monitorhellip49 20 Noticias de Espantildea y el mundo Para salir de la encrucijada econoacutemica

ABC por Joseacute Manuel Gonzaacutelez-Paacuteramohellip51

21 Having done such a great job at the eurogroup Juncker now recommends himself as EU president Eurointelligence hellip54

22 The proposed European systemic risk board is overweight central bankers Financial Timeshellip56

23 Too big to fail is too dumb an idea to keep FTcom by John Kayhellip62 24 Economy is kick-started but can it motor ahead The Washington Post

by Neil Irwinhellip64 25 Fears of a New Chill in home sales The New York Times by David

Streitfeldhellip66 26 Bill seeks to shift rescue costs to big banks The New York Times by

Stephen Labaton hellip68 27 ING to be broken up in wake of bail-out FTcom by Michael Steenhellip70 28 Reserve accumulation and easy money helped to cause the subprime

crisis A conjecture in search of a theory Vox by Guillermo Calvo 72 29 Paulson says crisis sown by imbalance FTcom by Krishna Guhahellip76 30 Causes Hank Paulson The Baseline Scenariohellip76 31 Causes Too much debt The Baseline Scenariohellip78 32 Schaumluble at finance and a euro25bn rise in the structural deficit ndashan

interesting start for Germanyrsquos centre-right coalition Eurointelligencehellip79

33 A polite discourse on bankers and bubbles FTcom by Wolfgang Muumlnchauhellip81

34 Do not ignore the need for financial reform FTcom by George Soroshellip82 35 After reform passes The New York Times by Paul Krugmanhellip84 36 A cornucopia of numbers to pick through The Washington Posthellip87 37 Chamber of commerce criticizes Obama team The Washington Post by

Michael D Shearhellip92 38 US considers reining in Too big to fail institutions The New York Times

by Stephen Labatonhellip90 39 If lenders say the dog ate your mortgage The New York Times by

Gretchen Morgensonhellip91 40 The state of financial reform The New York Times hellip96 41 La transicioacuten inmobiliaria en Espantildea El Paiacutes por Joseacute A Herce y Pep

Ruizhellip99 42 La generacioacuten Peter Pan estaacute hipotecada El Paiacutes por Josep Garrigahellip102

43 Cinco erres para mover la economiacutea El Paiacutes por Antoacuten Costashellip1066 44 Stock options y despido improcedente El Paiacutes por Joseacute Mariacutea

Lastrashellip108 45 Un rebote que da que pensar El Paiacutes por David Fernaacutendezhellip109 46 El riesgo es que el creacutedito vuelva a descontrolarse El Paiacutes por Alicia

Gonzaacutelezhellip114 47 El Ibex se desmarca del PIB El Paiacutes por David Fernaacutendezhellip116 48 Perspectivas econoacutemicas El Paiacutes por Miguel Boyer Salvadorhellip120 49 Wall Street on the lam The Washington Post by Eugene Robinsonhellip121 50 The Chinese Disconnect The New York Times by Paul Krugmanhellip123 51 Adjustment and the dollar The Conscience of a Liberalhellip124 52 Whatrsquos in a namehellip126 53 Is Japan on the fiscal brinkhellip127 54 Financial Regulation and supervision after the crisis the role of the

Federal Reserve Board of Governos of the Federal Reserve System by Chairman Ben S Bernankehellip128

55 Gloves are coming off in the fight to stop Blair Eurointelligence hellip136 56 Swedish bansk could they get burned by heavy Baltic exposure RGE

Monitorhellip138 57 ECB warns Brussels on hedge fund rules FTcom by Ralph Atkinshellip140 58 Rally fuelled by cheap money brings a sense of foreboding FTcom by

Gillian Tetthellip141 59 John Meriwether is back risk must be too Naked capitalism by John

Meriwtherhellip143 60 Government at a Glance 2009hellip145 61 Fed announces measures to regulate financial sector compensation RGE

Monitorhellip152 62 EM forex will the rally continue RGE Monitorhellip156 63 Whorsquos looking at the Fedrsquos books The New York Times hellip158 64 High-frequency trading and dark liquidity pools in equity markets SEC

pushes for transparency RGE Monitorhellip159 65 Will Germany finance tax cuts through off-balance sheet vehicles RGE

Monitorhellip162

66 John Mack consejero delegado de Morgan Stanley cuenta como se salvoacute el banco Universia Knowledge Whartonhellip165

67 Las sentildeales de recuperacioacuten traen una pregunta iquestes el momento de subir tipos Universia Knowledge Whartonhellip169

68 Zara reta a su modelo de negocio en el canal online Universia Knowledge Whartonhellip173

69 El impacto de las transacciones de alta frecuencia iquestmanipulacioacuten distorsioacuten o un mercado maacutes eficiente Universia Knowledge Whartonhellip177

70 US to cut pay for bailed-out bosses The Washington Post by Tomoeh Murakami Tse and Brady Dennishellip182

71 Pelosi explores for more economic fuel The Washington Post by Loru Montgomeryhellip184

72 A speech stuck on ldquorepeatrdquo The Washington Post by Dana Milbankhellip186 73 euro150 again Eurointelligence Carlo lbertohellip188 74 The growing case for a jobless recovery Economic research and datahellip190 75 Top China banker warns on asset bubbles FTcom by Geoff Dyer hellip191 76 Finance ministers concerned about the eurorsquos strength Eurointelligence

hellip192 77 Mervyn King calls for banks to split as public finances take record hit

Times Onlinehellip194 78 Demand for ECB liquidity at six-year low FTcom by Ralph Atkins hellip196 79 Brussels to clamp down on derivatives market Euractivhellip197 80 Easterns Europe Out of the Danger Zone RGE Monitor by Mary Stoker

and Jelena Vukotichellip199 81 Volkerrsquos voice fails to sell a Bank Strategy The New York Times by Louis

Uchitellehellip201 82 Rising debt a threat to Japanese economy The New York Times by Hiroko

Tabuchihellip204 83 Will the Brazilian Real Continue to appreciate despite the tax on capital

inflows RGE Monitorhellip207 84 Holding off disaster the race to save Lehman The New York Times by

Andrew Ross Sorkinhellip210 85 FDP seems to prevail in coalition negotiations Eurointelligence hellip215 86 Europe securities defaults set to depen FTcom by Jennifer Hugheshellip216

87 Thin line separates insider trading and research The New York Times by Alex Berensonhellip218

88 Asia Said to be leading the Globe out of crisis The New York Times by Edmund L Andrewshellip220

89 Asia and the global financial crisis Board of Governors of the Federal Reserve System by Chairman Ben S Bernankehellip221

90 Why the euro is not the next global currency FTcom by Jean Pisani-Ferry and Adam Posenhellip233

91 The banks are not alright The New York Times by Paul Krugmanhellip235 92 Ahip Ahip hooray The Conscience of a Liberalhellip236 93 In Dollarrsquos fall upside for US exports The New York Times by Nelson D

Schwartzhellip238 94 Global recession raises unemployment around the world RGE

Monitorhellip241 95 Fight over Klaus says he cannot stop Lisbon Treaty Eurointelligence

hellip246 96 Central banks fuel risky assets FTcom by Michael Mackenziehellip248 97 Ralph Atkins eurozone exports tumble sharply FTcom by Ralph

Atkinshellip250 98 Wolfgang Muumlnchau FTcomhellip251 99 A Lifeline not made in the USA The New York Times by Micheline

Maynardhellip253 100 Who is afraid of the global rebalancing RGE Monitor by Aurelio

Maccariohellip253 101 Time for the ECB to get serious about the overvalued euro Financial

Times hellip259 102 Todo el dinero para el alquiler El Paiacutes porLuis Doncel hellip267 103 Siacute a la filosofiacutea del texto no a la letra El Paiacuteshellip268 104 Un periacuteodo transitorio El Paiacuteshellip268 105 La liga de salida El Paiacutes por Joseacute A Herce y Alvaro Lissoacutenhellip269 106 A vueltas con la deflacioacuten El Paiacutes por Angel Labordahellip270 107 El matemaacutetico que agitoacute la Bolsa El Paiacutes por David Fernaacutendezhellip271 108 Record-High deacuteficit may dash big plans The Washington Post by Lori

Montgomery and Neil Irwinhellip273

109 Bailout helps fuel a new era of Wall Street Wealth The New York Times by Graham Bowleyhellip276

110 Renminbi Politics US starting to toughen on RMB RGE Monitorhellip279

111 TIC Data and the US current account deficit still buying treasuries but at a slowe pace RGE Monitorhellip282

112 De beta a alfa El Paiacutes por David Fernaacutendezhellip284 113 Sarkozy says Klaus must sign or else Eurointelligence hellip285 114 The winnerrsquos curse Eurointelligence by Jean-Pisani Ferryhellip287 115 Google da por finalizada la recesioacuten y vuelve a elevar sus ingresos

Cinco Diacuteashellip289 116 Is There too mucho r too Little liquidity a contrarian view RGE

Monitorhellip291 117 OTC Derivatives regulation house financial services committee votes

on draft bill RGE Monitorhellip293 118 A Hatchet job so bad Itrsquos good The New York Times by Paul

Krugmanhellip294 119 Smart guys and Wall Street The Conscience of a Liberalhellip296 120 Title The global economy One Asia by Paul Krugmanhellip297 121 Whatever happened to imbalances FTcom by Samuel Brittanhellip300 122 Un Mercado de la vivienda que no funciona El Mundohellip302 123 Los institutos econoacutemicos considerar superado el bache de la crisis

mundial Cinco Diacuteashellip305 124 Espantildea uacutenico paiacutes del euro con PIB negativo en 2010 seguacuten los sabios

alemaneshellip306 125 US Banks Q3 earnings strong trading weak banking results among

large Banks RGE Monitorhellip308 126 Renminbi politics US starting to toughen on RMB RGE

Monitorhellip310 127 Bailed-Out banks raking in big profits The Washington Post by

Binyamin Appelbaumhellip312 128 Lobbyists mass to try to shape financial reform The New York Times

by Stephen Labatonhellip314 129 Dancing again Eurointelligencehellip316

130 Eurozone rising like a phoenix from the ashes Ftcom by Miles Johnsonhellip318

131 Fitch contradice a Moodyrsquos y avala la Buena salud de la banca espantildeola A Bolantildeoshellip319

132 Fitch la gran banca espantildeola mantendraacute buenos resultados pese a los retos Cinco Diacuteas hellip321

133 Avec le Creacutedit Agricole toutes les banques franccedilaises sont en passe de se deacutefaire des aides de lrsquoEtat Les Echoshellip322

134 How healthy are Spanish Bankshellip324 135 Wall Street smarts The New York Times by Calvin Trillinhellip326 136 Global central banks are diversifying Eurointelligencehellip328 137 Stop ou encore Les Echoshellip330 138 Nouvelle monnaie de reacuteserve mondiale proposition chioise Les Echos

hellip331 139 The rumours of the dollarrsquos death are much exaggerated FTcom by

Martin Wolfhellip332 140 Sterling falls on weak inflation data FTcom by Neil Dennishellip330 141 Posturing Klaus FTcomhellip336 142 Moodyrsquos avisa de que la banca espantildeola oculta el deterioro de sus

activos El Paiacutes por C Peacuterezhellip337 143 Moodyrsquos still negative on Spanish Banks Financial Times by Stacy

Marie Ishmaelhellip339 144 Inversores extranjeros toman el 90 de los bonos corporativos

espantildeoles Cinco Diacuteas by Tania Juaneshellip344 145 Global macroeconomic imbalances G20 leaders must back up their

rhetoric with deeds Financial Times by Eswar Prasadhellip346 146 The Bank lending channel Economistrsquos viewhellip348 147 Disgruntled consumers organize a run on a Dutch bank and win

Eurointelligencehellip350 148 La debacle du dollar serait un desastre pour la planegravete Le

Mondehellip352 149 Who speaks for Europe in the G-whatever Financial Timeshellip349 150 BBC world financial crisis not over the real economy still looks very

weak BBC by Michelle Fleuryhellip355

151 Who needs big banks What happened to the global economy and what we can do about it The Baseline Scenario by James Kwak hellip356

152 Thoughts on the economy problems and solutions MISHrsquos by Michal Shedlockhellip360

153 Klaus wants opt-out from charter of fundamental rights Eurointelligencehellip364

154 Making the case for a weaker dollar FTcom by Wolgang Muumlnchauhellip366

155 Will stimulating nacional aggregate demand solve our problems Economist Viewhellip370

156 Skyhooks versus cranes the nobel prize for Elinor Ostrom Charter Citieshellip370

157 A second great depression is still possible Financial Times by Thomas Palleyhellip371

158 Rosenberg sees low to no growth as Kantor Vows vigorous economy Bloomberg Com by Michael Mckee 373

159 Misguided monetary mentalities The New York Times by Paul Krugmanhellip376

160 Seoul feud The Conscience of a Liberalhellip377 161 Glenn Rudebush vs John Taylor on the right value for the Right

value for the interest ratehellip383 162 The Fedrsquos monetary policy response to the current crisis Federal

Reserve Bank of San Francisco by Glenn D Rudebuschhellip384 163 Asset bubbles and economic activity Derivative Dribble Charles

Davihellip388 164 Global imbalances and the financial crisis products of common

causes Economist Viewhellip390 165 New way to tap gas may expand global supllies The New York Times

by Clifford Krausshellip393 166 Tort reform could save euro54 billion CBO says The Washington Post by

Lori Montgomeryhellip395 167 Crisis leaves Europe in slow lane The New York Times by Nelson D

Schwartzhellip396 168 Exit strategies for the Fed testing reverse repurchases RGE

Monitorhellip399

169 World economic forumrsquos 2009 financial development report UK comes first RGE Monitorhellip401

170 Sell for research renegades becomes business off Wall Street Bloombergcom by Edward Robinsonhellip402

171 Fed is split over timing of rate rise The New York Times by Edmund L Andrewshellip410

172 US mortgage backer may need bailout experts say The New York Times by David Streitfeld and Louise Storyhellip412

173 Housing chief rebuts warning of FHA bailout The Washington Post by Dina Elboghdadyhellip415

174 The uneducated American The New York Times by Paul Krugmanhellip417

175 ECG Benchmark rate left at 1 RGE Monitorhellip419 176 The Federal Reserversquos balance sheet an update Board of Governos of

the Federal Reserve Systemhellip431 177 A new season starts in the Berlusconi soap opera

Eurointelligencehellip432 178 Wasting a crisis Eurointelligence by Richard Porteshellip434 179 US regulators probe mainframes market Ftcom by Richard

Watershellip438 180 WWIIrsquos unclaimed treasure The Washington Post by David Chohellip439 181 How can congress fix the OTC derivatives market RGE Monitorhellip441 182 Will unsecured bank creditors take a haircut eventually Or secured

ones RGE Monitorhellip443 183 What do german factory orders suggest about the strength of the

recovery RGE Monitorhellip444 184 Q and A Joseph Stiglitz sees welcome change at the IMF The Wall

Street Journalhellip446 185 Obama under fire over falling dollar FTcom by Edward Luce and

Krishna Guhahellip448 186 Stocks and gold gain as investors shun the dollar The New Yokr Times

by Jack Healy and Keith Bradherhellip450 187 Paralysis in the debt markets is deepening the credit drought The

New York Times by Jenny Andersonhellip452 188 Still chasing shadows The Conscience of a Liberal by Paul

Krugmanhellip455

189 RGE Monitorrsquos Newsletter hellip456 190 Ask Paul Krugman Questions about the economy The Conscience of a

Liberal by The New York timeshellip459 191 How the fed can avoid the next bubble RGE Monitor by Nouriel

Roubini and Ian Bremmerhellip469 192 Ganging up on the dollar Could oil exporters move away from dollar

pricing RGE Monitorhellip470 193 How healthy are Spanish banks RGE Monitorhellip472 194 John Hempton on the (hidden) Losses of Spanish Bansk Alpha

Sourceshellip474 195 Are the Spanish banks hiding their losses Looking at the American

data Bronte Capital hellip476 196 The perfect storm in the Spanish banking teacup

clausvistesensquarespacecom by Edward Hughhellip484 197 Are Spanihs banks hiding their losses FTcom by Izabella

Kaminskahellip485 198 Toward a wider wireless world The Washington Post by Cecilia

Kanshellip490 199 Regulation doubts over political resolve for reform FTcom by Norma

Cohemhellip491 200 The Coming energy revolution BusinessWeek by Rachael Kinghellip493 201 The lost generation BusinessWeek by Peter Coyahellip496 202 Spanish insurer Mapfre goes global to thrive BusinessWeek by Mark

Scotthellip500

Opinion

November 2 2009 Op-Ed Columnist

Too Little of a Good Thing By PAUL KRUGMAN

The good news is that the American Recovery and Reinvestment Act a k a the Obama stimulus plan is working just about the way textbook macroeconomics said it would But thatrsquos also the bad news mdash because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems Unless something changes drastically wersquore looking at many years of high unemployment

And the really bad news is that ldquocentristsrdquo in Congress arenrsquot able or willing to draw the obvious conclusion which is that we need a lot more federal spending on job creation

About that good news not that long ago the US economy was in free fall Without the recovery act the free fall would probably have continued as unemployed workers slashed their spending cash-strapped state and local governments engaged in mass layoffs and more

The stimulus didnrsquot completely eliminate these effects but it was enough to break the vicious circle of economic decline Aid to the unemployed and help for state and local governments were probably the most important factors If you want to see the recovery act in action visit a classroom your local school probably would have had to fire a lot of teachers if the stimulus hadnrsquot been enacted

And the free fall has ended Last weekrsquos GDP report showed the economy growing again at a better-than-expected annual rate of 35 percent As Mark Zandi of Moodyrsquos Economycom put it in recent testimony ldquoThe stimulus is doing what it was supposed to do short-circuit the recession and spur recoveryrdquo

But itrsquos not doing enough

Suppose that the economy were to keep growing at 35 percent If that happened unemployment would eventually start falling mdash but very very slowly The experience of the Clinton era when the economy grew at an average rate of 37 percent for eight years (did you know that) suggests that at current growth rates wersquod be lucky to see the unemployment rate fall by half a percentage point per year meaning that it would take a decade to return to something like full employment

Worse yet itrsquos far from clear that growth will continue at this rate The effects of the stimulus will build over time mdash itrsquos still likely to create or save a total of around three million jobs mdash but its peak impact on the growth of GDP (as opposed to its level) is already behind us Solid growth will continue only if private spending takes up the baton as the effect of the stimulus fades And so far therersquos no sign that this is happening

So the government needs to do much more Unfortunately the political prospects for further action arenrsquot good

What I keep hearing from Washington is one of two arguments either (1) the stimulus has failed unemployment is still rising so we shouldnrsquot do any more or (2) the stimulus has succeeded GDP is growing so we donrsquot need to do any more The truth which is that the

stimulus was too little of a good thing mdash that it helped but it wasnrsquot big enough mdash seems to be too complicated for an era of sound-bite politics

But can we afford to do more We canrsquot afford not to

High unemployment doesnrsquot just punish the economy today it punishes the future too In the face of a depressed economy businesses have slashed investment spending mdash both spending on plant and equipment and ldquointangiblerdquo investments in such things as product development and worker training This will hurt the economyrsquos potential for years to come

Deficit hawks like to complain that todayrsquos young people will end up having to pay higher taxes to service the debt wersquore running up right now But anyone who really cared about the prospects of young Americans would be pushing for much more job creation since the burden of high unemployment falls disproportionately on young workers mdash and those who enter the work force in years of high unemployment suffer permanent career damage never catching up with those who graduated in better times

Even the claim that wersquoll have to pay for stimulus spending now with higher taxes later is mostly wrong Spending more on recovery will lead to a stronger economy both now and in the future mdash and a stronger economy means more government revenue Stimulus spending probably doesnrsquot pay for itself but its true cost even in a narrow fiscal sense is only a fraction of the headline number

OK I know Irsquom being impractical major economic programs canrsquot pass Congress without the support of relatively conservative Democrats and these Democrats have been telling reporters that they have lost their appetite for stimulus

But I hope their stomachs start rumbling soon We now know that stimulus works but we arenrsquot doing nearly enough of it For the sake of todayrsquos unemployed and for the sake of the nationrsquos future we need to do much more

httpwwwnytimescom20091102opinion02krugmanhtmlthampemc=th

November 1 2009 1108 am

Growth and jobs the lesson of the Clinton years Just a quick further note on my growth and jobs post To get a sense of what 35 growth does and doesnrsquot mean we can look at the Clinton years viewed as a whole (Irsquom using end-1992 to end-2000 but it doesnrsquot really matter if you vary the start and end dates a bit)

Over that 8-year stretch real GDP grew at an average annual rate of 37 (Did you know that My sense is that very few people realize just how good the Clinton-era growth record was) Over the same period the unemployment rate fell from 74 to 39 a 35 percentage point decline

So if we take 3rd quarter growth to be more or less equivalent to average Clinton-era growth even after 8 years of growth at that rate wersquod only expect unemployment to have fallen from the current 98 to a still uncomfortably high 63 It would take us around a decade to reach more or less full employment As I said in my previous post thatrsquos well into President Palinrsquos second term

The implications for Fed policy are also striking If we use a Taylor rule that suggests zero rates until the unemployment rate reaches the vicinity of 7 the Fed should stay on hold for around 6 more years

We need much faster growth

October 30 2009 601 pm

If a deficit falls in the forest hellip

Matt Yglesias makes a good point

A lot of politicians and political operatives in DC are very impressed by polling that shows people concerned about the budget deficit I think it would be really politically insane for people to take that too literally If congress makes the deficit even bigger in a way that helps spur recovery then come election day people will notice the recovery and be happy If by contrast the labor market is still a disaster then people will be pissed off Itrsquos true that they might say theyrsquore pissed off at the deficit but the underlying source of anger is the objective bad conditions

But the political argument against focusing on the deficit is even stronger than he realizes mdash because there are very good odds that even if Obama exhibited iron fiscal discipline voters wouldnrsquot notice Therersquos a remarkable depressing paper by Achen and Bartels that includes an analysis of voter views of the deficit in 1996 mdash by which time the huge deficit that Bill Clinton inherited had been drastically reduced Herersquos what voters thought they knew

American Political Science Association

Yep after one of the biggest moves toward budget balance in history a majority of Republicans and a plurality of all voters believed that deficits had increased

Not to put too fine a point on it if Obama succeeded in reducing the deficit would Fox News or the Washington Times report it

The truth is that the truth about budgets plays almost no role in real politics Right now Meg Whitman is campaigning for Governor of California on the claim that state spending has exploded over the last decade mdash when the fact is that it has fallen drastically in real per capita terms Will she pay a price for this Probably not

So if I were a politician Irsquod focus on providing real improvements in peoplesrsquo lives rather than seeking deficit reductions the public wonrsquot even hear about

httpkrugmanblogsnytimescom

Economy

November 1 2009

Economic View

Supply-Side Ideas Turned Upside Down By N GREGORY MANKIW

BARACK OBAMA is in many ways the leftrsquos answer to Ronald Reagan

Both came to office as charismatic and self-confident leaders elected in times of economic crisis and determined to move the economy in a new direction What is less obvious however is that the signature domestic issue in President Obamarsquos first year in office mdash health care reform mdash is shaping up to be the antithesis of President Reaganrsquos supply-side economics

The starting point for Ronald Reagan was the idea that people respond to incentives The incentives that he most worried about were those provided by the tax system According to his budget director David A Stockman Mr Reagan would regale the staff with stories of how he as an actor used to alter his work schedule in response to the tax code

ldquoYou could only make four pictures and then you were in the top bracketrdquo Mr Reagan would say ldquoSo we all quit working after four pictures and went off to the countryrdquo

The key economic concept here is the marginal tax rate which measures the percentage of a familyrsquos incremental income to which the government lays claim During Mr Reaganrsquos time in office the top marginal tax rate on earned income fell to 28 percent from 50 percent

The verdict on supply-side economics is mixed The most striking claim associated with the theory mdash that cuts in marginal rates could generate so much extra work effort that tax revenue would rise mdash is unlikely to apply except in extreme cases But substantial evidence supports the more modest proposition that high marginal tax rates discourage people from working to their full potential Mr Reaganrsquos behavior as a movie actor is a case in point

President Obama has said he wants to raise marginal tax rates on high-income taxpayers Yet under his policies the largest increases in marginal tax rates may well apply not to the rich but to millions of middle-class families These increases would not show up explicitly in the tax code but rather implicitly as part of health care reform

The bill that recently came out of the Senate Finance Committee illustrates the problem Under the proposed legislation Americans would have the opportunity to buy health insurance through government-run exchanges Depending on a familyrsquos income premiums and cost-sharing expenses like co-payments and deductibles would be subsidized to make health care more affordable

A family of four with an income say of $54000 would pay $9900 for health care That covers only about half the actual cost Uncle Sam would pick up the rest

Now suppose that the same family earns an additional $12000 by for example having the primary earner work overtime or sending a secondary worker into the labor force In that case the federal subsidy shrinks so the familyrsquos cost of health care rises to $12700

In other words $2800 of the $12000 of extra income or 23 percent would be effectively taxed away by the governmentrsquos new health care system

That implicit marginal tax rate of 23 percent is a significant disincentive And it comes on top of the explicit marginal tax rate the family already faces from income and payroll taxes Altogether many families would face marginal rates at or above the 50 percent level that animated the Reagan supply-side revolution

One might hope that such a large climb in marginal rates is a bug in the Senate Finance bill one that could be fixed before the legislation became law But there is no simple fix Higher marginal tax rates are an integral part of the Obama health plan

Herersquos why

Health reformers start with the problem that some people are expensive to insure because of pre-existing health conditions Their solution is to require insurers to sell insurance to everyone (a policy called guaranteed issue) at the same price (called community rating)

This solution however causes another problem For healthy people insurance is now a bad bet A person without significant medical needs has an incentive to wait mdash to buy insurance later if and when he gets sick a decision that raises the cost of insurance for everyone else This problem according to the reformers calls for another solution a mandate requiring people to buy health insurance

But this mandate leads to yet another problem Requiring an expensive purchase like health insurance can be onerous for low-income families So the health reformers offer subsidies

Which brings us back to marginal tax rates If large health insurance subsidies were offered to all Americans regardless of income the programrsquos cost would be exorbitant requiring substantial increases in explicit taxes So instead the subsidies are phased out as income rises As a result we get implicit marginal rates like those in the Senate Finance bill

NONE of this necessarily means that health reform is not worth doing President Obamarsquos push for reform is premised on the belief that access to good health care should be a right of all Americans mdash a proposition better judged by political philosophers than economists

But we should not forget the cost of translating that noble aspiration into practical policy As a matter of economic logic President Obamarsquos goal of universal health insurance cannot help but undermine former President Reaganrsquos goal of lower marginal tax rates Future generations of Americans may find health insurance more affordable but they will also find hard work less financially rewarding

N Gregory Mankiw is a professor of economics at Harvard He was an adviser to President George W Bush

httpwwwnytimescom20091101businesseconomy01viewhtmlem

Economy

November 1 2009

Can Citigroup Carry Its Own Weight By ANDREW MARTIN and GRETCHEN MORGENSON

OVER the past 80 years the United States government has engineered not one not two not three but at least four rescues of the institution now known as Citigroup In previous instances the bank came back from the crisis and prospered

Will Citigroup rise again from its recent near-death experience The answer to that question concerns not only the 276000 employees who work at what was once the worldrsquos largest bank but the nationrsquos taxpayers as well Even as Citigrouprsquos stock has soared from a low of $102 to its current $409 mdash and the company has eked out a $101 million profit in the third quarter along the way mdash itrsquos still unclear whether it can climb out of the hole that its former leaders dug before and during the mortgage mania If Citigroup remains stuck taxpayers will be on the hook for outsize losses

Citigroup remains a sprawling complex enterprise with 200 million customer accounts and operations in more than 100 countries And when people talk about institutions that have grown so large and entwined in the economy that regulators have deemed them too big to be allowed to fail Citigroup is the premier example

As a result the government has handed Citigroup $45 billion under the Troubled Asset Relief Program over the last year Through the Federal Deposit Insurance Corporation a major bank regulator the government has also agreed to back roughly $300 billion in soured assets that sit on Citigrouprsquos books Even as other troubled institutions recently curtailed their use of another FDIC program that backs new debt issued by banks Citigroup has continued to tap the arrangement

Citigroup is also one of only two TARP recipients so desperate for capital that theyrsquove swapped government-issued shares into common stock diluting existing shareholders (GMAC the troubled auto lender that may receive another government infusion is the other)

While Citigroup has written down tens of billions of dollarsrsquo worth of mortgages on its books there are looming problems in its huge credit card portfolio Of the companyrsquos $12 trillion in credit commitments outstanding in the second quarter $873 billion were credit card lines A measure of the bankrsquos efforts to wrestle that problem to the ground is the interest it charges customers in October Citigroup raised interest rates on some credit card holders to 2999 percent

Chris Whalen editor of the Institutional Risk Analyst calls Citigroup ldquothe queen of the zombie dancerdquo referring to the group of financial institutions that the government has on life support ldquoThey are hoping that a combination of bank assistance and maximizing revenue and buying time will let them surviverdquo he said ldquoWhen I look at the whole picture Citigroup is in the process of resolution I continue to believe the equity is worth zero and that the company will have to go to bondholders for some kind of money to make the bank stablerdquo

VIKRAM S PANDIT Citigrouprsquos CEO said in an interview that he was confident that Citigroup was on the right course focusing on global banking and shedding segments of the company mdash like insurance and the brokerage business mdash that arenrsquot part of that mission To

date he said Citigroup had sharply reduced its expenses improved how it monitors risk and established a management team that he said would return the bank to sustained profitability

ldquoOur distinctiveness is we connect the world better than anyone elserdquo he said noting Citigrouprsquos global reach ldquoWe have a great capability of building a business around that And we are in the process of building a culture around thatrdquo

Mr Pandit said he was working with federal regulators on a schedule for paying back TARP funds which he said was crucial to restoring Citigrouprsquos image among consumers ldquoItrsquos very hard to change perceptions in this marketplacerdquo he said ldquoWe are not a troubled bank We have a lot of assistance from the government We canrsquot fight thatrdquo

In trying to right itself Citigroup plans to undo much of what it did during a period some insiders call the lost decade mdash with events that included merging with Travelers Group in 1998 and a huge dizzying expansion of its asset base To untangle the company Mr Pandit has split Citigroup in half One part consists of operations that Citigroup executives consider central to the bankrsquos future these include retail banking worldwide investment banking and transaction services for institutional clients

The other part contains businesses that Citigroup executives hope to exit or unload This includes asset management and consumer lending such as residential and commercial real estate as well as auto loans and student loans Citigroup is also selling some of the many companies it acquired in recent years In the weak economy however buyers are few

To be sure Citigrouprsquos financial cushion has fattened significantly thanks in large part to taxpayer relief mdash prompting some banking analysts to be relatively optimistic about the bankrsquos prospects One is Matt OrsquoConnor an analyst at Deutsche Bank He says that Citigroup is still saddled with potential risks but that itrsquos well positioned for an economic recovery in that it can sell off assets more quickly or for another downturn since it has government protection and relatively little commercial real estate exposure

ldquoWe find Citi shares could reach $10rdquo Mr OrsquoConnor wrote in a recent report to investors ldquoHowever this may be several years away and many uncertainties remain mdash both to Citi and banks over allrdquo

Yet compared with other big banks like JPMorgan Chase or the Goldman Sachs Group Citigrouprsquos operations are not yet generating enough profits to cover potentially devastating write-downs to come In the third quarter none of the units upon which Citigroup has pinned its hopes showed a jump in revenue

Analysts at Fitch Ratings project that Citigroup will continue to be plagued with hefty loan loss provisions and that its operations will remain weak into 2010 The primary reason for Citigrouprsquos woes of course is relatively straightforward The bank simply placed too large a bet on risky consumer loans especially mortgages These were often repackaged into complex financial instruments that went sour when the economy collapsed Citigroup ended up eating these losses

Citigroup also sank deeper into the swamp of troubled loans than its peers according to interviews with more than a dozen former employees and analysts because of a number of other factors a culture of deal-making that trumped efforts to help existing businesses grow on their own constant churn among the executive ranks the sapping of top talent the blunting of dissent and a drive to mimic competitorsrsquo risk-taking while failing to assess when those gambles were becoming perilous

A byproduct of these flaws is now smoldering on taxpayersrsquo doorstep causing worries on Capitol Hill that the United States may never get back the bailout money it gave to Citigroup

Representative Lloyd Doggett a Texas Democrat on the House Ways and Means Committee recently registered unease about the governmentrsquos guarantee of $300 billion in Citigroup assets and how effectively the Treasury secretary Timothy F Geithner was monitoring the bank

ldquoWe cannot know the full scope of the taxpayersrsquo potential cost from these hasty guaranteesrdquo Mr Doggett said last week in an e-mail message ldquoInexplicably Secretary Geithner appears unwilling to commit to conduct an analysis despite my specific request to him in March A critical and transparent examination of the response to the financial crisis is essential not only to learn from past mistakes but also to prevent further erosion of the publicrsquos trust in governmentrdquo The Treasury secretary declined to comment

Neil M Barofsky special inspector general of TARP has assembled a team to examine how Citigroup is using taxpayer funds In a Sept 21 letter to Mr Doggett he said ldquoThe Citigroup guarantees raise important oversight concernsrdquo Those concerns are shared by others particularly financial analysts

ldquoTraditional banking is still in a recession and the situation is very tenuousrdquo said Janet Tavakoli founder of Tavakoli Structured Finance a consulting firm ldquoIf we do get our money back from Citi some of it will be the money we printed to give to themrdquo

ALTHOUGH history does not repeat now and then as Mark Twain famously proclaimed it rhymes Nowhere in the financial world perhaps is that more true than for Citigroup

During the 1920s the institution then known as National City Bank opened stores around the country to encourage the burgeoning middle class to invest in stocks and bonds With little money down mdash 10 percent of the cost of a trade was all an investor needed to buy shares mdash investors poured into the stock market Charles E Mitchell CEO of National City hyped these sales throughout the period His nickname was ldquoSunshine Charleyrdquo

Then came the Great Crash of 1929 Vilified as a ldquobanksterrdquo in the aftermath of the crash Mr Mitchell testified to Congress that banks ldquowere too ready to loan too ready to meet the competition of neighbors too willing to cut down their margins to a point of encouraging excessive bargainingrdquo

Before the crash industry practice allowed National City not only to underwrite securities but also to employ a sales army to peddle them to depositors After Congressional hearings determined that this conflict of interest was a major cause of the debacle lawmakers passed the Glass-Steagall Act separating activities of commercial banks (which offered plain old savings accounts and loans) from those of investment firms (which trafficked in more highflying endeavors like stock trading and underwriting)

Although thousands of smaller banks failed government policies to prop up the banking sector helped National City and other major banks weather the Depression

Fifty years later what was then known as Citicorp found itself in trouble again as huge loans to developing countries in Latin America soured The federal government weakened capital and accounting requirements to allow big American banks to survive the crisis Still in the early 1990s the bank was in a precarious state because of its problems in Latin America coupled with losses in commercial real estate and a weak economy

Citicorp survived this crisis with an infusion of cash from a Saudi Arabian prince and a gift from Alan Greenspan then the chairman of the Federal Reserve Mr Greenspanrsquos Fed kept interest rates unusually low allowing Citicorp and other troubled banks to borrow money cheaply and lend at higher rates to their customers

By 1998 Citicorp had more than regained its footing and was willing to take a more aggressive stance At the direction of its chief executive John S Reed Citicorp agreed to join forces with the Travelers Group an amalgam of insurance brokerage and investment banking services run by a brash dealmaker named Sanford I Weill The largest merger in history followed creating a colossus named Citigroup with $700 billion in assets

Because Travelers had an investment firm under its umbrella the creation of Citigroup prompted Congress to eliminate what remained of the Depression-era separation between Main Street banking and Wall Street trading Mr Reed and Mr Weill argued persuasively for the change and along with the rest of the financial industry deployed an armada of lobbyists in Washington In 1999 Congress overturned Glass-Steagall

ldquoBy liberating our financial companies from an antiquated regulatory structure this legislation will unleash the creativity of our industry and insure our global competitivenessrdquo Mr Weill and Mr Reed Citigrouprsquos co-chairmen and co-chief executives said in a statement after Congress repealed the law ldquoAs a result all Americans mdash investors savers insureds mdash will be better servedrdquo

Former employees wax nostalgic about the early days of the merger ldquoAcross the board it was clearly No 1rdquo said one former top executive who requested anonymity to maintain relationships with former colleagues ldquoYou had franchises that were the envy of the world It was a remarkably powerful institutionrdquo

Profits soared and by 2003 Citigroup was generating nearly $18 billion a year in them But even as the money flowed the euphoria over earnings was tempered by personnel upheaval recurrent scandals and the realities of managing such a behemoth

Mr Weillrsquos longtime sidekick and heir apparent Jamie Dimon was ousted eight months after the merger (He now runs JPMorgan a bank that has weathered the financial downturn much better than most of its large rivals) A steady exodus of top talent followed Mr Dimonrsquos departure from Citigroup it has only accelerated since the financial crisis began in 2007

In the last decade for instance Citigroup has had four chief executives six chief financial officers seven heads of consumer banking and eight investment banking chiefs

Bank of America by contrast has had two CEOrsquos four chief financial officers and one chief operating officer during the same period mdash though that relative stability didnrsquot spare the bank from mistakes and pain in the crisis

After a series of financial scandals that tarnished the bankrsquos reputation Mr Weill announced his retirement as chief executive at the end of 2003 handing the reins to Charles O Prince III his longtime general counsel who had navigated the company through its various legal and regulatory crises but had never run a major financial institution Mr Prince did not return several phone calls seeking comment

Deal-making largely continued unabated under Mr Prince while the bankrsquos myriad parts were never effectively knit together During his three-and-a-half-year reign Citigroup bought five large mortgage lenders or loan servicers and four credit card lenders or portfolios This buying spree would almost certainly have been larger had the Federal Reserve Bank of New York not barred Citigroup from making acquisitions for 12 months between the spring of 2005 and 2006 mdash a ban that followed complaints by foreign regulators that Citigrouprsquos risk management practices were dangerously lax

Even with occasional regulatory restraints Citigrouprsquos assets ballooned from $149 trillion to $219 trillion from 2005 to 2007 an increase of 469 percent (and three times the size of Citigrouprsquos balance sheet when the merger that created it occurred)

But amid that impressive growth dubious mortgage loans and questionable trading in mortgage and other debt-related securities began to undermine Citigrouprsquos finances One ugly class of securities continues to haunt the bank collateralized debt obligations or CDOrsquos

From 2004 to the beginning of 2008 Citigroup underwrote $70 billion in CDOrsquos but had to keep $57 billion of that amount on its own books when it couldnrsquot find buyers according to a class-action lawsuit filed in federal court in Manhattan on behalf of disgruntled Citigroup investors The suit contends that by late 2006 Citigrouprsquos CDO operations ldquohad devolved into a Ponzi scheme where unsold portions of older CDO securitizations were recycled as the asset base for new CDO securitizationsrdquo

Furthermore the lawsuit says Citigroup executives engaged in various accounting gimmicks to conceal the bankrsquos ownership of assets that eventually soured Citigroup denies the allegations and says it will vigorously fight the suit

Still the unfortunate truth about the bank during the last several years according to analysts and former insiders is that it was managed horribly ldquoThey just blew itrdquo said one former Citigroup executive who like many others interviewed for this article requested anonymity because of pending lawsuits and a desire to preserve relationships with former colleagues ldquoItrsquos really hard to drive the car if you donrsquot have the headlights onrdquo

If Citigroup was driving blind regulators seem to have been unaware Officials at the Office of Comptroller of the Currency and the New York Fed mdash overseen at the time by Mr Geithner who has since become the Treasury secretary mdash stood by as Citigroup amassed a portfolio that would ultimately generate losses of more than $35 billion

CITIGROUPrsquoS financial architecture remains rickety One reason is that it relies much more heavily than most other large domestic banks on uninsured deposits in overseas locales where customers are quick to pull their money at the first sign of trouble Also some of the accounting machinery it put in place to temporarily move assets off of its balance sheet (and make the bank look financially healthier) has backfired

Mr Pandit maintained that Citigrouprsquos strategy would take some time and depended in part on how the economy fared Should the economy continue to improve for instance he said the bank would snare handsome returns when it sells off assets Other assets like some mortgages for example will simply be paid off over time he said

ldquoWe have timerdquo he said ldquoIf markets do turn around these are going to be very valuable businesses This is going to take awhilerdquo Yet analysts say that for Citigroup to survive it must quickly sell the businesses it wants to exit And that is especially hard to do given that it is shopping its wares at a time when few people appear to want them particularly Citigrouprsquos middle-tier operations in far-flung regions around the globe

That means the plan to offload the orphan businesses is likely to take much longer than Citigrouprsquos management had hoped In January 2009 two years was an estimate for this wind-down but that is looking more improbable by the day according to analysts and others familiar with the bankrsquos operations

Mr Whalen the bank analyst thinks that squaring away Citigrouprsquos problems will take more than low interest rates and taxpayer assistance

ldquoCitigroup will need future capital injectionsrdquo he said ldquoEventually what happens with Citigroup is the government is going to turn to the bondholders and say we canrsquot put any more money into this You own the company nowrdquo

httpwwwnytimescom20091101businesseconomy01citihtml_r=1ampthampemc=th

Depression diary When the banks went dark I have some money and checks to deposit but do not know where to go

By Benjamin Roth Sunday November 1 2009

Eighty years ago this week the United States experienced the worst meltdown of the stock market in the nations history As the effects of the crash rippled through the broader economy banks began closing their doors in record numbers

Benjamin Roth a lawyer in Youngstown Ohio recorded the effects as the banks closed in his town His diary excerpted on The Big Money has just been published as a book -- The Great Depression A Diary (Public Affairs)

Oct 8 1931 Everybody is excited about President Hoovers plan to end the Depression and stocks go up as high as 10 and 15 points Under this plan a huge national banking corporation is to be formed backed by government money which will discount frozen mortgages and other illiquid assets of the banks in order to give them cash to pay depositors It will be something like the Federal Reserve Bank except that it can discount mortgages and other paper not now eligible The plan also contemplates making the Federal Reserve more flexible so that in time of depression it can widen its discount basis

Oct 10 1931 When I visited my safety box in the vault of the Dollar Bank today Mr Owen told me that in the last two days -- since President Hoover announced his plan to help the banks -- [it] has been the quietest we have had for several months Before that we had a number of new applicants for safety boxes every day but since then we have had none He felt that Hoovers [announcement] had strengthened faith in the banks and had put a stop to hoarding

Again and again I am forced to the conclusion that in prosperous times a man must be cautious and preserve his capital and be careful not to overexpand his business or to go too deeply in debt relying on a continuation of good business to pay the debt In time of depression a man can be brave and if the depression is nearing an end he can invest his money or expand his business or open a new business with confidence that he is facing five or 10 years of prosperity He can feel sure that the road ahead will be up -- not down Many great prosperous businesses were founded on the ruins of depression This may be why so many Federal Street merchants are now beginning to put in a new storefront etc

A great many losses and failures in business and in investment are due to the reversal of this policy At the height of prosperity they rush in to buy stocks or real estate or businesses at boom prices and assume enormous indebtedness that can be liquidated only if the boom spiral mounts higher and higher Then comes an abrupt end to prosperity -- a crash -- and down go these businesses and investments purchased at top prices If the purchase was made mostly with borrowed capital as so often happens -- then you can write finis to the chapter

Oct 12 1931 Bank failures continue in spite of President Hoovers plan Yesterday saw the closing of the National Bank of Uniontown -- one of the largest in western Pennsylvania

The Strouss-Hirshberg Company employees some time ago received a 25 percent cut in wages Yesterday the employees on the second floor were informed they could work only on alternate days At the Truscon Steel employees also received a 25 percent cut some time ago and now they can work only five days a week The stock market has been going up for several days now since the Hoover announcement

Oct 13 1931 The good effect of President Hoovers plan is wearing off rapidly Last nights paper publishes the quarterly reports of the local banks All were in pretty frozen shape (about 20 percent liquid) except the Commercial Bank which is about 65 percent liquid Long lines of people can be seen this morning quietly withdrawing deposits and bank officials seem more worried than ever More people renting safe deposit boxes or taking their money to the post office to open a US postal savings account

Oct 14 1931 Last nights paper reports the closing of eight banks in West Virginia and Philadelphia Also that the 14 banks in Atlantic City have been combined into four banks Also that the government bank aid plan is not going so good because the stronger banks do not want to guarantee the weaker The proposed capital has been cut from $500 million to $100 million

Stocks are on the way down again

Oct 15 1931 Great excitement in Youngstown It finally happened here The Dollar Savings amp Trust Co the City Trust and the 1st National Banks all fail to open for business this morning This leaves only the Mahoning Bank and the Commercial open for business Both of them are besieged by depositors seeking to withdraw their deposits I do not see how it can last The town is panic-stricken and the streets are crowded with people excitedly discussing the situation I was aroused this morning at 4 am by newsboys shouting extra It still seems like a bad dream

Oct 15 1931 2 pm Banks in the small towns around Youngstown are either closing their doors or refusing to permit withdrawals except for emergency use

Several of the wealthiest families in Youngstown had all their funds invested in local bank stocks or in the local steel mills With these investments almost worthless and with double liability attached to the bank stocks they are wiped out This seems to show the wisdom of a partial investment in sound bonds or government securities

Announcement is made that the proposed Bethlehem-Sheet amp Tube merger has been called off

Oct 15 1931 3 pm The run continues on the Mahoning and Commercial banks Both banks are still open but trying to talk depositors out of making withdrawals or giving them part of their money A large streetcar bus filled with armed guards just unloaded money for the Mahoning Bank brought from the Federal Reserve Bank at Cleveland

I have some money and checks to deposit but do not know where to go to open a checking account I was a depositor at the Dollar Bank which is now closed

Oct 16 1931 The Commercial and Mahoning Banks are still open and jammed with depositors but only partial withdrawals are being permitted

Business is being operated this morning in crazy-quilt fashion No one will accept checks -- and nobody has cash The wholesalers most of whom have their offices in other cities refuse to deliver merchandise to the stores except cod cash A good many professional men are also likely broke and admit it without hesitation When I came downtown yesterday morning my total assets consisted of a $15 check on a Hubbard Bank and $6 in cash I rushed to Hubbard -- was the first one to enter the bank at 9 am and succeeded in getting the check cashed So far so good -- but what of tomorrow

httpwwwwashingtonpostcomwp-dyncontentarticle20091030AR2009103004206htmlwpisrc=newsletter

Aug 5 1931 Depositors gathered outside after American Union Bank in New York City failed and was closed by state regulators (Associated Press)

Oct 28 2009

Vienna Initiative Western European Banks Pledge Continued Support To Eastern European Subsidiaries in Hardest Hit Countries In what is being called The Vienna Initiative Western European parent banks have pledged support for their Eastern European subsidiaries in Hungary Romania Serbia and Bosnia in coordination meetings The banks acknowledge that it is in their collective interest and in the interest of the CEE countries in which they operate to commit in a coordinated way to maintaining their exposure in these markets See related spotlight issue Will Western European Banks Continue To Support Their Eastern Offspring

o IMF So far 15 parent banks have made specific rollover and recapitalization commitments in five countriesmdashBosnia Hungary Latvia Romania and Serbiamdashall of which have stabilization programs supported with funding from the IMF and in some cases the European Union (October 28 2009)

o IMF If the banks werenrsquot willing to refinance their loans recapitalize their subsidiaries and maintain their exposure to the region it would have been difficult to avert a systemic crisis even with the rescue packages provided by the IMF and EU (October 28 2009)

Hungary

o May 20 Parent banks of the six largest foreign banks incorporated in Hungary reaffirmed their commitments to take the action needed to support their subsidiaries in the country

o The six banks are Bayerische Landesbank Erste Group Bank AG Intesa SanPaolo KBC Group Raiffeisen International Bank Holding and UniCredit Bank Austria AG

Romania

o March 26 Parent banks of the nine largest foreign banks in Romania (Erste Group Raiffeisen International Eurobank EFG National Bank of Greece UniCredit Group Socieacuteteacute Generale Alpha Bank Volksbank Piraeus Bank) declared that they would maintain their overall exposure to Romania and would increase the capital of their subsidiaries as needed

o May 19 The banks mentioned above committed to a precautionary increase in the minimum capital adequacy ratio for each subsidiary from 8 to 10 for the duration of the IMF program (IMF)

o The above nine banks hold a 70 market share in Romania (as of assets)

o Following the Vienna meeting on March 26 the National Bank of Romania conducted stress tests Outcome shows the banks are well capitalized and have high liquidity buffers

Serbia o March 27 Central bank said Intesa Sanpaolo Raiffeisen International Hypo Alpe-Adria

Eurobank EFG National Bank of Greece Unicredit Socieacuteteacute Geacuteneacuterale Alpha Bank

Oesterreichische Volksbanken and Piraeus Bank pledged they will maintain their exposure in Serbia and preserve their capital ratios

Bosnia Herzegovina o June 22 Six largest foreign-owned banks incorporated in Bosnia and Herzegovina (BiH)

met in Vienna (Raiffeisen International Hypo Alpe-Adria UniCreditBank Austria Volksbank International Intesa SanPaolo NLB Group)

o Banks said they were aware that it is in our collective interest and in the interest of Bosnia and Herzegovina in a coordinated way to maintain our overall exposure to

httpwwwrgemonitorcom10009Europecluster_id=13844

30102009

Game over for Blair

This looks like the end of President Blair The Socialists still reeling from the Barroso disaster have decided that whatever they do they have to do together this time decided not to nominate a Socialist for the EU council presidency but want to nominate the High Representative instead So this means the end of Blair This leaves the field open for a Christian Democrat head of the European Council as Der Spiegel reports

EU summit agrees on Czech Sudeten clause This must count as one of the most absurd demands a European Council ever had to deal with but last night it accepted a declaration by which the Charter for Fundamental Rights cannot be used by Sudeten Germans to their repatriate property which they lost under the Benes decrees Sueddeutsche Zeitung has the report It gave no details about the declaration itself except to say that there was a big round of applause when the Swedish PM announced the decision

Weber maps out the end of the unusual monetary policies FT Deutschland has a detailed article about a speech given by Bundesbank president Axel Weber in which he mapped out the end of the exceptional policy measures First to go will be the one-year repos he says and he called on banks to plan their future liquidity needs accordingly He said that the ordinary repos will remain unlimited for some time While the article does not suggest that the ECB is about to exit very soon the openness by which the ECB discusses the exit sets an important signal

Portugal suffers downgrade The FT reports that Portugal suffered its third credit downgrade warning this year as Moodyrsquos alerted the new Socialist government about high debt and a ldquoslow but inexorable declinerdquo in economic growth Moodyrsquos also placed the Greek governments A1 credit ratings on review for possible downgrade citing similar concerns The article said that Moodyrsquos decision will be seen as stern warning on the dangers of fiscal indiscipline as the minority government of Joseacute Soacutecrates the centre-left prime minister draws up its four-year legislative programme and the

2010 budget

US economy grows by 35 annualised The Bureau of Economic Analysis released its third quarter US GDP data yesterday according to which the annualised rate of growth in the third quarter was 35 The Bureau said the upturn in real GDP reflected upturns in private consumption private inventory investment exports and residential fixed investment Offsetting factors were an upturn in imports a downturn in state and local government spending and a deceleration in federal government spending The dollar fell on the news and stocks rallied Paul Krugman made the point that although this is welcome at this rate of growth unemployment would not return to pre-crisis levels until the second Palin administration

How central banks keep up the illusion This is an illuminating article in the Wall Street Journal about how the Federal Reserve keeps up the illusion that its policies are consistent with long-run price stability The Cleveland Fed has just brought out an indicator of future inflation expectations that tries to measure the inflation for the next 30 years () based essentially on interpolating bond yields and looking at various price expectation surveys (we are not sure how we would answer the question what inflation would be like in 30 years We would probably say it will be unchanged from today which is what consumers always say in such surveys It looks to us that somebody is kidding themselves and trying to do so behind the cloak of objectivity)

Why tax cuts are more effective than spending Writing in VoxEU Robert Barro and Charles Redlick say that the recent global recession has made the efficacy of fiscal-stimulus packages one of the most prominent policy debates in economics today This column finds that the multiplier of defence spending falls in a range of 06 to 08 and argues that non-defence multipliers are unlikely to be larger It says we should be sceptical when policymakers claim government-spending multipliers in excess of one and suggests tax cuts may be preferable to spending increases

Henri Guainorsquos visions This is the man to has given Sarkozy his economic strategy In an interview with Le Monde Henri Guaino said that this is the right time for a deficit-led investment spending His vision is that we are at the beginning at a new great 30-year growth cycle which requires that we need to invest now to reap the benefits in the future It would be a historic mistake to let go off that and to fuss about debt now

Weber maps out the end of the unusual monetary policies Eurointelligence 30102009 httpwwweurointelligencecomarticle581+M59014efe9950html

Oct 29 2009

US Economy Returned to Positive Growth in Q3 2009 as

Policy Measures Boosted Private Demand Overview The four economic indicators that the National Bureau of Economic Research (NBER) considers in calling the end of a recession improved during Q2 and Q3 2009 But the pace of improvement has slowed recently raising concerns about the strength of economic recovery The impact of tax cuts and cash for clunkers on personal disposable incomes and retail sales have waned Ex-auto industrial production and ISM are weak Job losses are comparable to the past recessions Bank credit is still contracting The impact of tax credit on home sales will begin to fade Durable goods orders are still under pressure Inventory adjustment and stimulus measures will drive growth to positive territory starting H2 2009 But sluggish private demand and structural factors like large public debt and private-sector deleveraging will pose the risk of below-potential GDP growth in 2010 and a sluggish recovery Early withdrawal of policy stimulus or increase in commodity prices pose the risk of a double-dip recession in late 2010 or early 2011 How Strong Will GDP Growth Be in 2009-10

bull In Q3 2009 real GDP growth rose 35 after contracting for four consecutive quarters (the longest and deepest recession in the post-war period) GDP contracted 07 SAAR in Q2 2009 Real final sales (GDP-change in private inventories) rose 25 Private inventories contribution to GDP turned positive but was a mere 094 (US Bureau of Economic Analysis [BEA] 102909)

bull Real personal consumption registered a strong growth of 34 as the cash for clunkers program boosted durable goods consumption (up 223) Motor vehicles and parts added 10 to GDP growth After witnessing a severe downturn in H1 2009 private investment rose 115 in Q3 led by the rebound in residential investment (234) due to the tax credit for homebuyers an improvement in fixed investment (23) and a smaller contraction in non-residential investment (-25) Residential investment added 05 to GDP growth Despite the stimulus spending at the Federal level government expenditure and investment slowed to 23 as spending at the state government levels declined Exports and imports moved to positive territory growing 147 and 164 respectively as global and domestic demand revived and autos and inventory restocking boosted global trade Faster pickup in imports led to a negative contribution of net exports of 053 to GDP growth (BEA 102909)

bull Analysts expect GDP to grow 2-3 in Q4 2009 but differ on the extent of boost to growth from inventories and policy stimulus and the ability to sustain growth in 2010 Since the inventory-to-sales ratio is high inventories might contribute more to growth in Q4 than in Q3 The impact of fiscal stimulus and cash for clunkers on growth will wane in Q4 As these adjustments end the economy might slow again sometime in 2010 if private demand and hiring are weak This has

raised political pressure to extend some of the fiscal stimulus but on the whole there is little policy space to stimulate growth in 2010

bull Growth Forecasts MS 35 in Q3 20 in Q4 -25 in 2009 and 27 in 2010 MLBoA 26 in Q3 35 in Q4 -25 in 2009 and 30 in 2010 GS 30 in Q3 30 in Q4 -25 in 2009 and 20 in 2010 JP Morgan 40 in Q3 30 in Q4 -24 in 2009 and 32 in 2010 Nomura 35 in Q3 21 in Q4 -25 in 2009 and 24 in 2010 (via Bloomberg Survey 101409)

bull The Conference Board The Index of Leading Indicators rose 1 in September 2009 the sixth consecutive month of an increase after rising 04 in August All leading indicators except for building permits and average workweek contributed positively to the index The coincident indicators index a measure of current economic activity was unchanged in September 2009 after rising 01 in August Ken Goldstein Economist The Conference Board These numbers strongly suggest that a recovery is developing However the intensity of that recovery will depend on how much and how soon demand picks up (102209)

bull According to the Fed Beige Book in October 2009 economic activity improved in most Districts though the improvement was small or scattered Many sectors showed stabilization or modest improvements though from depressed levels led by residential real estate and manufacturing Consumer spending and non-financial services showed mixed trends while commercial real estate showed weakness or deterioration Banking also faltered in several Districts though the first-time homebuyer tax credit fueled lending to new homebuyers Labor markets remained weak or mixed There was little or no increase in price or wage pressures (Federal Reserve Board 102109))

bull In its June 2009 meeting the Federal Open Market Committee (FOMC) raised the GDP growth forecast to -1 yy for 2009 and to 21 for 2010 It raised the unemployment rate forecast to 101 for 2009 and to 98 for 2010 FOMC participants expected that output would expand sluggishly in H2 2009 with a gradual recovery in 2010 and the economy would take five or six years to converge to a sustainable growth rate The labor market was expected to improve gradually in 2010-11

bull IMF The economy will contract 275 in 2009 and grow sluggishly at 15 in 2010 due to strains in the financial markets rising unemployment and subdued exports The unemployment rate will peak over 10 in H2 2010 and core inflation will be below 1 through most of 2010 Household deleveraging increasing unemployment and rising commercial real estate and corporate defaults are risks for the near-term outlook Medium-term outlook will likely be characterized by a below 2 potential growth for a considerable time higher structural unemployment and a rising saving rate The strength and sustainability of the recovery will depend on a timely and orderly exit strategy and addressing imbalances in the government household and financial balance sheets (World Economic Outlook October 2009)

bull OECD The economy will expand 16 in Q3 2009 and 24 in Q4 2009 taking the contraction in 2009 to 28 The inventories have corrected export orders have firmed up housing has shown some signs of stabilization both as regards prices and turnover residential construction may be nearing a bottom consumer confidence indicators remain at a weak level the financial market conditions have improved and fewer banks are tightening lending (September 3 2009)

bull According to the BEA based on revised estimates of economic data going back to 1929 the economy grew 34 during 1929-2008 and 28 during 1997-2008 and a mere 04 in 2008 From Q4 2007 to Q1 2009 real GDP fell 28 In 2001 real GDP rose by 11

bull The NBER doesnrsquot require two quarters of successive contraction in GDP to date the beginning and end of a recession and instead focuses on month-to-month changes in the economy It holds that the US entered a recession in December 2007 ending 73 months of expansion that began in November 2001 The decline in economic activity in 2008 met the Business Cycle Dating Committees standard for a recession with the drop of 26 million in employment in 2008 the major factor determining the start of the contraction The peak quarter of economic activity was Q4 2007 while employment and real personal income less transfers peaked in December 2007 Real manufacturing and wholesale-retail trade sales peaked in June 2008 while industrial production peaked in January 2008

Are There Risks to Growth Sustainability

bull Fed Chairman Ben Bernanke From a technical perspective the recession is very likely over at this point But the recovery will be weak due to tight credit conditions If economic growth is moderate and not much more than potential growth the unemployment rate will be slow to come down (Remarks at the Brookings Institute via Bloomberg 091509)

bull Richard Berner Managing Director Co-Head of Global Economics and Chief US Economist and David Greenlaw Managing Director and Chief US Fixed Income Economist Morgan Stanley (MS) Growth will surge in Q3 but will be more tepid in Q4 2009 as the stimulus impact on home and autos sales fade Consumption will remain under pressure and the unemployment rate will rise But rather than a double-dip [this] near-term slowing will simply represent a bumpy path to sustainable growth amid improving credit conditions and lagged impact of the fiscal stimulus Fiscal drag in 2011 less stimulating monetary policy and higher oil prices might slow growth in 2011 But stabilizing home prices easing financial conditions inventory restocking and capital spending might support the recovery (091009)

bull Economists Jan Hatzius and Ed McKelvey Goldman Sachs (GS) June 2009 might have been a trough for the economy since industrial production turned around in July 2009 The economy is expected to grow 1 in H2 2009 due to inventory restocking auto production improving investment and faster stabilization in housing But growth will be below trend in 2010 (August 18 2009 Report Timing the NBER Recession Trough - June Looks Good at Least for Now and July 31 2009 Report A Stronger Economy in the Near Term But)

bull Dr Nouriel Roubini Data from the US--rising unemployment falling household consumption still declining industrial production and a weak housing market--suggests that the US recession is not over yet The US recession will most likely be over by the end of 2009 (Project Syndicate 081609)

bull Nouriel Roubini Christian Menegatti and Arpitha Bykere RGE Inventory destocking fiscal stimulus and impact of cash for clunkers on auto production inventories and consumer spending--will boost GDP growth to 2 in Q3 2009 and 1 in Q4 2009 The economy will contract 28 in 2009 Even if real economic growth moves back into positive territory in H2 2009 the NBER is not likely to call the end of the recession until at least late 2009 or early 2010 since the four variables

NBER uses in making recession calls are likely to remain in contraction or register sub-par growth (US Economic Outlook Update 0809)

bull Lex FT The economy is on massive doses of stimulus spending and cheap money But the unemployment rate is steadily rising and household deleveraging is far from over The boost from inventory re-stocking in H2 2009 will not be large (073109)

bull Professor Paul Krugman Princeton University The US economy have have hit a trough in August 2009 While the economy is stabilizing its very different from returning to normality (via Bloomberg 080909)

bull Richard W Fisher president Federal Reserve Bank of Dallas Inventories and residential construction will cease to be a drag on growth the worst for consumer spending is over However a sustained recovery will have to come sectors other than housing construction and finance The reallocation of labor and capital away from these previously booming sectors will take time (090309)

bull Professor Alan Blinder Princeton University Growth in H2 2009 might get a boost from housing inventories business spending and autos as they turn from large negative numbers to zero But it will take years of strong growth to return to full employment given high unemployment excess capacity the damaged financial system and erosion of household wealth (WSJ 072409)

bull Professor Martin Feldstein Harvard University The US recession may not be coming to an end and there is a risk the economy may experience a double-dip contraction (via The Big Picture WSJ 072109)

bull Comstock Partners A sustainable recovery is not possible without the growth in consumer spending wages and employment Tight credit high debt and falling income and employment will put pressure on consumption Employment is unlikely to pick up soon There are growing risks related to commercial real estate and mortgage defaults (091009)

bull Larry Summers director White House National Economic Council GDP is close to a level path with prospects for positive growth to commence during this year Private sector deleveraging will be a drag on growth so government and Fed policies must cushion the adjustment process as long as necessary (via Peterson Institute for International Economics 071709)

httpwwwrgemonitorcom166United_States

Oct 28 2009

Regulatory Reform in the US Assessing the Draft Law on Systemically Important Institutions Overview June 17 Treasurys Comprehensive Plan for Regulatory Reform New framework includes the 1) Fed as systemic risk regulator and supervisor of too-big-to-fail institutions and creation of ldquocouncil of regulatorsrdquo 2) requires the originator sponsor or broker of a securitization to retain a financial interest in its performance (skin in the game) Also regulate all financial derivatives for the first time 3) Consumer Financial Protection Agency for strong investor protection and rules against predatory lending 4) new resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system including large hedge funds and major insurers such as AIG 5) lead the effort to improve regulation and supervision around the world

October 27 Draft Law Provisions

o Draft conveys Federal Reserve broad supervisory mandate for undisclosed list of systemic institutions (incl foreign ones with US subsidiaries) New prudential standards include leverage limits liquidity rules and drafting of a living will (ie resolution plan) Fed also receives authority to ask any systemically important firm to sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms to terminate one or more activities or to impose conditions on business activities (FT 102809)

o Council of Regulators will have recommendation powers but the Fed (and the Treasury) retain decision powers over systemically important institutions Sheila Bair of the FDIC and Mary Shapiro of the SEC have in past hearings pushed for a more meaningful role for the council

o Resolution Authority and bank assessments If regulatory interventions are not enough the government has the power to seize a company and force rival banks that have more than US$10 billion in assets to repay any taxpayer money used to seize or wind up their competitor (FT) Sheila Bair claimed that role for the FDIC in earlier speeches She also recommends to cap secured creditors claims at 80 in case of default (100409)

o SEC proposes separate law to regulate asset-backed securities (ABS) thet were at the heart of the current crisis Experts (see eg ShinAdrian) note the the skin in the game and transparency provisions are necessary but do not go far enough (WSJ 102809)

o See the debate on Contingent Debt-To-Equity Swaps Mervyn Kings Too Big Period stance and the EUs pre-emptive state aid rules

Main Points of Contention in Congress o Senator Dodd of Connecticut chairman of the Senate Banking Committee plans to

introduce legislation that creates one single bank regulator thus curtailing the powers of the Fed (September 21 2009)

o Baker Wallison Why expand the powers of an agency that sat idly by as the housing bubble took shape March 6 Reuters Are any of you troubled with giving the Fed so much power asked Spencer Bachus the top Republican on the full House Financial Services committee

o WaPo Another element likely to provoke fierce debate is the establishment of a Consumer Financial Protection Agency with a mandate to increase the availability of financial products in lower-income communities and other underserved areas

o CFTC and SEC still share regulation and supervision of derivatives How to ensure consistency Regulatory shopping opportunity

Opinions o Kenneth Rogoff The fact is that banks especially large systemically important ones are

currently able to obtain cash at a near zero interest rate and engage in risky arbitrage activities knowing that the invisible wallet of the taxpayer stands behind them In essence while authorities are saying that they intend to raise capital requirements on banks later in the short run they are looking the other way while banks gamble under the umbrella of taxpayer guarantees

o Nouriel Roubini Overall proposal goes in right direction but the following is missing - ensure risk-adjusted compensation eg individual lenders and traders pushing toxic assets should be paid with toxic assets or receive compensation tied to it so that they receive both the up- and the downside (see eg recent Credit Suisse compensation package) - there are still too many regulatory bodies allowing for regulatory shopping opportunities - Ensure that individuals at the helm of agencies are committed to use their powers Fed could have acted before but leaders at the time did not deem it necessary

o Hyun Song Shin Joseph Mason Require securitization originators to keep skin in the game is not going to solve anything The very reason for this banking crisis is that banks actually held on to the economic risk while treating the securitized assets as sold for accounting purposes (see eg FAS 140)

o Paul Volcker I do not believe hedge funds and private equity need to be so closely supervised and regulated as depository institutions A presumption of government protection and support for financial institutions outside the [commercial banking] safety net should be avoided Nor by the same token should hedge funds or private-equity funds indirectly benefit from official support by sponsorship or ownership by a banking institution See Private Equity Hedge Fund Consortium Buys IndyMac White Knights Or Indirect Access To Safety Net

o March 10 Ben Bernanke (via FTAlphaville) Suggestions for resolving systemic risk include perhaps most significantly modifying the accounting rules which cause pro-cyclicality for bankrsquos capital positions

Regulatory Reform in the US Assessing the Draft Law on Systemically Important Institutions Oct 28 2009httpwwwrgemonitorcom10006Finance_and_Bankingcluster_id=9221

Oct 27 2009

Contingent Debt-To-Equity Swaps Against Too-Big-To-Fail A Viable Tool Overview The uncertainty surrounding banks asset values makes it difficult to distinguish solvent from insolvent institutions Steven Kaplan (University of Chicago) If the underlying value of illiquid assets is assumed to be close to par then buying up illiquid assets would suffice Markets ditched that option right away This is why the adopted equity injection solution is superior and worth a try If the underlying value of illiquid assets should turn out to be lower still (ie capital does not restore solvency in the banking system and good money is thrown after bad) then debt reduction might be the only solution (101608) Ultimately if a banks realized asset value shrinks below its liabilities the optimal response is to let the bank go bankrupt To carry out an orderly resolution temporary nationalization is inevitable Augustin Landier Kenichi Ueda (IMF 062009) Debt-to-Equity Swaps Pro and Con Debt-to-equity swaps are the first-best solution when debt contracts can be renegotiated easily (ie first-best solution) LandierUeda (IMF) show that this option preserves the financial value of both debt and equity in a Modigliani-Miller framework Viral Acharya Matthew Richardson Nouriel Roubini (NYU Stern) point to practical problems with distressed exchanges involving large complex financial insitutions (LCFI) first the systemic risk stemming from a payment system disruption and the potential run on subsidiaries are still present Second the size of LCFI debt is daunting and creditors might hold out for a full bailout Third time is of the essence in view of dispersed debt ownership (062009) Moreover if debt is not renegotiable any voluntary restructuring requires a government subsidy in order to induce shareholders to participate (see overview of solutions by LandierUeda below) To do Include Conversion Clauses in Long-term Debt Contracts Oliver Hart (Harvard University) and Luigi Zingales (University of Chicago) We design a new implementable capital requirement for large financial institutions (LFIs) that are too big to fail Our mechanism mimics the operation of margin accounts To ensure that LFIs do not default on either their deposits or their derivative contracts we require that they maintain a capital cushion sufficiently great that their own credit default swap price stays below a threshold level If this level is violated the LFI regulator forces the LFI to issue equity until the CDS price moves back below the threshold If this does not happen within a predetermined period of time the regulator intervenes We show that this mechanism ensures that LFIs are solvent with probability one while preserving the disciplinary effects of debt William Dudley president of the NY Fed favors this solution as well whereas Mervyn King Governor of the Bank of England notes that it is worth a try even if contingent debt-to-equity swaps cannot prevent moral hazard--they [the LCFI] still have an incentive to take really big risks because the government would provide some back-stop catastrophe insurance (102109)

In Case of Default Should Secured Creditors take a Haircut too If a debt to equity swap is not enough to restore solvency there must be a resolution mechanism in place for systemic bank holding companies and non-bank institutions FDIC Chairwoman Sheila Bair proposes the following solution Like the broad authority provided to the FDIC these [LCFI resolution] powers should include the ability to reject burdensome contracts sell assets resolve claims and establish and operate bridge financial companies A more far reaching proposal to consider is limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm This could involve limiting their claims to no more than say 80 percent of their secured credits This would ensure that market participants always have lsquoskin in the gamersquo(100409) Joseph Mason What the FDIC is struggling against is really a violation of absolute priority that puts traditional bank assets squarely out of the reach of the deposit insurer The FDIC is now standing behind collateralized margin claims liquidating banks that have no assets left in them after repo [and derivatives] counterparties bleed them dry of collateral (10062009) See also too-big-to-fail vs too-difficult-to-resolve debate by Robert Johnson former chief economist of the Senate Banking Commitee (via naked capitalism) He notes that the risk of systemic disruption due to opaque derivatives exposures will prevent the resolution authority from using its powers The result is forbearance and increased moral hazard as we are seeing it now What are the Restructuring Options for Systemically Important Banks Augustin Landier and Kenichi Ueda (IMF 062009) The bank restructuring options with the objective to reduce the probability of a bankrsquos default and keep the burden on taxpayers at a minimum are the following o First debt-to-equity swaps without any government involvement This option is the

first-best solution when debt contracts are easily renegotiable o Second when debt contracts cannot be changed transfers from the taxpayer are

necessary because equity holders in such a case will bear the full cost of any restructuring and not participate (shareholders have control rights)

o In order to overcome signaling problems and incentivize banks participation in view of asymmetric information a compulsory program or a restructuring that uses hybrid instrumentsmdashsuch as convertible bonds or preferred sharesmdash are possible solutions

o The optimal subsidy (ie second-best solution) with minimum cost to taxpayers is a guarantee under which the government transfers money ex post only when the bank is in default but not far from solvency The optimal insurance scheme provides no transfer to debt holders when default is inevitable or when the bank can repay debt on its own Note that this optimal subsidy does not involve any cash flows to taxpayers

o Well-designed asset guarantees can be less costly to taxpayers than recapitalizations (both with common equity or convertible securities) which in turn are more efficient than asset sales above market values

o One solution involving recapitalization that is close to the first-best debt-to-equity swaps solution are subsidized debt buybacks Here the proceeds of subsidized equity issuance are used to buy back debt followed by conversion into additional equity

o Another option are good banksbad banks where the good or bad assets are removed from a banks balance sheet

o Finally in order to prevent moral hazard management and shareholder penalties are necessary httpwwwrgemonitorcom10006Finance_and_Bankingcluster_id=9221

ftcomeconomistsforum

Raise interest rates to increase lending October 29 2009 600am

By Ronald McKinnon

This is an updated version of Liquidity traps and the credit crunch published in this forum on August 13 2009

Since the onset of the credit crunch and global downturn governments everywhere have responded to the shortfall in aggregate demand in a textbook Keynesian fashion They have adopted fiscal stimuli ramping up government expenditures and cutting taxes Central banks followed the lead of the Federal Reserve by driving down short-term interest rates toward zero almost exactly zero for overnight interbank rates in the US Japan and Canada and generally less than 1 per cent in Europe into the autumn of this year

By dis-aggregating the US stimulus package into its relevant components one can identify some elements that can and should be exited immediately without undermining - and perhaps even strengthening - the expansionary impact of the whole regime

The Fed should raise short-term interest rates from near-zero to modest levels say 2 per cent Long 10 or 30-year bond rates would be largely unaffected or could even fall But in the current zero-interest liquidity trap such a modest increase in short rates has distinct advantages

1 In the huge but still constricted wholesale interbank market constraints on borrowing or lending at medium terms to maturity would be largely relaxed Only then can general bank credit at ldquoretailrdquo ie to firms and households increase Surprisingly retail bank credit in the both the US and Europe is still declining 2 The sharp weakening of the dollar would be curbed thus preventing a new dollar carry trade that diverts American banks lending to foreigners

3 China could better re-balance its economy It could become more restrictive with slightly higher interest rates without again being deluged with inflows of hot money from the US

I will here discuss only the first - the least self-evident of the three points

Wholesale interbank markets Counter-party risk and zero short-term interest rates The Keynesian response of stimulating aggregate demand through easy money and loose fiscal policy is correct to a point But flooding the system with excess liquidity that drives short-term interest rates to near zero has been a serious mistake In this liquidity trap the interbank market remains almost paralyzed Further Fed injections of liquidity simply led to a buildup of excess reserves in US commercial banks without stimulating new lending to households and non-bank firms After the financial panic began in July 2008 figure 2 shows that the Fed responded by more than doubling the stock of base money which reflects the huge increase in commercial bank reserves from the Fedrsquos extraordinary purchases of financial assets from the private sector However M2 - a broad measure of deposits held by the non-bank public - only increased

a modest 5 per cent reflecting an offsetting large fall in the base money multiplier Most disappointing of all figure 2 also shows that retail bank lending declined - and continues to decline Insofar as US commercial banks did slightly increase their net assets as the counterpart of the modest increase in M2 it was to buy securities such as government bonds or mortgages fully insured by the government But increased working capital for businesses especially small and medium-sized languished despite the gargantuan efforts of the Fed to expand the size of the banking system

In line with textbook economic theory the Fed focused mainly on the shortfall in aggregate demand rather than on the underlying supply constraint on credit availability However starting from a position where interest rates are already very low say 2 per cent as in early 2008 reducing them to zero has only a second-order effect on expanding aggregate demand But going from 2 per cent to zero has a first-order effect of tightening the credit constraint on the supply side Leaving the fed funds rate at zero makes it impossible for the resumption of normal bank credit to support investment growth in future years Because credit is an input into working capital a credit constraint acts very much like a supply constraint on physical capital In either case dumping more liquidity into the system does not increase output Why

Retail lending involves making risky forward commitments much like transacting in forward markets in foreign exchange For example a bank might open a line of credit to a well-known corporate customer that could be drawn upon over the next year But below some well-defined maximum the customer chooses when to draw it down and by how much

The willingness of banks to make such forward commitments to lend to non-bank firms and households depends very much on the wholesale interbank market If the wholesale interbank market works smoothly without counter-party risk at positive interest rates then even currently illiquid banks can make forward loan commitments to their retail customers If such a bank happens to be still illiquid when a corporate customer suddenly draws down its credit line the bank can cover its retail commitment by bidding for funds in the wholesale market at close to the ldquorisk-freerdquo interest rate Because the riskiness of making forward retail loan commitments is thereby reduced the bankrsquos willingness to do more retail lending increases (Otherwise without participating in the interbank market each commercial bank would have to hold much higher liquid reserves against its potential retail lending opportunities)

If a crash in home prices makes all mortgage-related assets on bank balance sheets suspect then counter-party risk becomes acute and banks become less willing to lend to each other unsecured Because the LIBOR market is unsecured one very rough measure of counter-party risk from the US housing crash is the difference between the federal funds rate which is fully secured by repo agreements based mainly on Treasury bonds as the collateral and the unsecured LIBOR Figure 1 shows that before mid-2007 the one-month LIBOR rate closely tracked the fed funds rate Then after mid 2007 LIBOR began to edge above the federal funds rate before spiking sharply in late summer and fall of 2008 to more than 200 basis points above the fed funds rate This was the most acute phase of last yearrsquos financial panic-when interbank trading dried up In 2008 the main constraint on interbank trading was counter-party risk Governments everywhere responded by pumping more equity into banks greatly expanding the ambit of their deposit insurance and opening up various central bank discount windows for distress borrowers This gigantic effort seems to have reduced counter-party risk the fear

of bank failure in interbank trading Figure 1 shows the one-month LIBOR rate coming down close to the Fed funds rate now near zero by mid 2009

In 2009 however the zero interest rate policy became an important supply-side constraint on the resumption of normal interbank trading Positive rates of interest at all terms to maturity are necessary for restoring normal borrowing and lending in the wholesale interbank market Only then will banks that are liquid ie have excess reserves but no good future lending opportunities at retail lend to those that are illiquid-ie those with good retail lending opportunities in domestic or foreign trade but no excess reserves But if the risk-free federal funds rate is close to zero banks with excess reserves will not bother parting with them for a derisory yield

Interest rates donrsquot have to be very high to unblock private interbank markets- just 1 to 2 per cent Otherwise the Federal Reserve itself has to be the intermediary by using the (excess) reserves of the commercial banks lodged with it to lend directly to the private sector Apart from the potential undesirable political biases in government direct lending small and medium-sized firms - which cannot issue marketable commercial bills - are still left starved for even normal bank credit

Residual counter-party risk could still be lodged in smaller US banks among which there have been numerous failures so far in 2009 Indeed LIBOR only reflects average interest rates for trade among the worldrsquos 20 or so largest banks in London It need not reflect the plight of smaller banks which have not been beneficiaries of government largess But smaller banks are the natural lenders to small- and medium-sized enterprises which seem the most stressed in the current downturn Thus figure 2 could reflect a huge build-up of excess reserves concentrated in large banks while simultaneously many small and medium sized banks-without easy access to the interbank market-reduce their (retail) lending thus making a robust recovery in the US impossible

Ronald McKinnon is William D Eberle professor of international economics at Stanford University

October 29 2009 Ronald McKinnon Raise interest rates to increase lending October 29 2009httpblogsftcomeconomistsforum200910raise-interest-rates-to-increase-lending

Oct 28 2009

Norways Central Bank First to Raise Interest Rates in Europe Bank Signals Steeper Rate Path Norges Bank (Norways central bank) increased the key policy rate by 025 percentage points to 15 Executive boards strategy sets the key policy rate interval to 125 - 225 until its meeting in March 2010 Given the Norwergian economys mild downturn and strong recovery prospects monetary tightening was expected Norges Bank cautioned that a stronger krone could slow its expected pace of rate increases

Svein Gjedrem (Governor of Norges Bank) If the interest rate is raised too sharply and too early the downturn may be prolonged a strong krone may appreciate even further and

inflation may become too low If we proceed too slowly household demand may surge and inflation may gradually become too high (Norges Bank 10282009)

In Norway the key policy rate is the interest rate on banks deposits in Norges Bank

Putting the Rate Hike in a Global Context

Norway follows in the footsteps of the Reserve Bank of Australia which was the first among advanced economies to hike rates Ward and Atkins of FT While the Norges Bank decision has symbolic importance as the first rate rise in Europe the small size of Norwayrsquos economy and its particular characteristics means it will have little immediate impact on the European Central Bank (102809)

Factors Behind the Rate Hike Decision Underlying inflation in Norway rose to 24 in September from 21 in August According to Norges Bank other main reasons for the hike include lower than projected unemployment signs of growth in world economy and stronger-than-expected economic activity in the Norwegian economy The fact that the 2010 budget is more expansionary than initially expected also contributed to the decision to raise rates

See related spotlight issue on Norways economic outlook

Where Are Rates Headed Rasmussen of Danske Norges Bank forecasts rates at 275 end 2010 We see rates at 325 and think we will see more upward revisions to the interest rate path during 2010 Norges Bank is trying to weaken the NOK But we doubt they will be successful due to an underlying strong economy and high oil money spending in the budget (October 28 2009)

BNP Expects rates to be kept on hold in December and foresees a 25bp rate hike in February We believe the Norges Bank will choose to wait and see the impact of todays rate hike on the market and on the domestic currency (not available online 102809)

Bjoslashrn-Erik R Orskaug of DnB NOR [M]arket is pricing in rate hikes of about 25 bps at each meeting in the next 1 to 1 frac12 years That means a policy rate of 375 at the end of 2010 A path markedly below these expectations may result in market reactions in the shape of falls in interest rates and a weaker krone (October 26 2009)

Orskaug of DnB NOR forecasts gradual rate hikes which would put the key rate at 2 by September 2010 (October 26 2009) Norways Central Bank First to Raise Interest Rates in Europe Bank Signals Steeper Rate Path Oct 28 2009 httpwwwrgemonitorcom683Nordicscluster_id=8029

TRIBUNA JOAQUIacuteN ESTEFANIacuteA

El siglo maacutes largo La actual Gran Recesioacuten pertenece a la loacutegica del siglo XX y las ideas que la alimentaron son las culpables de las secuelas que dejaraacute La llamada nueva economiacutea era una ideologiacutea destinada a beneficiar a unos pocos

JOAQUIacuteN ESTEFANIacuteA 29102009

Ahora que se cumplen 20 antildeos de la caiacuteda del Muro de Berliacuten estacioacuten teacutermini del siglo corto de Hobsbawm es buen momento para revisar la tesis del historiador britaacutenico y comprobar si se ajustoacute a la realidad Recordemos en queacute consistiacutea hay una coherencia en los antildeos transcurridos desde el estallido de la Primera Guerra Mundial hasta el hundimiento del comunismo En esas casi ocho deacutecadas se manifestaron tres fases desde 1914 hasta el final de la Segunda Guerra Mundial desde 1945 hasta principios de los antildeos setenta 30 antildeos de extraordinario crecimiento econoacutemico y transformacioacuten social y una nueva era de descomposicioacuten incertidumbre y crisis para vastas zonas del mundo Ese siglo XX corto se compuso de una fugaz edad de oro en el camino entre una y otra crisis hacia un futuro desconocido y problemaacutetico

Cuando acaba de estudiar ese periodo Hobsbawm manifiesta su preocupacioacuten por la existencia de un planeta cautivo desarraigado y transformado por el colosal progreso econoacutemico y tecnoloacutegico del capitalismo dominante en los dos uacuteltimos siglos que habiacutea mejorado las condiciones de vida de mucha gente Y concluye Cuanto he escrito hasta ahora no puede decirnos si la humanidad puede resolver los problemas con los que se encuentra al final del milenio ni tampoco coacutemo puede hacerlo Pero quizaacute nos ayude a comprender en queacute consisten esos problemas y queacute condiciones pueden darse para solucionarlos aunque no en queacute medida estas condiciones se dan ya o estaacuten en viacuteas de darse Puede decirnos tambieacuten cuaacuten poco sabemos y queacute pobre ha sido la capacidad de comprensioacuten de los hombres y las mujeres que tomaron las principales decisiones puacuteblicas del siglo y cuaacuten escasa ha sido su capacidad de anticipar -y auacuten menos de prever- lo que iba a suceder esencialmente en la segunda parte del siglo (Historia del siglo XX)

Todaviacutea cuando escribe esto el planeta estaacute beneficiaacutendose de los mejores efectos de la nueva economiacutea aquel paradigma que afirmaba que habiacutean acabado los ciclos econoacutemicos (como se habiacutea terminado la historia) y que las sociedades no podiacutean maacutes que crecer y progresar Hoy sabemos que la nueva economiacutea fue en el mejor de los casos una ensontildeacioacuten y en el peor una ideologiacutea cuyo objetivo era beneficiar a unos pocos No es seguro y tampoco probable que nuestros hijos vayan a vivir mejor que nosotros Cuando llevamos maacutes de dos antildeos de Gran Recesioacuten y se empiezan a desvelar con crudeza las huellas que va a dejar en teacuterminos de paro empobrecimiento de las clases medias marginalidad hambre desigualdad o endeudamiento iquestes demasiado arriesgado analizar esta crisis heredera de la Gran Depresioacuten como una continuacioacuten natural de ese futuro desconocido y problemaacutetico que define al siglo XX y aseverar que a medida que avanza el nuevo milenio estaacute cada vez maacutes claro que la tarea principal seraacute reconsiderar los abusos intriacutensecos del capitalismo Entonces el siglo XX no seriacutea un siglo corto sino un siglo largo

Son bastantes los que definen a la actual crisis como un cisne negro en la descripcioacuten de Nassim Taleb un acontecimiento inesperado que ocasiona enormes impactos en este caso una tormenta que surgioacute en un cielo casi sin nubes imprevista que se abatioacute sobre un planeta

que creiacutea que tales acontecimientos extremos no se iban a repetir Otros sin embargo consideran que las bases para el actual derrumbamiento de la economiacutea estaban puestas desde hace al menos dos deacutecadas cuando la autodestruccioacuten del socialismo real cambioacute la naturaleza del poder y el escenario de los miedos aumentoacute el temor de los ciudadanos comunes que empezaron a soportar con maacutes intensidad que nunca la inseguridad a perder el puesto de trabajo a quedar atraacutes en una distribucioacuten de recursos cada vez maacutes desigual a zozobrar en el control de las circunstancias y rutinas de sus vidas cotidianas y quizaacute y sobre todo alarma ante el hecho de que quienes tienen la autoridad delegada hayan perdido su control a favor de fuerzas que estaacuten maacutes allaacute de su alcance como consecuencia de la globalizacioacuten realmente existente Por el contrario perdieron esos miedos los poderosos que a partir de principios de los antildeos noventa no se teniacutean que enfrentar ya a la existencia de un sistema poliacutetico y econoacutemico alternativo con todos los defectos que se le quieran poner (y que eran ciertos) y teniacutean barra libre para experimentar a su favor con cualquier unguumlento de serpiente como era la desregulacioacuten de mercados inestables con informacioacuten asimeacutetrica y competencia imperfecta

Llevamos maacutes de dos antildeos componiendo el juego de culpables de esta crisis los bancos centrales que no la previeron o la facilitaron con su poliacutetica de gran liquidez las agencias de calificacioacuten de riesgos que nos engantildearon sobre el verdadero valor de los activos financieros los fondos de alto riesgo totalmente libres los banqueros que sacaban de balance multitud de riesgos imprecisos los organismos reguladores que dedicados a lo que estaba dentro de sus fronteras no previeron que eacutestas ya no existiacutean para los movimientos de capital los gobiernos que permitieron todo lo anterior y lo legitimaron con su inaccioacuten Pero para comprender esta Gran Recesioacuten debemos ir maacutes allaacute de ese espejo de culpables parciales o de chivos expiatorios porque soacutelo ahondando en la fuente de los errores puede sentildealarse el sistema de ideas que dio lugar a ellos Como acertadamente ha sentildealado Robert Skidelsky (El regreso de Keynes) cuando algo va mal el primer instinto es sentildealar a los responsables praacutecticos de la cosa y soacutelo empezamos a culpar a las ideas cuando resulta evidente que aquellos responsables no eran excepcionalmente corruptos avariciosos ni incompetentes sino que estaban actuando sobre lo que creiacutean ser unos sanos principios y no lo eran el pensamiento uacutenico

Asiacute que las praacutecticas de todos esos agentes por escandalosas que hayan sido deben remontarse a las ideas que las acogieron Estas ideas (la autorregulacioacuten el Estado es el problema y el mercado la solucioacuten presupuestos equilibrados en sociedades con muchas necesidades primero es crecer y soacutelo luego distribuir la inflacioacuten como prioridad econoacutemica absoluta) llegan siempre a la arena puacuteblica mezcladas con la poliacutetica los intereses creados las circunstancias de cada eacutepoca y lugar y devienen en la ideologiacutea dominante

No soacutelo Skidelsky defiende esta interpretacioacuten de lo sucedido El Nobel de Economiacutea George Akerloff y otro economista que puede serlo en cualquier momento Robert Shiller se preguntan en queacute hemos estado pensando los ciudadanos durante la parte alta del ciclo por queacute no nos dimos cuenta de lo que estaba sucediendo si era evidente la artificiosidad de la economiacutea hasta que no se nos cayoacute el mundo encima con acontecimientos como bancos que quiebran y han de ser nacionalizados empresas que desaparecen contabilidad creativa peacuterdida de centenares de miles de empleos ejecucioacuten de hipotecas sequiacutea de preacutestamos bonus desequilibrantes de la estructura social Y se responden porque el puacuteblico y los Gobiernos se sentiacutean respaldados por una teoriacutea que les deciacutea que estaban seguros que todo iba perfectamente y que no corriacutean ninguacuten peligro

Aseguraba Schumpeter que las fluctuaciones ciacuteclicas de la economiacutea capitalista hoy tan abundantes no son como las amiacutegdalas oacuterganos aislados que pueden extirparse por separado

sino como los latidos del corazoacuten parte de la esencia del organismo que los pone de manifiesto

Quieacuten nos iba a decir que maacutes de 60 antildeos despueacutes de su muerte Keynes iba a ser tan reivindicado por el fracaso intelectual de las ideas que lo arrumbaron que iacutebamos a volver a contemplar la historia mucho maacutes como una escalera de espiral que con la linealidad que con tanta falsedad nos vendieron y que no iacutebamos a poder dejar tan faacutecilmente el siglo XX olvidaacutendonos de lo terrible que fue

httpwwwelpaiscomarticuloopinionsiglolargoelpepuopi20091029elpepiopi_12Tes

Banesto pone a la venta 1200 viviendas con rebajas del 40 EFE - Madrid - 29102009

Banesto pondraacute a la venta a partir del lunes y soacutelo durante noviembre 1200 viviendas en toda Espantildea con descuentos de hasta el 40 con el objetivo de dar salida a un precio ventajoso a una cuarta parte de su cartera de inmuebles Las rebajas se aplican sobre el precio de tasacioacuten de este antildeo periodo en el que la entidad se ha hecho con la mayoriacutea de las propiedades en liacutenea con el resto del sector para tener bajo control los posibles impagos En caso de venderlas todas la operacioacuten le reportaraacute cerca de 110 millones de euros

Seguacuten fuentes de la entidad presidida por Ana Patricia Botiacuten el banco abriraacute algunas de sus oficinas los viernes por la tarde y los saacutebados por la mantildeana al tiempo que celebraraacute rastrillos en al menos seis capitales de provincia Madrid Barcelona Valencia Sevilla Valladolid y Maacutelaga Ademaacutes pondraacuten puntos de informacioacuten especializada en las sucursales del banco maacutes cercanas y con mayor concentracioacuten de pisos en oferta Puntualmente el banco publicaraacute en su portal inmobiliario ofertas especiales

Aunque Banesto ofrece inmuebles en toda Espantildea con descuentos en Andaluciacutea estaacute el 23 de ellos (275) en Madrid el 13 (150) mientras que en Cataluntildea y la Comunidad Valenciana se concentran el 12 (140) respectivamente Maacutes de la mitad de las viviendas tienen tres dormitorios en tanto que maacutes de una cuarta parte cuentan con dos Asimismo con el objetivo de vender el mayor nuacutemero de viviendas la entidad ofreceraacute hasta el 90 de financiacioacuten en condiciones preferentes y a un plazo maacuteximo de 40 antildeos

Bruselas exige a Espantildea que suprima las ayudas fiscales a las fusiones ANDREU MISSEacute - Bruselas - 29102009

La Comisioacuten Europea ha exigido a Espantildea que suprima el reacutegimen fiscal que favorece la compra de empresas extranjeras por parte de compantildeiacuteas espantildeolas Bruselas pide la supresioacuten de una disposicioacuten del impuesto de sociedades que permite amortizar durante cierto tiempo el sobreprecio pagado en la adquisicioacuten de una compantildeiacutea extranjera respecto a su precio de mercado El fundamento de esta decisioacuten es que Bruselas estima que la norma fiscal da una ventaja competitiva a las empresas espantildeolas

Tras la investigacioacuten iniciada en octubre de 2007 la Comisioacuten llegoacute a la conclusioacuten de que el reacutegimen fiscal espantildeol falseaba la competencia en el mercado uacutenico ya que otorgaba una ventaja injustificada a las empresas espantildeolas especialmente en las ofertas puacuteblicas de adquisicioacuten La comisaria de Competencia Neelie Kroes precisoacute que para preservar unas condiciones competitivas equitativas en el mercado uacutenico Espantildea debe poner fin a esta medida y recuperar la ayuda legal concedida desde diciembre de 2007

La circunstancia de que la obligacioacuten de recuperar estas ayudas ilegales sea soacutelo efectiva a partir de diciembre de 2007 implica que las cantidades que deberaacuten devolver las empresas seraacuten muy reducidas debido a que las grandes operaciones afectadas se hicieron antes de esta fecha

El portavoz de Competencia Jonathan Todd precisoacute que ni Iberdrola ni Telefoacutenica deberaacuten devolver las deducciones que se aplicaron por sus adquisiciones de la compantildeiacutea energeacutetica Scottish Power y la operadora O2 respectivamente La explicacioacuten es que estas compantildeiacuteas teniacutean razones para considerar que el reacutegimen no era ilegal antes de que la Comisioacuten abriera la investigacioacuten El Banco Santander sin embargo deberaacute devolver las deducciones que se aplicoacute en la compra de Alliance amp Leicester en 2008

Informacioacuten adicional Kroes precisoacute por otra parte que la Comisioacuten sigue esperando que Espantildea le enviacutee informacioacuten adicional sobre las adquisiciones fuera de la Unioacuten Europea donde podriacutean estar justificados tratamientos diferentes

Por lo que respecta a las adquisiciones en paiacuteses que no pertenecen a la Unioacuten Europea las autoridades espantildeolas aducen que persisten obstaacuteculos especiacuteficos y que en un futuro proacuteximo presentaraacuten a la Comisioacuten Europea elementos adicionales a este respecto seguacuten fuentes comunitarias Lo que implica que continuacutea la investigacioacuten sobre esta parte de la medida

Un portavoz del Ministerio de Economiacutea y Hacienda -cuya titular es Elena Salgado que se entrevistoacute con Kroes a mediados de mes- manifestoacute estar muy satisfecho con la decisioacuten de Competencia y consideroacute que la cuantiacutea a devolver por las empresas seraacute miacutenima

El Santander afirma que Espantildea es la mayor amenaza para su negocio El Santander gana un 3 menos con 6740 millones para aumentar su colchoacuten y cae en Bolsa con fuerza

ELPAIacuteScom - Madrid - 28102009

El banco maacutes grande de Espantildea y toda la eurozona el grupo Santander aunque no es inmune a la crisis estaacute logrando capear el temporal con solvencia gracias a la buena evolucioacuten de su negocio en Reino Unido donde saca lustre a la incorporacioacuten a su red del Alliance amp Leicester y el Bradford amp Bingley y Europa Continental de donde procede el 49 de su beneficio Precisamente la entidad ha apuntado a la diversificacioacuten geograacutefica como factor clave para mantener unos buenos resultados a pesar de recortar sus beneficios un 3 ya que seguacuten ha advertido el consejero delegado Alfredo Saacuteenz el mercado espantildeol es la principal amenaza para su negocio

Pese a este temor justificado por el fuerte deterioro del mercado inmobiliario la persistencia en el alza del paro y la atoniacutea del consumo que llevaraacuten a Espantildea a la que incluye dentro de los paiacuteses con un ritmo lento de recuperacioacuten a ser el uacuteltimo de la eurozona en dejar atraacutes la recesioacuten Saacuteenz se ha mostrado confiado en que el Santander ganaraacute cuota de mercado en nuestro paiacutes durante los proacuteximos antildeos Un trozo del pastel que iraacute creciendo en la medida en que el proceso de reestructuracioacuten reduzca la cartera de las cajas que han ganado posiciones frente a la banca en los uacuteltimos ejercicios por su apuesta decidida por el sector inmobiliario ahora en entredicho En cualquier caso Saacuteenz se ha mostrado convencido de que no existe ninguacuten riesgo de que se produzcan en 2010 quiebras en Espantildea algo que no seriacutea bueno para el sistema

Seguacuten ha comunicado a la CNMV el banco que preside Emilio Botiacuten ha cerrado los nueve primeros meses de 2009 con un recorte del 3 en su beneficio atribuido hasta los 6740

millones de euros tras destinar todas las plusvaliacuteas obtenidas en este periodo 2247 millones a aumentar su colchoacuten de reservas para hacer frente al posible deterioro de activos y el aumento de la morosidad

Caiacuteda en Bolsa Una vez concluida la eacutepoca de los beneficios reacutecord que acompantildearon al ciclo expansivo de la economiacutea el banco de Botiacuten estaacute optando por mantener estables sus ganancias y seguir retribuyendo al accionista al tiempo que refuerza su balance ante lo que pueda venir y cumple con las previsiones del mercado De hecho el grupo ha confirmado hoy su objetivo de repetir el beneficio de 2008 que ascendioacute a 8876 millones y tambieacuten su deseo de mantener el dividendo fin al que destinaraacute 4812 millones pese al entorno de mercado complicado Pese a ello los inversores han castigado al valor en Bolsa cuyas acciones caiacutean pasadas las 1100 maacutes de un 3 en un mercado a la baja

De los 2247 millones de plusvaliacuteas netas 1400 millones han ido a parar a provisiones geneacutericas y otros 600 millones a sanear los inmuebles que como el resto del sector ha adquirido para evitar un exceso de mora en sus activos inmobiliarios

En total el Santander ha aumentado su colchoacuten en 7200 millones desde enero un 54 maacutes que el antildeo pasado con lo que ascienden a 16619 millones de los que 10550 millones fueron dotaciones especiacuteficas -las realizadas ante creacuteditos dudosos- y 6069 millones geneacutericas -las aportadas en funcioacuten de los creacuteditos independientemente de si tienen riesgo-

Morosidad del 33 para final de antildeo No obstante seguacuten antildeade la nota el Santander confiacutea en que la morosidad se situacutee por debajo del 35 a cierre de antildeo en Espantildea desde el 298 actual En su conjunto la tasa de mora general del grupo volvioacute a moderar su ritmo de crecimiento por segundo trimestre consecutivo hasta cerrar septiembre en el 303 con una tasa de cobertura que sube por primera vez desde 2006 hasta el 73 Incluso podriacutea limitar su subida hasta el 33 seguacuten ha matizado Saacuteenz que ha adelantado que tanto esta tasa como la dotacioacuten de provisiones alcanzaraacute su pico maacutes alto a mediados del antildeo que viene

En cuanto a los indicadores que miden la solvencia el core capital -capital y reservas sobre activos ponderados por riesgo- se situoacute en el 77 frente al 67 que marcoacute en septiembre de 2008 mientras que el Tier 1 alcanzoacute el 92 frente al 83 de un antildeo antes

Sobre los uacuteltimos meses contabilizados el Santander que sigue moderando el diferencial con respecto a 2008 tras cerrar el primer trimestre con un recorte de sus ganancias del 5 y del 446 en en el segundo destaca que el resultado del tercer trimestre ha sido de 2221 millones de euros una cifra ligeramente superior al del mismo periodo del antildeo pasado (2205 millones) mejora que no se habiacutea producido en los dos primeros trimestres de este antildeo

Ademaacutes el grupo emergido como uno de los ganadores de la crisis financiera internacional resalta que mientras los ingresos siguen subiendo con un ritmo del 16 los planes del recorte de gasto han permitido moderar su avance a la mitad con un 8 lo que ha situado su ratio de eficiencia en 413 tres puntos inferior al de un antildeo antes y entre los mejores del mundo seguacuten antildeade en la nota a la CNMV

Mejora de todos los maacutergenes El hecho de que lo peor del deterioro econoacutemico generalizado haya pasado ya tambieacuten se nota en el negocio tiacutepico bancario del Santander que mejora en un 217 con una facturacioacuten de 17232 millones del margen neto Tambieacuten eleva su margen de intereses en un 243 con

19478 millones en tanto que el bruto alcanzoacute los 29371 millones despueacutes de un incremento del 156 pese a que los ingresos por comisiones se redujeron el 08

Por su parte los creacuteditos a la clientela se situaban en 670059 millones de euros netos el 109 maacutes que en septiembre de 2008 pese a caer un 1 en Espantildea en tanto que los recursos de los clientes sumaban 866879 millones el 45 maacutes

En cuanto al mercado de Estados Unidos el Santander espera que su filial el Sovereign empiece a aportar beneficios el proacuteximo antildeo despueacutes de haber equilibrado ya sus resultados tras las peacuterdidas cosechadas en los nueve primeros meses del antildeo de 29 millones

Los impagos en el alquiler suben un 12 entre enero y junio Madrid tiene la tasa maacutes elevada y junto a Murcia es la uacutenica comunidad que supera la media espantildeola- Les sigue Baleares Paiacutes Vasco y Cataluntildea

AGENCIAS - Madrid - 28102009

Los impagos de la renta del alquiler han cerrado la primera mitad del antildeo con un avance del 1222 lo que ha disparado el iacutendice de morosidad por encima de los 188 puntos 21 puntos maacutes que el nivel con el que acaboacute 2008 seguacuten el (FIM) de la empresa privada FIM Ibeacuterica

De abril a junio Madrid alcanzoacute la tasa de mora en arrendamientos maacutes elevada de Espantildea con una deuda media superior a los 14600 euros un 1644 maacutes que en igual periodo del pasado antildeo y junto a Murcia (con cerca de 12000 euros de media) fue la uacutenica comunidad que superoacute la media espantildeola situada en 7600 euros Les siguioacute Baleares con una morosidad que ascendioacute a los 10156 euros Paiacutes Vasco con 8000 euros y Cataluntildea con 7078 euros adeudados

En el otro extremo Aragoacuten cuenta con la menor tasa de mora de alquiler de Espantildea con una media que no alcanzoacute los 3000 euros a pesar de que experimentoacute el segundo mayor crecimiento en el segundo trimestre del 1702 soacutelo superada por la Comunidad Valenciana (1751)

El fichero de FIM que cuenta con 70000 registros de arrendamientos impagados tanto de particulares como de empresas y estaacute inscrito en el Registro General de la Agencia Espantildeola de Proteccioacuten de Datos estaraacute disponible a partir de ahora a traveacutes de Internet por 995 euros para cualquier arrendador De ellos un 15 de los casos cuentan con datos provenientes de sentencias judiciales por desahucio El resto lo aportan los propietarios

El objetivo del FIM es minimizar los riesgos de morosidad para el propietario asiacute como ofrecer informacioacuten perioacutedica sobre la evolucioacuten de la mora en el alquiler de vivienda en Espantildea ha explicado el director general de FIM Ibeacuterica Antonio Carroza que ha anunciado que a partir de ahora publicaraacute informes trimestrales

El director de FIM Ibeacuterica ha subrayado que estos datos muestran que no pagar un alquiler en Espantildea es muy barato y no tiene consecuencias mientras que si uno deja de pagar un recibo de inmediato es inscrito en todos los ficheros de morosidad En este sector ante un impago el tiempo medio para desalojar al inquilino moroso es de entre diez y veinte meses Ademaacutes seguacuten ha antildeadido el arrendatario es muy paciente para denunciar a un moroso y que casi nunca lo denuncia antes de seis meses de impago

Seguacuten ha recordado actualmente existen en Espantildea 31 millones de pisos vaciacuteos lo que significa que mientras en nuestro paiacutes soacutelo se arrienda el 8 del parque inmobiliario disponible la media europea es del 30 porcentaje que aumenta en el caso de Alemania donde alcanza el 58

httpwwwelpaiscomarticuloeconomiaimpagosalquilersubenenerojunioelpepueco20091028elpepueco_7Tes

Nouriel Roubini|Balanced Global Diet Oct 28 2009 Nouriel Roubini| Oct 28 2009

From the International Herald Tribune httpwwwnytimescom20091029opinion29iht-edroubinihtml_r=1ampadxnnl=1ampref=globalampadxnnlx=1256742466-ARMF7CuS9C2GhMeXFwipw

Global imbalances mdash roughly defined the different emphasis the worldrsquos leading economies place on savings spending and debt mdash is a phrase much used and little acted upon

Well before the current financial crisis began world leaders pledged to address this disconnect At an International Monetary Fund meeting in 2007 for instance representatives of the United States and the European Union agreed they should change economic incentives to encourage more savings and less spending officials speaking for China Japan and Germany meanwhile pledged to take steps to encourage spending At the end of the day nothing much happened and these imbalances helped grease the skids for the global descent toward the economic abyss

This might not be readily apparent from current numbers in fact the financial crisis has contributed to a significant narrowing of global economic imbalances Consumers in so-called ldquodeficit countriesrdquo mdash states like the US Britain Spain and the countries of Eastern Europe that have huge trade deficits mdash are saving more as the crisis has exposed the dangerous extent of their indebtedness Meanwhile in China and other large export-driven economies fiscal stimulus spending and some other policy moves have encouraged more domestic consumption

The reduction in the US current account deficit mdash the broadest measure of trade in goods and services mdash is particularly striking and serves as an example This reduction holds true across other less robust economies too Many of the emerging economies of Eastern Europe had easily financed wide deficits during the boom years Now they find they are reducing private consumption in light of the lack of credit

In more desperate cases like Ukraine and Kazakhstan this has necessitated currency devaluation that boosts the costs of imports Others especially Eastern European countries in line for EU membership have clung to their currency pegs This leaves room for adjustment only via a sharp reduction in domestic demand

Changing ingrained habits mdash whether the tendency is to be too thrifty or too loose with money mdash is never easy There is a powerful temptation to point at current trends and argue that rebalancing is taking place naturally That would be a big mistake

All evidence suggests that this rebalancing is temporary mdash the result of reactive policy measures among exporters and retrenchment among the profligate China the worldrsquos sovereign wealth machine over the past decade is a case in point My colleague Rachel Ziemba projects Chinarsquos current account surplus will likely narrow to $350-370 billion depending on the import trajectory down from a record $420 billion in 2008

Chinarsquos trade surplus was just under $100 billion in the first half of 2009 A trade surplus of about $30 billion in the third quarter of this year is expected which is well below 2008 levels Increased spending at home rather than savings could further reduce the surplus Yet with China reluctant to allow currency appreciation reserve accumulation has resumed at a strong pace

Although the export-oriented growth model has been shaken by the crisis many countries seem reluctant to recalibrate The beginning of inventory restocking has buoyed Asia significantly as companies that cut back sharply have now increased output Avoiding currency appreciation will exacerbate this trend adding to reserve accumulation and distortions

The most recent IMF estimates mdash released in the October 2009 World Economic Outlook mdash suggest that imbalances could widen again but remain lower (as a share of GDP) than their 2006 peak Yet the dollar values of these imbalances could be very large

In the IMFrsquos forecast Chinarsquos surplus will widen again in 2010 even as a retrenched US consumer remains weak

So who offsets the US deficit The IMF suggests a diffusion of imbalances where surpluses of Germany and Japan will remain in shrinking mode even in 2010 while the deficits of Canada and Australia as well as emerging economies like Brazil will offset the growth of Chinarsquos surplus However the IMF five-year projections also show a widening current account surplus for the entire world This could suggest that some of the underlying export assumptions are too optimistic given the growth estimates

Global imbalances are back on the policy agenda with the G-20 agreeing to create a peer review of macroeconomic policies including imbalances to avoid another crisis The details are limited so far but focus once again on an agreement that the US will consume less and save more Japan Germany and China will spend more and will reallocate investment away from the export sector

These are the right goals to be sure But a joint communiqueacute from a nascent international organization isnrsquot much to hang the worldrsquos hat upon The IMF needs teeth perhaps along the lines of the WTOrsquos authority to prod member states toward ldquoout of courtrdquo settlements in order to enforce these difficult political and economic goals

These imbalances represent serious misallocations of capital in domestic economies that projected globally raise the risks considerably of future financial crises and asset bubbles

While imbalances did not cause the current financial crisis mdash I believe lax regulation bears a far greater onus mdash these imbalances certainly helped create the conditions for this crisis Easy money and low long-term interest rates created an incentive to invest in seemingly-safe high-yield assets An orderly unwinding of imbalances might put a lid on global growth during the adjustment but is fundamental to achieve sustainable global growth

Nouriel Roubini is a professor of economics at the Stern School of Business New York University

httpwwwrgemonitorcomroubini-monitor257899a_balanced_global_diet

Noticias de Espantildea y del mundo Para salir de la encrucijada econoacutemica La crisis ha confirmado que a fin de aumentar la flexibilidad y la resistencia de nuestras economiacuteas es clave seguir avanzando en las reformas de los mercados de bienes servicios y trabajo Las reformas de los mercados de bienes y servicios deben fomentar la competencia y acelerar la reestructuracioacuten JOSEacute MANUEL GONZAacuteLEZ-PAacuteRAMO

Publicado Mieacutercoles 28-10-09 a las 03 07

Transcurridos maacutes de dos antildeos del comienzo de la crisis la maacutes severa en varias generaciones podemos ya extraer algunas lecciones sobre la eficacia de las medidas adoptadas para restablecer la estabilidad y la solidez de nuestros sistemas financiero y econoacutemico

Los datos maacutes recientes confirman que ya no estamos en caiacuteda libre La combinacioacuten de un estiacutemulo monetario y fiscal extraordinario la provisioacuten ilimitada de liquidez del Banco Central Europeo (BCE) y las medidas gubernamentales dirigidas a reforzar el balance de las entidades de creacutedito estaacute contribuyendo ya de forma efectiva a la recuperacioacuten de la economiacutea y a la suavizacioacuten de las tensiones financieras Este apoyo seguiraacute notaacutendose durante los proacuteximos trimestres incluso en mayor medida

No obstante tambieacuten es forzoso reconocer que la crisis no seraacute breve Es inmensa la cantidad de riqueza financiera y productiva que ha sido destruida o dantildeada y su recuperacioacuten no seraacute posible sin emprender reformas que promuevan el trasvase de recursos hacia sectores de futuro Respecto de las medidas monetarias presupuestarias y de apoyo al sistema financiero eacutestas soacutelo seraacuten uacutetiles para sentar las bases de un crecimiento sostenido si se aplican de forma consistente con los objetivos de estabilidad de precios estabilidad financiera y sostenibilidad presupuestaria esto es si se entiende que son medidas necesariamente temporales Por eso su eacutexito a medio y largo plazos pasa por definir y comunicar estrategias apropiadas de salida de la crisis Los gobiernos europeos ya se han comprometido a consolidar sus presupuestos cuando se asiente la recuperacioacuten y el BCE por su parte retiraraacute progresivamente sus medidas extraordinarias teniendo en cuenta los riesgos para la estabilidad de precios asiacute como tambieacuten la situacioacuten de los mercados financieros

iquestQueacute hay que preservar y queacute hay que reformar para salir con confianza de la encrucijada financiera y econoacutemica en la que Europa se encuentra Hay dos categoriacuteas de ensentildeanzas de la crisis entre las que cabe distinguir las referidas a lo que ha funcionado bien y que cabriacutea reforzar y las relacionadas con lo que ha ido mal y debe reformarse

La crisis ha demostrado que poseemos algunos activos de valor inestimable sobre los que debe pivotar el retorno de la confianza Subrayareacute cuatro de ellos Primero nuestra soacutelida moneda uacutenica basada en una poliacutetica monetaria orientada de modo creiacuteble a garantizar la estabilidad de precios a medio plazo El euro ha sido y continuaraacute siendo un gran activo tambieacuten en tiempos de incertidumbre y crisis financiera Tenemos una moneda uacutenica soacutelida creiacuteble y global lo que nos ha permitido reaccionar firmemente con prontitud y eficacia cuando como ocurrioacute en otontildeo de 2008 la crisis financiera comenzoacute a desbordarse a la economiacutea real

Otro de nuestros activos es el marco de poliacutetica macroeconoacutemica orientado al medio plazo En la zona del euro el firme compromiso del BCE con la estabilidad de precios y la aplicacioacuten del Pacto de Estabilidad para afianzar la sostenibilidad de las finanzas puacuteblicas ha contribuido durante la pasada deacutecada a contener los desequilibrios macroeconoacutemicos y a fomentar la creacioacuten de empleo La vigencia del Pacto debe ser uno de los pilares del retorno de la confianza

El tercer activo es el compromiso europeo con la apertura externa y la competitividad con el dinamismo de nuestras empresas y con la necesidad de fomentar la preparacioacuten y cualificacioacuten de nuestra poblacioacuten activa Debemos recordar que la apertura exterior dinamiza nuestras estructuras fomenta la reforma y da a Europa un gran peso en la direccioacuten de la economiacutea global Por ello ceder a la tentacioacuten proteccionista es una foacutermula para el desastre econoacutemico absoluto

Finalmente como ilustran las iniciativas del Eurogrupo el ECOFIN el Consejo de Estabilidad Financiera o los acuerdos del G 20 la respuesta a la naturaleza global y compleja de la crisis actual se ha traducido en una intensificacioacuten sin precedentes de la cooperacioacuten econoacutemica internacional tanto entre los paiacuteses europeos como a escala mundial La colaboracioacuten entre las autoridades en aacutembitos como la gestioacuten de liquidez la poliacutetica monetaria la poliacutetica fiscal y la regulacioacuten financiera ha demostrado ser crucial para garantizar la coherencia de los objetivos y la eficacia de las medidas

La crisis ha puesto tambieacuten de manifiesto que algunos elementos institucionales de nuestras economiacuteas son perjudiciales y deben reformarse a fondo iquestCuaacuteles son estos pasivos En primer lugar la crisis ha demostrado que la capacidad de resistencia de nuestros sistemas financieros puede verse gravemente afectada si los reguladores y los supervisores no vigilan adecuadamente los fallos del mercado derivados de la falta de transparencia los incentivos cortoplacistas en las remuneraciones y en el control de riesgos y la orientacioacuten prociacuteclica de algunas normas prudenciales y contables Los compromisos del G 20 en estos aacutembitos deben aplicarse sin dilacioacuten

En segundo lugar la crisis ha evidenciado que en un entorno de raacutepida innovacioacuten financiera y con mercados financieros internacionales altamente integrados y poblados por instituciones grandes y complejas el principio de regulacioacuten y supervisioacuten nacional estaacute abocado al fracaso Los pilares de un sistema financiero internacional estable soacutelo pueden asentarse en marcos de regulacioacuten y supervisioacuten internacionalmente coordinados y en los que la vigilancia del riesgo sisteacutemico reciba la atencioacuten adecuada

Asimismo la crisis ha mostrado que el crecimiento de un laquosistema financiero en la sombraraquo disentildeado para aprovechar el arbitraje regulatorio y obtener beneficios a corto plazo no es coherente con la estabilidad financiera a largo plazo El periacutemetro regulatorio debe abarcar a toda entidad bancaria o no sisteacutemicamente relevante asiacute como a todos los productos y mercados de importancia sisteacutemica

Por uacuteltimo la crisis ha confirmado que a fin de aumentar la flexibilidad y la resistencia de nuestras economiacuteas es clave seguir avanzando en las reformas de los mercados de bienes servicios y trabajo Las reformas de los mercados de bienes y servicios deben fomentar la competencia y acelerar la reestructuracioacuten y las de los mercados de trabajo deben tener dos objetivos mejorar el proceso de fijacioacuten de salarios y facilitar la movilidad laboral (geograacutefica y sectorial) que es esencial en momentos de ajuste

Es eacuteste un imperativo urgente para economiacuteas en las que la rigidez de las instituciones laborales se erige en un obstaacuteculo insalvable para la sustancial reasignacioacuten de recursos que exige el pasado sobredimensionamiento de sectores como el financiero o el inmobiliario En

combinacioacuten con las restricciones crediticias y la tendencia a la caiacuteda de los gastos de inversioacuten e innovacioacuten un mercado de trabajo riacutegido podriacutea retardar largos antildeos la recuperacioacuten de los niveles de renta previos a la crisis Primero porque el paro coyuntural se convertiriacutea en estructural debido a la peacuterdida de empleabilidad Segundo porque dificultariacutea la sostenibilidad presupuestaria Y tercero porque hariacutea probable que el necesario cambio de ciclo de tipos de intereacutes que habraacute de producirse en el aacuterea del euro sea poco adecuado para las condiciones especiacuteficas de las economiacuteas menos ambiciosas en la reforma

Deciacutea Jean Monnet que los hombres no aceptamos el cambio sino en la necesidad y que no vemos eacutesta maacutes que como reflejo de la crisis Por ello la imagen que hoy nos devuelve el espejo de la realidad del desempleo debiera ser el catalizador de las reformas necesarias Los retos son extraordinarios tanto como uacutenica la oportunidad que se nos ofrece

httpwwwabces20091028opinion-tercerapara-salir-encrucijada-economica-200910280307html

28102009 Having done such a great job at the eurogroup Juncker now recommends himself as EU president

Jean-Claude Juncker put himself up as a candidate for the presidency of the European Council a job as he put it in an interview with Le Monde he would not immediately refuse if others offered it to him This is only partly who about gets to be the first president of the council It is also about what the presidentrsquos job is about Juncker said he would take a minimalist position dealing mainly with the internal aspects of EU council meetings and not act as a representative of the EU abroad Since Blair never really understood how the council works one would expect him to have different view on the subject It looks as that Junckerrsquos unofficial candidacy serves mainly to get rid of Blair Sarkozy and Merkel will meet for dinner tonight where the issue will almost certainly come up It will also be a theme though not official agenda point at the EU summit which starts tomorrow

Eurozone lending contracts The latest European data show a annual drop in corporate credits by 01 the first recorded since the beginning of the statistical series in 2003 These data are a somewhat lagging indicator of what has been happening on the ground but they confirm that we are in a continuing credit squeeze FT Deutschland has talked to a number of experts who says that credit conditions are very likely to deteriorate further The main hope is that the turnaround will come in early 2010 One economist expressed concerned about the fall in M1 growth which he said might signal a slowdown in economic growth next year

ECB warns banks not to pay out Christian Noyer governor of the Bank of France warned that banks are taking the same risks that led to the financial crisis reports the Irish Independent He urged that banks should preserve capital rather than to pay it out to bankers and investors Bank profits in recent weeks were a result of public policies to combat the crisis and did not mean the industry hadrecovered its balance or that further reforms were not necessary While the worst has been avoided he warned that ldquomost of the negative effects of the economic downturn on balance sheets are still to comerdquo

$155 is pain threshold for euro-dollar FT Deutschland reports on a study according to which a euro exchange rate of $155 is a

critical pain threshold for German exporters The study is based on a price elasticity investigations between 19952008 and concludes that at this level exporters start withdrawing from markets One of the authors of this study Ansgar Belke made the additional point that the benefits of hedging will be limited this time as companies are still benefiting from their hedges of 2008 when EurDlr reached 160

In defence of the new German government Germanyrsquos new government will be elected ndash if all goes well for them ndash and sworn in today In a comment in FT Deutschland Christian Schuette looks at the extremely low expectations by the German media and finds some of the same criticisms that commentators held up against the Willy Brandt government in 1969 He says the most important thing for the new government to do is not to panic and to push through its agenda

In a separate comment Wolfgang Muenchau says this government might bring the most signficant political change in German economic policy since 1969 For the first time the country drives a deliberately expansionary policy in the end-phase of an economic crisis to ensure that a solid recovery gains hold And secondly the appointment of Wolfgang Schauble as finance minister is the best that could have happened for European co-ordination He is still remembered outside Germany as the co-author of the Schauble-Lamers core Europe paper in the mid 1990s and he is one of the most ardent advocates of closer European integration As Germanyrsquos representative in the Ecofin Eurogroup and G20 he will change both substance and style of Germanyrsquos international economic policy

John Kay on why we need to sort out of the too-big-to-fail problem John Kay has a terrific comment in the Financial Times in which he argues that we need to reduce the size of the financial sector or else risk even more severe problems than we faced during the current crisis He says Mervyn King was right when he said that the purpose of regulation is to protect the pubilc not to pursue the interests of the financial sector When the next crisis comes a frustrated public is likely to turn not only on negligent politicians but also on capitalism itself

Buiter on the ESRB In a long post Willem Buiter says he supports the idea of macroprudential supervision in principle but the EUrsquos proposals for a European Systemic Risk Board are ill-conceived He says while central bankers clearly have to be represented in those boards they are not the most competent supervisors The Bundesbank failed to spot the mess of the Landesbanken and the Bank of Spain failed to spot the problems of its own banking sector He concludes ldquoCentral banks have neither the technical knowledge nor the tools and instruments nor the legitimacy to dominate the macro-prudential financial stability framework Back to the drawing boardrdquo

Boeri and Panunzi on Italian fiscal policy In Lavoce Tito Boeri and Fausto Panunzi write about the abolition of Irap an Italian local business tax In an article entitled Voodoo Economics and Tremonti they write that Italyrsquos finance minister has better strengthen his efforts to reduce the deficit To compensate for the revenue loss of Irap the government talks about saving cuts in consumption which in the past proved so illusionary And the most dangerous perception is that tax cuts have no effect on debt or may improve the public accounts httpwwweurointelligencecomarticle581+M55a5baf96000html

ftcommaverecon Willem Buiter

The proposed European Systemic Risk Board is overweight central bankers October 28 2009 1234am On September 25 2009 the Commission of the European Communities produced a proposal for EU-level macro-prudential regulation and supervision ldquoProposal for a Regulation of the European Parliament and of the Council on Community macro prudential oversight of the financial system and establishing a European Systemic Risk Boardrdquo It looks as though the EU Presidency (Sweden) and the Commission are trying to get this proposal adopted in a hurry

I recognise the need for EU level regulation and supervision of macro-prudential risk and support EU-level Colleges or Agencies to supervise systemically important cross-border banks other financial institutions markets and instruments Unfortunately the design of the proposed European Systemic Risk Board (ESRB) is a shambles The composition of the General Board the Steering Committee and the Advisory Technical Committee the selection of the Chair of the General Board and the Steering Committee (the same person) the selection of the Chair of the Advisory Technical Committee (appointed by the General Board on a proposal from its Chair) and the nature of the Secretariat are ludicrously lopsided in favour of central banks in general and of the ECB in particular It is high time to have a re-think before the EU adopts and implements a financial and political disaster

(1) This is it

The European Commissionrsquos proposal is worth quoting at length In this Section all quotes are in italics My own comments are in regular characters

61 Establishment of the ESRB

The ESRB is an entirely new European body with no precedent which shall be responsible for macro-prudential oversight The objective of the ESRB shall be threefold

bull It shall develop a European macro-prudential perspective to address the problem of fragmented individual risk analysis at national level

bull It shall enhance the effectiveness of early warning mechanisms by improving the interaction between micro-and macro-prudential analysis The soundness of individual firms was too often supervised in isolation with little focus on the degree of interdependence within the financial system

bull It shall allow for risk assessments to be translated into action by the relevant authorities

62 Tasks and powers of the ESRB

The ESRB will not have any binding powers to impose measures on Member States or national authorities It has been conceived as a ldquoreputationalrdquo body with a high level composition that should influence the actions of policy makers and supervisors by means of its moral authority

621 Warnings and recommendations

An essential role of the ESRB is to identify risks with a systemic dimension and prevent or mitigate their impact on the financial system within the EU To this end the ESRB may issue risk warnings These warnings should prompt early responses to avoid the build-up of wider problems and eventually a future crisis If necessary the ESRB may also recommend specific actions to address any identified risks

ESRB recommendations will not be legally binding However the addressees of recommendations cannot remain passive towards a risk which has been identified and are expected to react in some way If the addressee agrees with a recommendation it must communicate all the actions undertaken to follow what is prescribed in the recommendation

If the addressee does not agree with a recommendation and chooses not to act the reasons for inaction must be properly explained Hence recommendations issued by the ESRB cannot be simply ignored

The ESRB shall decide on a case by case basis whether warnings and recommendations should be made public

Comply or explain in short

65 The internal organisation of the ESRB

The ESRB shall be composed of (i) a General Board (ii) a Steering Committee and (iii) a Secretariat

651 The General Board

The General Board is the decision making body of the ESRB and as such will be responsible for the adoption of the warnings and recommendations described in section 621 of this explanatory memorandum

The members of the General Board with voting rights are

- the Governors of national central banks (currently 27)

- the President and the vice-President of the ECB (2)

- a Member of the European Commission (1)

- the Chairpersons of the three European Supervisory Authorities (3)

The members of the General Board without voting rights are

- one high level representative per Member State of the competent national supervisory authorities (currently 27 assuming there can be no more than one competent national supervisory authorities we already know there can be at least one incompetent national supervisory authority if the competent national supervisory authority is the central bank that central bank gets a non-voting member of its own as well as its voting Governor member)

- the President of the Economic and Financial Committee (1) This is the committee established pursuant to Article 114 of the Treaty establishing the European Community[1]

Until the EU expands its membership the membership of the General Board would therefore be 61 enough to run a small football league This is not a body that will do anything useful

652 Chairperson

The Chair will be elected for 5 years from among the Members of the General Board of the ESRB which are also Members of the General Council of the ECB The Chair will preside the General Board as well as the Steering Committee and instruct the Secretariat of the ESRB on

behalf of the General Board The Chair shall be able to convene extraordinary meetings of the General Board on its own initiative As regards voting modalities within the General Board the Chair will have a casting vote in the event of a tie The Chair shall represent the ESRB externally

What is interesting here is that because the General Council of the ECB includes the 6-member Executive Board and the 27 Governors of the national central banks (NCBs) it could in principle amp in theory be possible for someone other than the President of the ECB to be the Chair of the ESRB including a Governor of an NCB that is not part of the Eurosystem In practice because the Governing Council of the ECB (the six Executive Board members plus the Governors of the sixteen NCBs that are also members of the Eurosystem) which is a subset of the General Council has 18 voting members on the ECB General Board (the President and the Vice-President of the ECB and the Governors of the 16 Eurosystem NCBs) it will always be able to have its way as the total number of voting members is 33

653 The Steering Committee

Given the size of the General Board -which will comprise a total of 61 members- a Steering Committee will assist the decision-making process of the General Board The Steering Committee will prepare the meetings of the General Board review the documents to be discussed and monitor the progress of the ESRBrsquos on-going work

The Steering Committee will comprise the Chair and Vice-Chair of the General Board the Chairpersons of the three ESAs the President of the EFC the Member of the Commission and five members of the General Board which are also members of the General Council of the ECB (12 members)

Note that central bankers will dominate the Steering Committee with seven out of 12 members The Chair of the Steering Committee is the same person as the Chair of the General Board all but certain to be the President of the ECB

654 The Secretariat

The ECB will ensure the Secretariat to the ESRB The Secretariat will receive instructions directly from the Chair of the General Board

Who was surprised that the ECB will lsquoensurersquo the Secretariat to the ESRB

655 The Advisory Technical Committee and other sources of advice

The role of the Advisory Technical Committee (hereinafter referred to as the ldquoATCrdquo) is to provide advice and assistance to the General Board on the issues that are within the scope of the ESRB on request from the latter

The members of the ATC are

- one representative of each national central bank

- one representative from the ECB

- one representative of the national supervisory authority per Member State

- one representative of each European Supervisory Authority

- two representatives of the European Commission

- one representative of the EFC

The Chair of the ATC shall be appointed by the General Board on a proposal from its Chair

Note that because for quite a few member states the representative of the national supervisory authority will come from the central bank it is quite likely that the ATC will have a majority of central bankers on it Its chair is effectively in the gift of the President of the ECB

(2) Central banks are wildly over-represented on the proposed ESRB

Six arguments support the view that central banks are greatly over-represented on the proposed ESRB

(1) The ECB the Eurosystem NCBs and the rest of the EU NCBs have not exactly covered themselves with glory in the area of macro-prudential supervision and regulation during the past decade Like the Fed they failed to foresee the financial crisis let alone to prevent it Like the Fed the ECB and most other EU central banks contributed over a period of many years to the unsustainable credit and asset market boom and bubble that turned to bust starting in August 2007 They did so by keeping interest rates too low for too long by failing to control the excessive growth of credit and the broad monetary aggregates and by failing to diagnose the excessive leverage and the maturity and liquidity mismatch that was building up in the banking sector and shadow banking sector balance sheets

In Germany the Bundesbank failed to diagnose the deep rot in most of the Landesbanken and the excessive leverage of its main cross-border banks in Spain the Banco de Espantildea despite being widely admired for its pioneering of dynamic provisioning failed to recognise the wildly excessive exposure of its regional Cajas to the construction industry developers and the housing market generally The Banque de France missed an epochal fraud at Socieacuteteacute Generale The Dutch central bank missed the ball completely with the ABN-Amro take-over and the subsequent collapse of Fortis The litany of central bank failure is endless

It makes no sense to turn over control of the task of macro-prudential supervision to a set of institutions that have manifestly failed to do the job properly at the latest time of asking They have no track record of competence in macro-prudential supervision

Clearly as the ultimate providers of domestic-currency-liquidity of the highest quality central banks have to be actively involved in maintaining financial stability and in restoring it should it become impaired They should not be put in charge of the activity however Arguments to the contrary including those made by the Fed (in its opposition to proposals for a new council of financial regulators who would collectively rule the financial stability roost rather than conceding supremacy to the Fed or a to body dominated by the Fed) have no intellectual merit and are best explained as manifestations of the very human and institutional desire for more turf

(2) The central banks in control of the ESRB would be conflicted in the use of their instruments especially in the setting of the short-term interest rates under their control by the potentially clashing demands of price stability and financial stability This point has been made many times but does not get any less convincing because of its frequent invocation

(3) Macro-prudential regulation and supervision inevitably involves guiding and direction the actions of and even determining the fate of large systemically important individual financial institutions Such institutional life-or-death decisions involve property rights and other important distributional and wider political dimensions as well as technical issues They are inherently political even party-political The independence of the ECB in the area of price stability could be undermined if it were to play a dominant role in macro-prudential regulation and supervision

(4) The proposed construction ignores the central fiscal dimension of financial stability Although there was much that was flawed about the UK model of financial stability

management its tripartite nature has to be a feature of any viable system for macro-prudential management The key financial stability related competencies are (1) liquidity provision (2) prescribing and proscribing behaviour of financial actors and (3) solvency support These three functions or competencies can be performed by three different institutions with the central bank engaged in liquidity provision the Treasury providing tax payer support for under-capitalised systemically important institutions and a regulatorsupervisor telling financial institutions what they must do andor cannot do These three functions or competencies can also be bundled in just two organisations (typically the Treasury for the solvency support and the central bank for liquidity support and regulatory and supervisory authority) or even by just one the Treasury taking over the functions of the central bank and the regulatorsupervisor

Regardless of how these tasks are structured institutionally the recent crisis has made it clear that without the ultimate support of current and future tax payers (managed through the Treasury) either there is no such thing as a safe bank (or a safe highly leveraged institution with serious asset-liability mismatch as regards maturity liquidity and currency mix) or safety for the banks can only be assured by abandoning the goal of price stability

When central banks act on their own to recapitalise under-capitalised banks as has been done on a large scale in the US and on a smaller but still significant scale in the Euro Area the UK and Japan they act in a quasi-fiscal capacity that undermines important constitutional and legal prerogatives of the legislature These quasi-fiscal operations of the central banks (through artificially low borrowing rates for banks overvalued collateral and outright purchases of private securities at prices above fair value etc) are in addition often opaque and non-transparent They represent an abuse of seigniorage by an appointed unaccountable authority In the interest of good government quasi-fiscal actions should be rooted out and replaced by explicit transparent fiscal actions including fiscal bail-outs

Before banks are supplied with additional capital by the tax payer however the unsecured and secured creditors and other counterparties of the undercapitalised or borderline-insolvent banks should be asked to donate blood In inverse order of seniority haircuts should be applied to unsecured creditors and to secured creditors and other counterparties or their (contingent) claims on the bank should be converted into common equity

It is astonishing to have a proposal for a European Systemic Risk Board that does not find a place in the key decision-making bodies for the fiscal authorities - a place that ought to be at least as significant as that of the central banks Indeed a proper tripartite representation with equal voting rights for central banks fiscal authorities and regulatorssupervisors has much to recommend it

(5) The proposed construction does not allow for the proper representation of the financial industry Obviously we donrsquot want turkeys to turn up in large numbers to vote against Christmas Industry representatives should however be present as a matter of course in a non-voting capacity The expertise in the central banks the regulatorssupervisors and the ministries of finance concerning complex systems and convoluted financial instruments is quite inadequate as a foundation for effective macro-prudential management We must get the banks hedge funds and other financial institutions inside the tent

(6) The proposed construction does not permit external independent talent knowledge and expertise to be brought to bear on the decision making process There are independent experts outside the central banks regulatorssupervisors ministries of finance and the (private) financial sector who would have much to contribute to a systemic risk board Time to get such experts be they at universities think tanks or other research institutes on board

No substantive accountability

The proposal repeats a feature of the design of the ECB that is most unwelcome the absence of any substantive accountability To the ECB (and to its architects) accountability means reporting obligations - nothing more And indeed in the Commissionrsquos proposal it states

66 Reporting obligations

ldquoThe ESRB shall be accountable to the European Parliament and to the Council and shall therefore report to them at least annually The European Parliament and the Council may also require the ESRB to report more oftenrdquo

Reporting obligations are part of what is sometimes called formal accountability It means that the Agent or Trustee (the ESRB) is required to provide the Principal or Beneficiary (the Council the European Parliament the citizens of the EU) with the information necessary to assess how well the AgentTrustee has performed with respect to its mandate Substantive accountability means that the Principal(s) can impose sanctions on the AgentTrustee if the performance of the AgentTrustee is unsatisfactory in the eyes of the Principal(s)

Substantive accountability is lacking for the ECB because it is logically incompatible with the extreme degree of independence accorded by the Treaty to the ECB in the conduct of monetary policy That same extreme degree of independence the ECB enjoys in the pursuit of price stability the Commission apparently also wishes to bestow on the ESRB in the pursuit of financial stability This is implied by its proposal for two reasons First because accountability is as with the ECB defined purely in terms of reporting obligations with no sanctions or punishment available to be imposed on the ESRB and its members should their performance not be up to snuff Second because the majority of the voting members of the General Board and the Steering Committee are members of the Governing Council of the ECB The Executive Board members of the ECB and the 16 NCB Governors of the Eurosystem are inviolable and untouchable as monetary policy makers How could they be fired demoted reprimanded subjected to a pay cut or tarred and feathered and run out of town in their new capacity as members of the General Board and Steering Committee of the ESRB

The lack of substantive accountability of the ECB as regards monetary policy should not be extended to the domain of financial stability which is an inherently political rather than just a technical issue

Conclusion

We need an EU level macro-prudential stability board The current proposals for the ESRB are however deeply misguided as they make the central banks the dominant players in the systemic risk game Central banks have neither the technical knowledge nor the tools and instruments nor the legitimacy to dominate the macro-prudential financial stability framework Back to the drawing board

[1] Contrary to what I asserted in the first version of this note the EFC is not a committee of the European Parliament Rather it gathers senior civil servants from national Ministries of Finance It is de facto a preparatory forum for the ECOFIN Council The relevant committee of the European Parliament is called the Economic and Monetary Affairs Committee I am indebted to Carlomagno (carlomagno07gmailcom) for correcting my error

httpblogsftcommaverecon200910the-proposed-european-systemic-risk-board-is-overweight-central-bankers

COLUMNISTS

lsquoToo big to failrsquo is too dumb an idea to keep By John Kay

Published October 27 2009 2136 | Last updated October 27 2009 2136

In the 2007-08 crisis many different kinds of financial institution failed or were saved only by state intervention Large financial conglomerates ndash Citigroup and Royal Bank of Scotland Investment banks ndash Bear Stearns and Lehman Smaller retail banks without investment banking arms (but with active treasuries) ndash Northern Rock and Sachsen Landesbank Diversified banks such as Fortis and specialist lenders such as Hypo RE Public agencies such as Fannie Mae and Freddie Mac Americarsquos largest

insurer AIG Taxpayers will be footing the bills for a generation

All these businesses exemplified management hubris and in almost all the failure was the result of losses in activities that were peripheral to their core business Otherwise they had little in common The variety of institutions is matched by the variety of regulators The list of public agencies supervising failed businesses is much longer than the list of institutions

There are people who believe that in future better regulation co-ordinated both domestically and internationally will prevent such failures The interests of consumers and the needs of the financial economy will be protected by such co-ordinated intervention and there will never again be major calls on the public purse There are also people who believe that pigs might fly Mervyn King governor of the Bank of England has made enemies by pointing out that they will not

It is impossible for regulators to prevent business failure and undesirable to pursue that objective The essential dynamic of the market economy is that good businesses succeed and bad ones do not There is a sense in which the bankruptcy of Lehman was a triumph of capitalism not a failure It was badly run it employed greedy and overpaid individuals and the services it provided were of marginal social value at best It took risks that did not come off and went bust That is how the market economy works

The problem now is how to have greater stability while extricating ourselves from the ldquotoo big to failrdquo commitment and taking a realistic view of the limits of regulation ldquoToo big to failrdquo exposes taxpayers to unlimited uncontrolled liabilities The moral hazard problem is not just that risk-taking within institutions that are too big to fail is encouraged but that private risk-monitoring of those institutions is discouraged

Interconnected systems too complex and dangerous to fail are not unique to financial services Failure could also have catastrophic consequences in electricity networks oil refineries and petrochemical plants and nuclear power stations Interconnectedness is handled by building robust systems If the failure of individual components might destroy the whole systems are redesigned to eliminate the problem

The paradox is that every financial institution has elaborate procedures to deal with a technological failure but neither they nor the financial system as a whole has measures for organisational failure We need to achieve that ndash by setting up firewalls between activities

within companies and across sectors and by breaking down large institutions into parts so that problems of individual elements do not jeopardise the whole

The best way to safeguard the real economy while protecting the public purse is to ensure essential financial services to individuals and businesses are regulated but to refuse to underwrite risk-taking Some ndash including Martin Wolf in last Fridayrsquos paper ndash argue this result could be achieved by higher capital requirements and ldquoliving willsrdquo If these requirements were sufficiently demanding they would achieve the same outcomes as the separation involved in narrow banking ndash because they would amount to much the same thing The capital requirements would have to be not just higher but much higher while an effective living will would need to ringfence retail operations and assets to enable an administrator to take them over seamlessly in a crisis

Their activities underwritten by implicit and explicit government guarantee it is increasingly business as usual for conglomerate banks The politicians they lobby sound increasingly like their mouthpieces espousing the revisionist view that the crisis was caused by bad regulation It was not the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand While regulators may be at fault in not having acted sufficiently vigorously the claim that they caused the crisis is as ludicrous as the claim that crime is caused by the indolence of the police

The governor of the Bank of England is one of the few public officials to have grasped that the primary purpose of regulation is to protect the public both as taxpayers and users of financial services and not to promote the interests of the financial services industry When the next crisis hits and it will that frustrated public is likely to turn not just on politicians who have been negligently lavish with public funds or on bankers but on the market system What is at stake now may not just be the future of finance but the future of capitalism

johnkayjohnkaycom

httpwwwftcomcmss0375f4528-c330-11de-8eca-00144feab49as01=1html

Economy is kick-started but can it motor ahead By Neil Irwin Washington Post Staff Writer Wednesday October 28 2009

Over the past year the US government has thrown almost every tool at its disposal toward making the economy grow again And it has worked at least for now

The trillion-dollar question for the economy now is What will happen when those government supports are gone While the government has successfully jump-started the US economy there are emerging signs that its engine still isnt running very well and may even sputter out

The government has deployed about half of $787 billion in spending and tax cuts that were part of its stimulus package It has executed the Cash for Clunkers program that boosted auto sales over the summer and it has taken a wide range of steps to support the housing market The Federal Reserve besides cutting its target interest rate to nearly zero has committed $175 trillion to unconventional programs meant to reduce interest rates

The combined results of all those efforts will be on display Thursday when the Commerce Department reports on gross domestic product for the July through September quarter Economists expect that broadest measure of economic activity to have risen at a 3 percent annual rate compared with a 64 percent drop in the first quarter and forecasters expect growth to continue through years end

The patient is out of intensive care but is still highly medicated said David Shulman senior economist at the UCLA Anderson Forecast So you dont know how much of this growth is driven by short-term stimulus and how much of it is self-sustaining My guess is this is going to be the best quarter of growth for a long time

Besides the government programs a major factor in the rebound is that companies have ramped up operations to restore inventories depleted during the recession -- although that boost to growth is also expected to wane in the quarters ahead

The risk in the current crisis is that the structural changes occurring in the economy are so great that they will take far longer to play out than the government can maintain policies to support growth Some remedies such as the housing tax credit may even serve to delay those structural adjustments

The idea behind the government interventions was to boost economic activity when it otherwise would be far below its potential supporting demand for goods and services of all types and helping instill confidence that the nation is not entering a downward economic spiral Having bridged that down period the economy should begin to improve on its own momentum as businesses ramp up production and begin hiring and making investments again

Thats the idea anyway But fundamental changes are occurring in the economy that could slow growth for some time The United States needs to shift away from consumption and home building and toward business investment and exports Meanwhile whole industries from financial services to auto manufacturing to news media are being fundamentally remade

Various elements of the governments efforts to prop up the economy will likely expire before those transitions are done Cash for Clunkers is already over having boosted auto sales during the summer but resulting in a 35 percent drop in the rate of sales from August to September

It may have pulled forward some sales that would have happened later and led some people who to buy new cars who would have bought used said Chris Hopson an auto industry analyst at IHS Global Insight But in terms of lasting impact on the way the industry does business we dont see there being much

An $8000 tax credit for first-time home buyers which was part of the February stimulus package is scheduled to expire Nov 30 although Congress is moving to extend it into the spring Other programs to support housing include help for people facing foreclosure and an expansion of Federal Housing Administration insured loans

Economists at Goldman Sachs last week estimated that government supports for housing increased prices 5 percent over where they would be otherwise and that as the programs expire the risk of renewed home price declines remains significant

The Fed has said its program to buy $300 billion in Treasury bonds will expire this month and that its program to buy $145 trillion in mortgage-related securities will be wound down by the end of March 2010 (It has also indicated it will leave the bank lending rate it controls near zero for an extended period though there is plenty of disagreement among Fed watchers over just how long that period will turn out to be)

And spending through the $787 billion stimulus package known as the American Recovery and Reinvestment Act will taper off next year and into 2011 Nonprofit journalism group ProPublica estimates that there is about $291 billion left to spend and $150 billion in tax cuts yet to play out

Programs like Cash for Clunkers and the home-buyer tax credit are like caffeine to the economy in that the buzz dissipates quickly said Ethan Harris chief US economist for Bank of America-Merrill Lynch The bigger program the Fed monetary easing and the Obama stimulus plan have a longer-lasting impact But as we move out into the middle of next year you need to see signs that economic growth has become self-generating Thats where well have a second test of the recovery

Historically some nations that experienced financial crises have rebounded relatively quickly said Carmen M Reinhart a University of Maryland economist But they tend to be nations that have moved more aggressively than the United States to remove bad loans from bank balance sheets she said

We have stopped the freefall with household spending and residential activity stabilizing and the fiscal stimulus kicking in she said so the numbers for the second half are going to look like a recovery

But Reinhart the author with Kenneth S Rogoff of This Time Is Different a history of financial crises worries about what lies ahead As she put it The question is how robust and how durable it would be You eventually need some sort of normalcy in the availability of credit but we havent established that or anything close to that

Economy

October 28 2009

Fears of a New Chill in Home Sales By DAVID STREITFELD Even as new figures show house prices have risen for three consecutive months concerns are growing that the real estate market will be severely tested this winter Artificially low interest rates and a government tax credit are luring buyers but both those inducements are scheduled to end Defaults and distress sales are rising in the middle and upper price ranges And millions of people have lost so much equity that they are locked into their homes for years a modern variation of the Victorian debtorrsquos prison that is freezing a large swath of the market ldquoPlenty of pain yet to comerdquo said Joshua Shapiro chief United States economist for MFR He is forecasting an imminent resumption of price declines This summer housing seemed at last to be stabilizing A flood of last-minute buyers trying to conclude a deal before the tax credit expires Nov 30 helped push up the Standard amp PoorrsquosCase-Shiller home price index a seasonally adjusted 1 percent in August it was announced on Tuesday That was the first time since early 2006 that the widely watched measure of 20 metropolitan areas put together three consecutive increases While underlining the importance of that long-awaited rise Maureen Maitland the Samp P vice president for index services warned ldquoEverything is up for grabs this winterrdquo Consumers seem acutely aware of the strains ahead The Conference Boardrsquos consumer confidence index fell unexpectedly in October after reaching its high for the year in September the board announced on Tuesday The only hot sector of the real estate market has been foreclosures Investors and first-time buyers have been competing for these often creating bidding wars But with the economy still weak many analysts expect more foreclosures Another factor likely to weigh on home sales in the coming months is a rise in interest rates As the Federal Reserve ceases its buying of mortgage-backed securities rates may well drift up to 6 percent from 5 percent Worries about the fragility of the housing market fanned by the real estate industry may prompt an extension of the tax credit The controversial program has spurred as many as 400000 buyers including Brenda Colon a nurse in Las Vegas ldquoIf you had told me in January that I would be buying a house I would have laughedrdquo said Ms Colon 48 who lives with her two daughters and granddaughter ldquoBut the tax credit was just the kicker to throw me overrdquo Yet despite the tax credit and other local and federal incentives for homebuyers in Las Vegas prices there are continuing to fall shedding 08 percent in August The cityrsquos home prices have declined on average more than 55 percent from their peak more than in any other metropolis Whenever the tax credit finally expires Las Vegas and every other city will have to confront the inevitable question after all such stimulus packages what will motivate the buyers of tomorrow

ldquoIn my office people were buying homes left and right because of that tax creditrdquo said Kitty Berberick who works for an insurance company in Las Vegas ldquoThat credit was a godsendrdquo Ms Berberick 62 could not strike a deal in time and now has signed another lease for her apartment If the credit is not extended she said she is likely to give up the search entirely until the market really crashes This of course is the sort of fatalistic attitude that relentlessly drove down prices last fall ldquoEveryone keeps telling me itrsquos going to go down before it goes uprdquo Ms Berberick said ldquoI hope it does because then I can buyrdquo The recovery is both modest and tentative when measured against the preceding plunge Prices have fallen nearly a third from their peak and are down 114 percent over the last year In most major cities it is as if the housing boom never happened Prices over all are back to where they were in the fall of 2003 Some cities have been pushed down even more In Cleveland prices are at 2001 levels in Detroit theyrsquore at 1995 It is the magnitude of this decline that makes Karl E Case the Wellesley professor for whom the Case-Shiller index is partly named an optimist While acknowledging ldquothere are a lot of dangers out thererdquo Mr Case said ldquohousing is as affordable as itrsquos been in 20 years I donrsquot see a very rapid recovery but I think wersquove seen the bottomrdquo Sixteen of the 20 cities in the index rose in August including San Francisco up 26 percent and Minneapolis which rose 23 percent Besides Las Vegas three cities fell Charlotte Cleveland and Seattle New York was up 03 percent The Case-Shiller numbers on prices lag behind the National Association of Realtorsrsquo report on existing-home sales which has been issued for September Sales were up 94 percent from August with the tax credit again getting much of the credit Critics of the credit argue that the number of those who merely qualify for it mdash and gladly take it mdash greatly outnumber those it is precisely intended to assist people who would not have bought a house otherwise That means they argue that the government is essentially paying more than $40000 for each purchase that would not have occurred without the credit That is an expensive proposition said Roberton Williams a senior fellow at the Tax Policy Center who has closely followed the issue ldquoThe bigger threat to the housing market is not the reduction in demand from the end of the credit but the continuing wave of foreclosures wersquore likely to see over the next 18 monthsrdquo he said In California there is strong evidence that foreclosures are beginning to migrate from the subprime inland areas to the more exclusive coastal region According to MDA DataQuick third-quarter notices of default in Santa Barbara were up 25 percent from 2008 in San Luis Obispo they rose 46 percent in Marin County they were up 66 percent Defaults in hard-hit Sacramento by contrast were up only 10 percent In Merced County in the Central Valley an epicenter of the bust they actually fell While defaults are only the first stage in foreclosure Mr Shapiro the MFR economist expects many formerly creditworthy homeowners to go under He says he thinks the recent improvement in Case-Shiller numbers is an aberration rather than the beginning of a long-term improvement with consequences for the larger economy ldquoAnother leg down in home prices even if much more limited than the initial move would nonetheless weigh on consumer spendingrdquo Mr Shapiro said adding that he did not expect a second recession httpwwwnytimescom20091028businesseconomy28homehtmlthampemc=th

Politics

October 28 2009

Bill Seeks to Shift Rescue Costs to Big Banks By STEPHEN LABATON WASHINGTON mdash The Obama administration and the head of an important House committee unveiled legislation on Tuesday to give the government broad new powers to shift the cost of rescues of big troubled financial institutions from taxpayers to other large companies

The legislation drafted jointly by Treasury officials and Representative Barney Frank the head of the House Financial Services Committee would create a special fund paid by assessments on financial companies with more than $10 billion in assets to bear the costs of big firms that fail

A statement by the committee said that the legislation followed a ldquopolluter-pays model where the financial industry has to pay for its mistakes mdash not taxpayersrdquo Assessments on those companies would be made only after the collapse of a large institution and the legislation gives the government authority to levy such payments over an extended period The legislation tries to respond to the enormous outcry over the serial taxpayer bailouts over the last 15 months of some of the nationrsquos biggest financial companies including Bear Stearns Fannie Mae Freddie Mac the American International Group Citigroup and Bank of America

The measure directed at institutions whose troubles might pose risks to the financial system would create a powerful financial services oversight council led by the Treasury secretary and composed of top regulators to set policy and tougher regulations for the largest companies and mediate disputes between federal agencies It would also give the Federal Reserve Board a lead role in directly supervising many of the largest financial conglomerates

The legislation would impose new restraints on industrial loan companies mdash financial institutions owned by commercial enterprises like retailers or manufacturers mdash and in the future would not permit any more commercial companies to own banks The committee striking a compromise with the administration preserves the thousands of thrift charters that the White House proposed to eliminate but it gives supervision of thrift holding companies to the Fed to prevent them from shopping for the least restrictive regulator

The legislation would permit the government to impose tough new capital requirements on the largest companies as well as take them over making their shares virtually worthless and remove management when they fail It would provide new authority for the Federal Deposit Insurance Corporation which seizes weak commercial banks to take over other large failing financial institutions like insurance companies or hedge funds

Under the proposal future rescues of large institutions would be paid for by other big firms The proposal says that any financial company with assets of more than $10 billion would have to contribute to the rescue of a failed firm The legislation emerged after

community banks lobbied to ensure that small institutions would not have to pay for future bailouts The legislation was made public after the House Financial Services Committee approved another major chapter of legislation aimed at overhauling the regulatory system

Continuing its focus on the regulatory issues raised by the financial crisis the committee approved a measure that would require hedge funds private equity funds and offshore pools of capital to register with the Securities and Exchange Commission The committee also nearly completed its work on a provision to impose tighter regulations on credit rating agencies which it is expected to approve on Wednesday

At the committeersquos legislative drafting session on Tuesday Representative Paul Kanjorski the Pennsylvania Democrat who heads the House Financial Services Subcommittee on Capital Markets added the requirement of registration by offshore funds Without that he said regulators could not get a broad picture of the marketplace

ldquoThere is a common psychology to use the Cayman Islands to hide fundsrdquo Mr Kanjorski said ldquoThe whole point of these bills is to get a large enough understanding of the total amount of capital that the systemic risk regulator should be aware ofrdquo

Mr Kanjorskirsquos legislation contained an exemption for venture funds but they would have to provide more information to regulators in other ways

The legislation approved by the committee on Tuesday would also give the commission the authority to abolish the requirement that brokers force customers to take disputes to arbitration And it would establish a fund to compensate whistle-blowers on Wall Street who report unlawful activity

The legislation was prepared after the revelations of problems at the SEC including its repeated failures over many years to detect the huge Ponzi scheme engineered by Bernard L Madoff

The legislation that the committee is expected to approve on Wednesday would tighten restrictions on credit rating agencies and would explicitly give investors the ability to sue the companies if they violate federal securities law and ldquoknowingly or recklesslyrdquo fail to review significant information as they prepare their ratings

Senator Christopher J Dodd the Connecticut Democrat who heads the Senate banking committee has said he intends to introduce legislation as early as November He has been engaged in discussions on a draft of the legislation with Senator Richard Shelby of Alabama the senior Republican on the committee The men have a close working relationship though aides said that significant differences remain between them about important aspects of the legislation

The House Financial Services Committee has already approved legislation tightening regulation of derivatives and creating a consumer protection agency to monitor companies for misleading credit cards or mortgages

httpwwwnytimescom20091028uspolitics28regulatehtml_r=1ampthampemc=th

COMPANIES

ING to be broken up in wake of bail-out By Michael Steen in Amsterdam

ING one of Europersquos biggest financial groups unveiled a radical break-up forced on it by the European Commission that will have the financial services group sell off its insurance and investment management business

The dismantling of ING is one of the toughest interventions yet by Europersquos competition authorities which waved through state aid to financial groups during the crisis but made clear these would be subject to scrutiny if they later appeared too generous

It is expected that the forced divestments will have repercussions for state-aided banks in Europe and the US as well as in the UK

Analysis Payback time - Oct-26 How ING will be forced to go back to basics - Oct-26 ING move a warning to UK banks - Oct-26 Lex ING - Oct-26 Gapper blog A bank is made to pay for misdemeanours - Oct-26 Video Sharlene Goff assesses the implications for UK banks - Oct-26

ING must offload its insurance business worth an estimated euro12bn-euro15bn and focus solely on banking to meet the commissionrsquos demands a decision that goes substantially further than expected The break-up also includes a requirement that ING sell ING Direct USA its US banking arm

ING will be left with a balance sheet about 45 per cent smaller than before it turned to the state last year roughly equivalent to that of Commerzbank the German lender Commerzbank in May agreed to cut its balance sheet by 45 per cent to comply with Brusselsrsquo demands In the UK Lloyds Banking Group and Royal Bank of Scotland are likely to face similar demands to shrink

ING also announced plans to raise euro75bn in equity to cover the early repayment of half the euro10bn capital injection it received plus premium and to fund about euro13bn in extra payments for state guarantees on risky assets

Although both the Commission and ING declined to be drawn on the extent to which Brussels dictated the radical restructuring plans there was little doubt among analysts that the company had faced a long list of demands from Neelie Kroes the European Union competition commissioner

Chris Hitchings analyst at Keefe Bruyette amp Woods said ldquoThe reason theyrsquore selling the whole lot is because Kroes told them to They donrsquot want tordquo

ING which embarked on a ldquoback to basicsrdquo restructuring programme earlier this year had drawn up plans to manage insurance and banking separately ndash in a retreat from the classic bancassurance model ndash but it had been choosing individual assets to sell rather than tearing up its business model

The restructuring is to be completed by 2013 Jan Hommen chief executive said an initial public offering for the insurance business as a whole would be ldquoquite interestingrdquo but other options included IPOs of smaller parts of the business

The requirement to sell ING Direct USA is a blow to ING which had built up the biggest global network of such direct online and telephone retail banks However it was the unitrsquos move to invest in ldquoalt-Ardquo mortgage-backed securities that led the group to seek state aid

Shares in ING fell 18 per cent to euro956

httpwwwftcomcmss0681ffe72-c200-11de-be3a-00144feab49ahtml

vox Research-based policy analysis and commentary from leading economists

Reserve accumulation and easy money helped to cause the subprime crisis A conjecture in search of a theory Guillermo Calvo 27 October 2009

How did turmoil in the US subprime mortgage market ignite a global crisis This column explains how emerging marketsrsquo voracious appetite for international reserves coupled with record-low US policy interest rates and lax financial regulation to produce the large-scale creation of quasi-money subject to self-fulfilling-expectations runs The theory suggests significant changes in Fed and regulatory policy are needed

A view that is gaining popularity as one of the fundamental explanations for the current crisis is that emerging marketsrsquo voracious appetite for international reserves coupled with record-low US policy interest rates and lax financial regulation to produce a frantic ldquosearch for yieldrdquo the creation of fragile financial instruments and occasionally outright fraud For example see Henry Paulsonrsquos discussion quoted in Guta (2009)

This view ndash particularly the ldquofinancial fragilityrdquo component ndash could help to answer a central question namely why minor fireworks in the subprime mortgage market ignited a fearsome powder keg and a local problem became global in a short span of time

In this column I will present a framework that provides some conceptual support for the view The framework stresses fragilities associated with liquid financial instruments that have long been identified in the finance literature1 For the sake of concreteness I will focus on the Fed and abstract from international aspects unless strictly necessary

The financial framework The argument develops through eight related points

1 A starting point is that the 19978 AsianRussian crises showed emerging economies the advantage of holding a large stock of international reserves to protect their domestic financial system without IMF cooperation This self-insurance motive is supported by recent empirical research though starting in 2002 emerging economiesrsquo reserve accumulation appears to be triggered by other factors2 I suspect that a prominent factor was fear of currency appreciation due to (a) the Fedrsquos easy-money policy following the dot-com crisis and (b) the sense that the self-insurance motive had run its course which could result in a major dollar devaluation vis-agrave-vis emerging economiesrsquo currencies3

2 Let me make some simplifications I will assume that reserve money is a composite of US currency and Treasury bills Let s be the nominal interest rate on reserve money4 Thus when the demand for international reserves goes up the Fed can opt for accommodating its supply or lowering the policy interest rate (which I will equate with s)

3 Enter the private sector as producer of reserve money and as I will conjecture generator of a rickety financial system Asset-backed securities and collateralised debt obligations are

different from Treasury bills but are certainly much closer to reserve money than the underlying assets Thus the development of those instruments can be seen as helping to create what might be called (reserve) quasi-money

Quasi-money creation is costly part of the cost stems from the fact that quasi-money competes with official reserve money When s declines ndash especially when s falls more than inflation as in the US ndash the marginal cost of creating quasi-money goes down stimulating supply Therefore an increase in the demand for international reserves accompanied by a lower interest rate on reserve money (s) will give rise to an increase in the supply of quasi-money The effect of low s is enhanced by lax financial regulation and the expectation of bailouts in case of systemic crisis (more on this below) Without the latter the supply effect was unlikely to be large

4 As a general rule quasi-money can be created by generating some type of mismatch of maturities or currency denomination For example bank deposits are a class of quasi-money which has shorter maturity than the assets banks hold against them Therefore their moneyness requires that only a handful of depositors attempt to cash their deposits at the same time If rumour spreads that depositors will massively try to withdraw their deposits depositors will have strong incentives to do the same which results in widespread bank failures destroying the moneyness of deposits This has been one of the central motivations for the creation of central banks5

5 We now know that the new financial instruments were partially insured by regular banks through for example structured investment vehicles Learning about that seems to have startled many observers and regulators who thought that securitisation had taken meltdown risks off of banksrsquo balance sheets However a little thinking should have warned them that such risk transfer was bound to be incomplete because banks can piggy back on central banks especially in a systemic crisis as actually happened6

6 Under these circumstances banks would be called to honour the insurance contracts if a run against quasi-money materialises thus forcing central banks to come to their rescue

Unfortunately given the nature of their mandates central banks stepped in only when regular banks were on the verge of collapse because insurance arrangements had been activated and they did not have the resources to meet them At that juncture the quasi-moneyrsquos credibility had already been lost and the financial system was stuck in a situation in which the supply of quasi-money had correspondingly collapsed

Summary of points 1 to 6 To summarise the increase in the demand for international reserves accompanied by low US policy interest rates and lax financial regulation may have led to a large-scale creation of quasi-money subject to self-fulfilling-expectations runs The probability of runs against the new instruments was presumably low but likely much higher than for bank deposits Central banks eventually reached the source of the financial problems but damage to the credibility of the financial sector had already occurred Liquidity collapsed setting in motion strong price-deflation forces

Real sector impact

Letrsquos turn to the non-financial or real sector

7 Keeping banks and other institutions afloat does not guarantee that credit will be revived and that credit flows will go back to normal There are three independent reasons for credit flows to dry up

bull First prior to crisis credit flows were partially structured on instruments that are no longer available or have drastically lost their appeal

bull Second price deflation could give rise to Irving Fisherrsquos debt deflation and widespread bankruptcy7

bull Third part of the stock of quasi-money was based on asset-backed securities as their moneyness evaporates the relative price of the underlying assets (eg real estate) falls lowering available collateral and consequently further dampening credit8

8 A sudden stop of credit flows has a direct impact on the real sector9 forcing a sudden and large cut in private sector expenditure (a flow)10 In particular large cuts in the flow of credit for working capital results in sizable falls in investment and employment Moreover since it is unlikely that expenditure contraction will be uniform across the economy the credit sudden-stop may give rise to sharp changes in relative prices further complicating the financial landscape Bad debts will arise but they may be just a consequence of quasi-money destruction not of over-borrowing

Policy implications There are six key policy implications

1 Financial innovation and bubbles could stem from lax monetary policy and financial regulation

2 Bubbles are not all the same Bubbles that involve the banking system are likely the worst kind because they could bring about a sudden stop of bank credit seriously draining working capital for example

3 With the benefit of hindsight to prevent price deflation in the first half of the 2000s the Fed should have resorted to quantitative easing instead of keeping interest rates low for an extended period of time This would have signified a radical departure from the Fedrsquos practice and in all probability would have been difficult to defend or even explain in a no-deep-crisis environment

Going forward however the Fed (or whichever its successor may be) should add quantitative easing to its tool kit in normal situations and employ it to accommodate a major increase in the demand for reserve money To operationalise this the Fed could for example have a rule by which quantitative easing is triggered once its policy interest rate reaches a lower bound larger than zero For example the lower bound could be made equal to the long-run marginal productivity of capital plus target inflation

4 During financial crises expansive monetary and fiscal policy may not suffice An aggressive credit policy may be called for Since under those circumstances credit markets donrsquot work properly the central bank may have to direct credit to strategic sectors like Brazil has done on several occasions

5 Crisis time is no time for implementing tighter financial regulation The latter may exacerbate contraction of credit flows and enhance its deleterious effects

6 The above observation weakens any tough statement in normal times about policy in crisis times (eg a commitment to no-bailout) But normal times are the time to deactivate financial bombs

The main challenge is that the financial sector is in constant evolution and regulators are required to be ldquoahead of the curverdquo Thus it would be advisable for the regulatory authority to have a unit closely following developments in the capital market Given globalisation this task

should be coordinated with other regulatory authorities The BIS and the IMF could play a key role in this respect

Footnotes 1 See Allen and Gale (2007) See Calvo (2009a 2009b) for models that highlight the macroeconomic role of liquid instruments

2 See Obstfeld Shambaugh and Taylor (2008)

3 Sometimes this policy is called ldquoneo-mercantilismrdquo However emerging marketsrsquo intervention in the foreign-exchange market could also be interpreted as a defensive move vis-agrave-vis the US beggar-thy-neighbor policy implied by its lax monetary stance

4 This approach is advanced in ie Calvo and Vegh (1995) and Canzoneri et al (2008)

5 See Allen and Gale (2007) for a discussion of this and other related issues

6 This applies to the US In emerging markets the ability of central banks to operate as lenders of last resort in terms of reserve money depends on external credit lines and their stock of international reserves This by the way is one of the reasons for the self-insurance motive

7 See Fisher (1933) For a modern discussion of debt deflation in the context of the Great Deflation see Bernanke (2000) For the relevance of this concept for emerging market crises see Calvo (2005)

8 See Calvo (2009a 2009b) for models in which the relative price of quasi-money real underlying assets falls as quasi-money liquidity evaporates

9 In line with the sudden-stop literature for emerging markets I define a sudden stop of domestic credit as a fall in credit flows to the private sector that exceeds two standard deviations the latter is computed on the basis of the credit-flow time series prior to each point in time For more details see Calvo (2009b)

10 Notice that I am referring to flows not stocks Stocks may not decline and still a fall in credit flows may have major real effects This is fully in line with the literature on sudden stops of international capital inflows See Calvo (2005)

References Allen Franklin and Douglas Gale (2007) Understanding Financial Crises New York NY Oxford University Press Bernanke Ben (2000) Essays on the Great Depression Princeton NJ Princeton University Press Calvo Guillermo (2005) Emerging Markets in Turmoil Bad Luck or Bad Policy Cambridge MA MIT Press Calvo Guillermo (2009a) ldquoFinancial Crises and Liquidity Shocks A Bank-Run Perspectiverdquo NBER Working Paper 15425 Calvo Guillermo (2009b) ldquoLooking at Financial Crises in the Eye A Simple FinanceMacro Frameworkrdquo Columbia University mimeograph Calvo Guillermo and Carlos Vegh (1995) ldquoFighting Inflation with High Interest Rates The Small-Open-Economy under Flexible Pricesrdquo Journal of Money Credit and Banking 27 pp 49-66 Canzoneri Matthew Robert E Cumby Bezhad Diba and David Lopez-Salido (2008) ldquoMonetary Aggregates and Liquidity in a Neo-Wicksellian Frameworkrdquo Journal of Money Credit and Banking 40 8 December pp 1667-1698 Fisher Irving (1933) ldquoThe Debt-Deflation Theory of Great Depressionsrdquo Econometrica pp 337-357 Guha Krishna (2009) ldquoPaulson Says Crisis Sown by Imbalancerdquo Financial Times 1 January Obstfeld Maurice Jay C Shambaugh and Alan M Taylor (2008) ldquoFinancial Stability the Trilemma and International Reservesrdquo NBER Working Paper 14217

Guillermo Calvo Reserve accumulation and easy money helped to cause the subprime crisis A conjecture in search of a theory 27 October 2009

Paulson says crisis sown by imbalance By Krishna Guha in Washington

Published January 1 2009 2331 | Last updated January 1 2009 2331

Global economic imbalances helped to foster the credit crisis by pushing down global interest rates and driving investors towards riskier assets outgoing US Treasury Secretary Hank Paulson told the Financial Times

In a valedictory interview Mr Paulson cast the crisis as partly the result of a collective failure to come to terms with the way the rise of emerging markets was reshaping the global financial system These imbalances ndash arising from differences in the inclinations of different nations to save and invest ndash are reflected in large current account deficits and surpluses around the world

The US Treasury Secretary said that in the years leading up to the crisis super-abundant savings from fast-growing emerging nations such as China and oil exporters ndash at a time of low inflation and booming trade and capital flows ndash put downward pressure on yields and risk spreads everywhere

This he said laid the seeds of a global credit bubble that extended far beyond the US sub-prime mortgage market and has now burst with devastating consequences worldwide

ldquoExcesses built up for a long time [with] investors looking for yield mis-pricing riskrdquo he said ldquoIt could take different forms For some of the European banks it was eastern Europe Spain and the UK were much more like the US with housing being the biggest bubble With Japan it may be banks continuing to invest in equitiesrdquo

This argument ndash already advanced by a number of economists and largely endorsed by Federal Reserve chairman Ben Bernanke ndash suggests that the roots of the crisis do not simply lie in failures within the financial system

It also implies that avoiding crises in future will require global macroeconomic co-operation as well as better financial regulation and risk-management

httpwwwftcomcmssff671f66-d838-11dd-bcc0-000077b07658dwp_uuid=5aedc804-2f7b-11da-8b51-00000e2511c8print=yeshtml

The Baseline Scenario What happened to the global economy and what we can do about it

Causes Hank Paulson Other posts in this occasional series I generally prefer systemic explanations for events but it is obviously worthwhile to complement this with a careful study of key individuals And in the current crisis no individual is as interesting or as puzzling as Hank Paulson

The big question must be How could a person with so much market experience be repeatedly at the center of such major misunderstandings regarding the markets and how could his team ndash stuffed full of people like him ndash struggle so much to communicate what they were doing and why

Hank Paulsonrsquos exit interview with the Financial Times contains some potential answers but also generates some new puzzles

Paulson argues that he lacked the legal powers and resources necessary to intervene decisively and early on in the crisis and this may account for some of his actions through mid-September Still the Fed has plenty of powers and essentially unlimited resources in a crisis and itrsquos not clear why Paulson and Bernanke acting together couldnrsquot have done more ndash for example after Bear Stearns revealed (to most observers private and official and presumably to them) the depth of the systemic problems Itrsquos odd that Paulson feels the severity of the crisis was only apparent after the intervention in Fannie Mae and Freddie Mac

The greatest puzzle of course is why Lehman was not saved Paulson essentially says that letting Lehman fail was not his idea and the well-informed FT article implies it was definitely not due to Geithner Yet itrsquos not plausible that Bernanke would have taken such a stand So who did it

(The excellent recent WSJ article on that critical weekend ndash link here but subscription required ndash also jumps that key moment itrsquos as if there is a cone of silence on this point Perhaps Geithnerrsquos upcoming confirmation hearing will reveal more)

But there is also a more analytical puzzle In his interview Paulson stresses the role of capital flows and the so-called ldquoglobal savings glutrdquo in driving down risk premia and encouraging a system full of bad decisions (and the FT rightly regarded this as an important statement and put it on the front page) Paulson also implies that more urgent multilateral action on this dimension would have helped

Yet Paulson himself was instrumental in blocking or not taking forward (and thatrsquos close to the same thing) the deal brokered in the Multilateral Consultation between the worldrsquos major trading areas This was a major opportunity to advance policies both in the US and elsewhere that would have exactly addressed what Paulson now says was an evident first-order system problem

Of course the idea of de-emphasizing any kind of multilateral approach might have come from the Bush White House but this level of detail is almost always delegated to the Treasury And there is every indication that Mr Bush trusted completely and listened carefully to Paulson at every stage including throughout this fallrsquos downward spiral

Corroborating evidence for the idea that Paulson did not want to work in a multilateral fashion comes from the fact that in fall 2007 he called for sharp spending cuts at the IMF (see his IMFC statement near the top of the last page) The US Treasury continued to push for these cuts in the ensuing months despite the obvious onset of a serious worldwide financial crisis ndash about which they of all people surely had the most inside knowledge In fact despite the current series of urgent crises the IMF still finds itself constrained by the roughly 20 budget cut that the US insisted upon Quite why these limits on spending were not immediately relaxed after September ndash which would have been easy to do under G7 or G20 leadership ndash is yet another mystery that can presumably be traced back to the attitude of the US authorities although the crisis-deniers in Europe probably also played a supportive role

In any case Paulson was entitled to choose a strategy to address global imbalances other than that of the Multilateral Consultation But what was his global strategy No one has yet been able to explain that to me but please do make suggestions in comments on this post

httpbaselinescenariocom20090105causes-hank-paulsonmore-1826

Causes Too Much Debt Menzie Chinn one of my favorite bloggers and Jeffry Frieden have a short and highly readable article up on the causes of the financial crisis Chinn is not given to ideological ranting and is a great believer in actually looking at data so I place significant weight in what he says

Chinn and Frieden place the emphasis on excessive American borrowing by both the public and private sectors

This disaster is in our view merely the most recent example of a ldquocapital flow cyclerdquo in which foreign capital floods a country stimulates an economic boom encourages financial leveraging and risk taking and eventually culminates in a crash

They have little patience for the idea that the financial crisis was the fault of Chinese over-saving

It is necessary to dispense with the view that all this excess saving from the rest of the world was ldquoforcedrdquo upon us The rest of the worldrsquos capital flowed to us in part because we wanted to borrow and we wanted to borrow because of the Bush administrationrsquos emphasis from 2001 to 2008 on cutting taxes while still spending

They do endorse as exacerbating factors the low interest rates set by the Federal Reserve earlier this decade and the growth of a large and unregulated financial sector

Essentially the development of an unregulated financial sector has circumvented the entire panoply of banking regulation created in the wake of the Great Depression This made the financial system vulnerable to traditional ldquobank panicsrdquo or ldquorunsrdquo on the financial system The abdication of regulatory oversight (particularly in allowing high leverage) in the presence of too many institutions ldquotoo large to failrdquo meant the buildup of implicit financial liability on the part of the government

But the overall story is that high borrowing brought in foreign capital insofar as the borrowing was spent on nontradable goods such as housing and financial services necessarily pushing up prices (there is no way for competition from houses in China to keep US housing prices down)

I think itrsquos hard to argue against the idea that a huge debt-financed bubble was a bad bad thing I still think as you might predict that the nature of our particular financial system both made the bubble larger than it might otherwise have been and made its collapse more spectacular than it had to be

The article is drawn from a book they are working on which I will be sure to buy

By James Kwak httpbaselinescenariocom20090828causes-too-much-debtmore-4833

26102009

Schaumluble at finance and a euro25bn rise in the structural deficit ndash an interesting start for Germanyrsquos centre-right coalition

The German press was totally dumbfounded by the coalition agreement Having spent the last few weeks ridiculing the process predicting that there is no room for tax cuts that the FDP would have give up almost all of its policy agenda the agreement came a a shock A commentator in the left-leaning Sueddeutsche Zeitung expressed his horror at the 124 page agreements which is full about tax cuts and individualism something he finds to be complete break with the consensus that has governed the country for a long time (including even way back into the Kohl era) Der Spiegel has a nice summary of the main points as well as an article in which economists criticise the governmentrsquos ldquoirresponsiblerdquo fiscal policies

The fiscal policy package is expansive The increase in the structural deficit will be about euro25bn in 2010 FT Deutschland says the effect will be like a third stimulus The big tax reform will arrive in 2011 totalling about euro19bn and involving a switch-over to a simpler income tax system as well as cuts in the income tax rates The size has yet to be determined

Interesting also the difference in headlines between the FT (ldquoGrowth is key as Berlin ring-fences spending - Schaumluble puts recovery before fixing deficitrdquo) and FT Deutschland which effectively says the two parties are using a conjuring trick

Schauble is the new finance minister an interesting appointment and a big contrast to the populist Peer Steinbruck Schauble has been politically socialised at a time when Germany still had some political ambitions for Europe he is the co-author of the Schauble-Lamers paper something we are often reminded of in France and never in Germany As one of the most pro-European German politicians he is likely to bring a very different style to the Ecofin and the Eurogroup In his first press comments as reported by der Spiegel he made it absolutely clear that he is opposed to a premature exit strategy His appointments makes a co-ordinated or least consistent exit strategy in the euro area more likely

Gunther Oettinger the prime minister of Baden-Wuerttemberg will be Germanyrsquos European Commissioner It is very typical for the news reporting in Germany that the decision is seen as a demotion (yes running a state government is considered a much more important job) This

attitude is exemplified by Die Zeit which says the appointment marks the end of his political career Der Spiegel also has an article which says that Merkel sent Oettinger to Brussels because she wanted to get rid of him (We think this is nonsense As he is interested in business affairs he is likely to end up with one of the heavy hitting economic portfolios in the Commission) Wolfgang Proissl warns in FT Deutschland that Oettinger might face a hurdle in the European Parliament

France welcomes policy change

France is rejoicing as the new finance minister Wolfgang Schauble declared that a balanced budget is not on the programme France sees this as a triumph of the French ldquolaissez fairerdquo over German austerity Les Echos now expects the political pressure on France to abate and argues that the ECB and the Commission will find it harder to denounce divergences in the euro zone But it also warns that when all member states are on the same expansionary trajectory it will be harder to argue when it is time for to exit

German and French economies pull out of recession The latest euro area purchasing manager survey published on Friday confirmed that Germany and France are the engines of euro area economic growth as both economies are fast pulling out of the crisis For Germany the latest index is 524 and for France 584 (with 50 as the neutral level) The German Ifo index also registered a small increase reflecting a recovery but not a strong one

Monti calls for a new deal This is a very interesting interview by Mario Monti to the Financial Times in which he said that we have to resolve the deteriorating conflict between EU competition and internal market rules and social objectives by national governments He called for a new deal that may include a reduction in tax competition ndash though full tax harmonisation was not on the cards

French parliament erred The French parliament erroneously voted for an additional 10 profit tax on banks said the finance minister Christine Lagarde and got the parliament to vote again today to correct this ldquotechnical errorrdquo reports Les Echos The clash is about an amendment introduced by a Socialist MP one of the first measures of the 2010 budget to be voted in parliament Shortly after the vote has been made public the French finance ministry declared that two deputies mistakenly voted in favour of the amendment The new vote is now certain to reject the amendment By contrast a second measure that requires banks to contribute to the costs of banking supervision was adopted unanimously The government expects some euro100m

Why do British house prices rise while the economy sinks deeper into recession Ed Harrison asks in Europe Economonitor how come British house prices rise to new records while the economy sinks deeper into recession The answer is of course Absurdly low nominal interest rates which as we have known from the previous crash lead to asset price bubbles in areas such as housing equities and commodities Harrison makes the link to falling bonuses The rise in asset prices compensates bankers for falling bonuses and this keeps demand in London high

The conundrum of finance reform In a comment in the Financial Times George Soros makes the point that the financial sector requires different policy approaches in the short and the long run This is now not the right time to enact reforms because the financial sector is far from equilibrium But in the long term more reforms are needed that will ultimately reduce leverage and profits What should central banks do about asset price inflation Wolfgang Muumlnchau says central banks should now develop a strategy about how to prick asset price bubbles early on He says a few years ago there was consensus among economists and central bankers and central banks should not prick bubbles This consensus has broken down But as of yet central banks have no idea what to do Muumlnchau says central banks should use the leeway they have on interest rates (while not abandon price stability targeting) that they use regulatory instruments such as shifting rules on loan-to-value-ratio that they co-ordinate internationally and intervene jointly in global equity and commodity markets and that they should take a greater interest in the analysis of monetary and financial flows

httpwwweurointelligencecomarticle581+M5c2e617c3100html

COLUMNISTS Wolfgang Muumlnchau

A polite discourse on bankers and bubbles By Wolfgang Muumlnchau

Remember the debate about whether central banks should prick bubbles It was not too long ago that simply asking the question incited abuse While pricking bubbles is now considered a suitable subject for polite conversion there is still no agreement on what to do or how to do it Since bubbles are already building up in several segments of the financial markets it is time to think about this question in detail

As I argued last week there are some deep-rooted causes of the proliferation of bubbles ndashamong them the size of the financial sector the too-big-to-fail problem and the banksrsquo renewed lust for risk Governments have not been addressing these causes Central bankswill not provide the cure either but they can address some of the symptoms Symptoms matter

Some economists reluctant to let go of the comforting world of rational expectations still tell us it is impossible for a central bank ndash or anyone else for that matter ndash to call a bubble This is baloney When looking at house prices just look at price-to-rent and the price-to-income ratios sales volumes and credit statistics and you know everything you need to know Almost everything else central bankers do is more difficult than calling a housing bubble The most persistent argument against pricking bubbles is that monetary policy cannot target consumer and asset prices with a single instrument ndash the short-term interest rate This statement is both trivially true and misleading One can use existing instruments more flexibly

and one can also add new ones Based on these principles I have four proposals

1 The first is the use of alternative regulatory instruments if available This is not always possible but where it is such instruments could be deployed in the housing market for example where one could vary the ceiling on the loan-to-value ratio according to market conditions Since housing bubbles are almost always credit-driven an anti-cyclical LTV could encourage or discourage risky mortgage lending Such a tool could be deployed by local central bank branches ndash or national central banks in the eurozone ndash since many housing bubbles are regional east and west coast in the US Spain and Ireland in the eurozone

2 Second central banks should use existing leeway in their monetary policy In an ideal world a single policy instrument should focus on a single target but this is not an ideal world Central banks will have to master the art of targeting some measure of price stability as well as including asset prices in their consideration In practice this would mean that a central bank should by reflex not always choose the lowest interest rate consistent with its definition of price stability It should choose a higher rate in the presence of a bubble With hindsight if central banks had not cut interest rates quite so aggressively in 2003-04 we would probably still have had a bubble but perhaps a smaller one

3 Third central banks should accompany their model-based economic forecasts with an analysis of monetary and financial conditions The workhorse economic forecasting models used by central banks are built in such a way that they cannot capture financial shocks and bubbles This makes them worse than useless ina world characterised by persistent financial instability An analysis of monetary conditions and financial flows can provide at least a useful complement to now defunct models

4 Finally central banks must co-ordinate with one another While each has the tools to establish price stability in its own jurisdiction many asset prices ndash equity prices and housing prices in particular ndash tend to correlate globally It makes no sense for the central bank of a small or medium-sized country to try pricking a domestic equity bubble But if central banks act jointly they could send out a strong signal Just imagine what would happen if the worldrsquos three leading central banks shorted Intel BMW and Toyota

I am aware that these measures are not going to solve the problem of financial instability In the absence of deeper reforms in the financial sector nothing will But they might still be useful firefighting tools It may be better to try out at least some of them than to pretend that the problem will simply go away

I suspect strongly that we are already in another bubble in the global equity and bonds markets and also in sections of the commodity markets These may burst well before the world economy recovers from the most recent bubble Central banks should eventually prick them before they cause calamity

It may not be the time yet to deploy an anti-bubble strategy But we sure need to put one together

httpwwwftcomcmss0a1853610-c196-11de-b86b-00144feab49ahtml

COMMENT George Soros

Do not ignore the need for financial reform By George Soros

The philosophy that has helped me both in making money as a hedge fund manager and in spending it as a policy oriented philanthropist is not about money but about the complicated relationship between thinking and reality The crash of 2008 has convinced me that it provides a valuable insight into the workings of the financial markets

The efficient market hypothesis holds that financial markets tend towards equilibrium and accurately reflect all available information about the future Deviations from equilibrium are caused by exogenous shocks and occur in a random manner The crash of 2008 falsified this hypothesis

I contend that financial markets always present a distorted picture of reality Moreover the mispricing of financial assets can affect the so-called fundamentals that the price of those assets is supposed to reflect That is the principle of reflexivity

Instead of a tendency towards equilibrium financial markets have a tendency to develop bubbles Bubbles are not irrational it pays to join the crowd at least for a while So regulators cannot count on the market to correct its excesses

The crash of 2008 was caused by the collapse of a super-bubble that has been growing since 1980 This was composed of smaller bubbles Each time a financial crisis occurred the authorities intervened took care of the failing institutions and applied monetary and fiscal stimulus inflating the super-bubble even further I believe that my analysis of the super-bubble offers clues to the reform that is needed First since markets are bubble-prone financial authorities must accept responsibility for preventing bubbles from growing too big Alan Greenspan and others refused to accept that If markets cannot recognise bubbles the former chairman of the US Federal Reserve asserted neither can regulators ndash and he was right Nevertheless authorities have to accept the assignment

Second to control asset bubbles it is not enough to control the money supply you must also control credit The best known means to do so are margin requirements and minimum capital requirements Currently they are fixed irrespective of the marketrsquos mood because markets are not supposed to have moods They do and authorities need to counteract them to prevent asset bubbles growing too large So they must vary margin and capital requirements They must also vary the loan-to-value ratio on commercial and residential mortgages to forestall real estate bubbles Regulators may also have to invent new tools or revive ones that have fallen into disuse Central banks used to instruct commercial banks to limit lending to a particular sector if they felt that it was overheating Another example of needing new tools involves the internet boom Mr Greenspan recognised

it when he spoke about ldquoirrational exuberancerdquo in 1996 He did nothing to avert it feeling that reducing the money supply was too blunt a tool But he could have devised more specific measures such as asking the Securities and Exchange Commission to freeze new share issues as the internet boom was fuelled by equity leveraging Third since markets are unstable there are systemic risks in addition to the risks affecting individual market participants Participants may ignore these systemic risks believing they can always sell their positions but regulators cannot ignore them because if too many participants are on the same side positions cannot be liquidated without causing a discontinuity or a collapse That means the positions of all major participants including hedge funds and sovereign wealth funds must be monitored to detect imbalances Certain derivatives like credit default swaps are prone to creating hidden imbalances so they must be regulated restricted or forbidden

Fourth financial markets evolve in a one-directional non-reversible manner Financial authorities have extended an implicit guarantee to all institutions that are too big to fail Withdrawing that guarantee is not credible therefore they must impose regulations to ensure this guarantee will not be invoked Such institutions must use less leverage and accept restrictions on how they invest depositorsrsquo money Proprietary trading ought to be financed out of banksrsquo own capital not deposits But regulators must go further to protect capital and regulate the compensation of proprietary traders to ensure that risks and rewards at too-big-to-fail banks are aligned This may push proprietary traders out of banks and into hedge funds where they properly belong Since markets are interconnected and some banks occupy quasi-monopolistic positions we must consider breaking them up It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall act of 1933 did But there have to be internal compartments that separate proprietary trading from commercial banking and seal off trading in various markets to reduce contagion

Finally the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans they ignored the systemic risks attached to concentrated positions in securities This was an important factor aggravating the crisis It has to be corrected by raising the risk ratings of securities held by banks That will probably discourage the securitisation of loans

All these will cut the profitability and leverage of banks This raises an issue about timing It is not the right time to enact permanent reforms The financial system is far from equilibrium The short-term needs are the opposite of what is needed in the long term First you must replace the credit that has evaporated by using the only source that remains credible ndash the state That means increasing national debt and extending the monetary base As the economy stabilises you must shrink this base as fast as credit revives ndash otherwise deflation will be replaced by inflation We are still in the first phase of this delicate manoeuvre Banks are earning their way out of a hole To cut their profitability now would be counterproductive Regulatory reform has to await the second phase when the money supply needs to be brought under control and carefully phased in so as not to disrupt recovery But we cannot afford to forget about it

The writer is chairman of Soros Fund Management and author of lsquoThe Crash of 2008rsquo

httpwwwftcomcmss0a12061e0-c196-11de-b86b-00144feab49ahtml

Opinion

October 26 2009

OP-ED COLUMNIST

After Reform Passes By PAUL KRUGMAN

So how well will health reform work after it passes

Therersquos a part of me that canrsquot believe Irsquom asking that question After all serious health reform has long seemed like an impossible dream And it could yet go all wrong

But the teabaggers have come and gone as have the cries of ldquodeath panelsrdquo and the demonstrations by Medicare recipients demanding that the government stay out of health care And reform is still on track Right now it looks highly likely that Congress will indeed send a health care bill to the presidentrsquos desk Then what

Conservatives insist (and hope) that reform will fail and that there will be a huge popular backlash Some progressives worry that they might be right that the imperfections of reform mdash what wersquore about to get will be far from ideal mdash will be so severe as to undermine public support And many critics complain with some justice that the planned reform wonrsquot do much to contain rising costs

But the experience in Massachusetts which passed major health reform back in 2006 should dampen conservative hopes and soothe progressive fears

Like the bill that will probably emerge from Congress the Massachusetts reform mainly relies on a combination of regulation and subsidies to chivy a mostly private system into providing near-universal coverage It is to be frank a bit of a Rube Goldberg device mdash a complicated way of achieving something that could have been done much more simply with a Medicare-type program Yet it has gone a long way toward achieving the goal of health insurance for all although itrsquos not quite there according to state estimates only 26 percent of residents remain uninsured

This expansion of coverage has tremendous significance in human terms The Kaiser Commission on Medicaid and the Uninsured recently did a focus-group study of Massachusetts residents and reported that ldquoHealth reform enabled many of these individuals to take care of their medical needs to start seeing a doctor and in some cases to regain their health and control over their livesrdquo Even those who probably would have been insured without reform felt ldquopeace of mind knowing they could obtain health coverage if they lost access to their employer-sponsored coveragerdquo

And reform remains popular Earlier this year many conservatives citing misleading poll results claimed that public support for the Massachusetts reform had plunged Newer more careful polling paints a very different picture The key finding an overwhelming 79 percent of the public think the reform should be continued while only 11 percent think it should be repealed

Interestingly another recent poll shows similar support among the statersquos physicians 75 percent want to continue the policies only 7 percent want to see them reversed

There are of course major problems remaining in Massachusetts In particular while employers are required to provide a minimum standard of coverage in a number of cases this standard seems to be too low with lower-income workers still unable to afford necessary care And the Massachusetts plan hasnrsquot yet done anything significant to contain costs

But just as reform advocates predicted the move to more or less universal care seems to have helped prepare the ground for further reform with a special state commission recommending changes in the payment system that could contain costs by reducing the incentives for excessive care And it should be noted that Hawaii which doesnrsquot have universal coverage but does have a long-standing employer mandate has been far more successful than the rest of the nation at cost control

So what does this say about national health reform

To be sure Massachusetts isnrsquot fully representative of America as a whole Even before reform it had relatively broad insurance coverage in part because of a large union movement And the state has a tradition of strong insurance regulation which has probably made it easier to run a system that depends crucially on having regulators ride herd on insurers

So national reformrsquos chances will be better if it contains elements lacking in Massachusetts mdash in particular a real public option to keep insurers honest (and fend off charges that the individual mandate is just an insurance-industry profit grab) We can only hope that reports that the Obama administration is trying to block a public option are overblown

Still if the Massachusetts experience is any guide health care reform will have broad public support once itrsquos in place and the scare stories are proved false The new health care system will be criticized people will demand changes and improvements but only a small minority will want reform reversed

This thing is going to work

httpwwwnytimescom20091026opinion26krugmanhtml

A cornucopia of numbers to pick through Monday October 26 2009

A wide array of economic data should provide insight into the state of the housing market consumers the manufacturing industry and the overall economy

It begins Tuesday with the release of the Standard amp PoorsCase-Shiller index of housing prices nationwide After years of declines that precipitated the credit crisis and recession housing prices nationally have been rising recently They increased 16 percent in July from June the most recent measure which was the biggest one-month jump in more than four years

Also Tuesday comes a monthly survey by the Conference Board a private research group that measures consumer confidence in the economy After plummeting for months consumer confidence jumped in August before declining yet again in September

The Commerce Department on Wednesday will offer data on durable goods orders -- which are new orders placed with US manufacturing companies for future delivery of goods such as refrigerators or cars Last months durable goods report showed an unexpected decline in orders as the federal governments Cash for Clunkers program ended

On Thursday comes a report on the growth of the US economy as measured by the gross domestic product This will be the first estimate for the quarter ended Sept 30 a period when economic growth might have restarted

Finally Friday brings a report on personal income and outlays another measure of the economic conditions of ordinary Americans This has been rising in recent months

Beyond the economic numbers Congress will likely be a hotbed of activity relating to the nations financial system this week The House Financial Services Committee takes up several regulatory bills These include new oversight of hedge funds venture capital funds and private equity new investor protections and new regulations for credit rating agencies

On Wednesday the Treasury Departments compensation czar Kenneth R Feinberg is scheduled to testify before the House Oversight and Government Reform Committee a few days after he dramatically limited compensation at the seven firms that have received extraordinary government bailouts

-- Zachary A Goldfarb

MUST READS Steven Rattner formerly the governments auto czar offers a detailed account of his decisions in Fortune magazine

Chamber of Commerce criticizes Obama team Lobbyist accuses White House of name-calling By Michael D Shear Washington Post Staff Writer Monday October 26 2009

The chief lobbyist for the US Chamber of Commerce alleged Sunday that there is a White House campaign of invectives and name-calling against his organization and said the business group is eager to ignore the heated rhetoric

Speaking on Fox News Sunday longtime Chamber lobbyist Bruce Josten said the groups relationship with the White House began to sour after differences of opinion developed about President Obamas health-care and economic agendas

Lets be clear we havent raised up the Cain It came from their side of the street Josten said referring to the White House which sits just across Lafayette Park from the Chambers national headquarters

We intend to remain focused on our goals and our responsibilities to represent the American business Josten said Were not going to take the bait and engage in a name-calling campaign here of invectives back and forth Were going to stay focused

White House officials contend they are not waging a campaign against the Chamber and they say top officials remain open to discussions with the groups leadership Members of the administrations business outreach team met last week with business leaders including Chamber representatives White House Chief of Staff Rahm Emanuel on Friday accepted a request to be the keynote speaker at the Chambers board meeting early next month And the president invited the Chamber and the National Federation of Independent Business to the White House for an event on Thursday in which he will discuss small business

There has of course been disagreement on issues like energy and regulatory reform said deputy press secretary Jen Psaki referring to the Chambers vocal opposition to many of the administrations chief policy goals But were going to continue to work with the Chamber on a variety of issues including job creation for large and small businesses

But despite the efforts of both sides to dial back the tensions over the weekend the clash between the Chamber and the White House is a clear indication that Obama intends to challenge the power of lobbyists

During his presidential campaign Obama vowed to tell Washington and their lobbyists that their days of setting the agenda are over And just a month into office he said in a radio address that the system we have now might work for the powerful and well-connected interests that have run Washington for far too long but I dont I work for the American people

That sentiment has run into a massive lobbying presence in Washington which is fighting back against the presidents push for health-care reform his climate change legislation and his plans to regulate the financial sector

But Obama is fighting back too by seeking to meet directly with business leaders and by verbally calling out groups such as the Chamber for their reliance on big-time lobbying

Psaki said the reaction from Josten and others at the Chamber is an indication that they are feeling the impact of Obamas efforts

Under the Obama administration Washington is changing and the role of big lobbying organizations like the Chamber has changed as well Psaki said

Economy

October 26 2009

US Considers Reining In lsquoToo Big to Failrsquo Institutions By STEPHEN LABATON

WASHINGTON mdash Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year mdash how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble

A senior administration official said on Sunday that after extensive consultations with Treasury Department officials Representative Barney Frank the chairman of the House Financial Services Committee would introduce legislation as early as this week The measure would make it easier for the government to seize control of troubled financial institutions throw out management wipe out the shareholders and change the terms of existing loans held by the institution

The official said the Treasury secretary Timothy F Geithner was planning to endorse the changes in testimony before the House Financial Services Committee on Thursday

The White House plan as outlined so far would already make it much more costly to be a large financial company whose failure would put the financial system and the economy at risk It would force such institutions to hold more money in reserve and make it harder for them to borrow too heavily against their assets

Setting up the equivalent of living wills for corporations that plan would require that they come up with their own procedure to be disentangled in the event of a crisis a plan that administration officials say ought to be made public in advance

ldquoThese changes will impose market discipline on the largest and most interconnected companiesrdquo said Michael S Barr assistant Treasury secretary for financial institutions One of the biggest changes the plan would make he said is that instead of being controlled by creditors the process is controlled by the government

Some regulators and economists in recent weeks have suggested that the administrationrsquos plan does not go far enough They say that the government should consider breaking up the biggest banks and investment firms long before they fail or at least impose strict limits on their trading activities mdash steps that the administration continues to reject

Mr Frank Democrat of Massachusetts said his committee would now take up more aggressive legislation on the topic even as lawmakers and regulators continue working on other problems highlighted by the financial crisis including overseeing executive pay protecting consumers and regulating the trading of derivatives

Illustrative of the mood of fear and anger over the huge taxpayer bailouts was Mr Frankrsquos recent observation that critics of the administrationrsquos health care proposal had misdirected

their concerns mdash Congress would not be adopting death panels for infirm people but for troubled companies

The administration and its Congressional allies are trying in essence to graft the process used to resolve the troubles of smaller commercial banks onto both large banking conglomerates and nonbanking financial institutions whose troubles could threaten to undermine the markets

That resolution process gives the government far more sweeping authority over the institution and imposes major burdens on lenders to the companies that they would not ordinarily face when companies go into bankruptcy instead of facing a takeover by the government

Deep-seated voter anger over the bailouts of companies like the American International Group Citigroup and Bank of America has fed the fears of lawmakers that any other changes in the regulatory system must include the imposition of more onerous conditions on those financial institutions whose troubles could pose problems for the markets

Some economists believe the mammoth size of some institutions is a threat to the financial system at large Because these companies know the government could not allow them to fail the argument goes they are more inclined to take big risks

Also under the current regulatory structure the government has limited power to step in quickly to resolve problems at nonbank financial institutions that operate like the failed investment banks Lehman Brothers and Bear Stearns and like the giant insurer AIG

As Wall Street has returned to business as usual industry power has become even more concentrated among relatively few firms thus intensifying the debate over how to minimize the risks to the system

Some experts including Mervyn King governor of the Bank of England and Paul A Volcker the former chairman of the Federal Reserve have proposed drastic steps to force the nationrsquos largest financial institutions to shed their riskier affiliates

In a speech last week Mr King said policy makers should consider breaking up the largest banks and in effect restore the Depression-era barriers between investment and commercial banks

ldquoThere are those who claim that such proposals are impractical It is hard to see whyrdquo Mr King said ldquoWhat does seem impractical however are the current arrangements Anyone who proposed giving government guarantees to retail depositors and other creditors and then suggested that such funding could be used to finance highly risky and speculative activities would be thought rather unworldly But that is where we now arerdquo

The prevailing view in Washington however is more restrained Daniel K Tarullo an appointee of President Obamarsquos last week dismissed the idea of breaking up big banks as ldquomore a provocative idea than a proposalrdquo

At a meeting Friday at the Federal Reserve Bank of Boston the Federal Reserve chairman Ben S Bernanke said in response to a question by a former Bank of England deputy governor that he would prefer ldquoa more subtle approach without losing the economic benefit of multifunction international firmsrdquo

Republican and Democratic lawmakers generally agree that the ldquotoo big to failrdquo policy of taxpayer bailouts for the giants of finance needs to be curtailed But the fine print mdash how to reduce the policy and moral hazards it has encouraged mdash has provoked fears on Wall Street

Even before Mr Frank unveils his latest proposals industry executives and lawyers say its approach could make it unnecessarily more expensive for them to do business during less turbulent times

ldquoOf course you want to set up a system where an institution dreads the day it happens because management gets whacked shareholders get whacked and the board gets whackedrdquo said Edward L Yingling president of the American Bankers Association ldquoBut you donrsquot want to create a system that raises great uncertainty and changes what institutions risk management executives and lawyers are used tordquo

T Timothy Ryan the president of the Securities Industry and Financial Markets Association said the market crisis exposed that ldquothere was a failure in the statutory framework for the resolution of large interconnected firms and everyone knows thatrdquo But he added that many institutions on Wall Street were concerned that the administrationrsquos plan would remove many of the bankruptcy protections given to lenders of large institutions

httpwwwnytimescom20091026businesseconomy26bightml_r=1amphp

Economy

October 25 2009

FAIR GAME

If Lenders Say lsquoThe Dog Ate Your Mortgagersquo By GRETCHEN MORGENSON

FOR decades when troubled homeowners and banks battled over delinquent mortgages it wasnrsquot a contest Homes went into foreclosure and lenders took control of the property

On top of that courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties

In other words with lenders in the driverrsquos seat borrowers were run over more often than not Of course errant borrowers hardly deserve sympathy from bankers or anyone else and banks are well within their rights to try to protect their financial interests

But if our current financial crisis has taught us anything it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring And banks often lacked a clear understanding of whether all those borrowers could really repay their loans

Even so banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms But some judges are starting to scrutinize the rules-donrsquot-matter methods used by lenders and their lawyers in the recent foreclosure wave On occasion lenders are even getting slapped around a bit

One surprising smackdown occurred on Oct 9 in federal bankruptcy court in the Southern District of New York Ruling that a lender PHH Mortgage hadnrsquot proved its claim to a delinquent borrowerrsquos home in White Plains Judge Robert D Drain wiped out a $461263 mortgage debt on the property Thatrsquos right the mortgage debt disappeared via a court order

So the ruling may put a new dynamic in play in the foreclosure mess If the lender canrsquot come forward with proof of ownership and judges donrsquot look kindly on that then borrowers may have a stronger hand to play in court and apparently may even be able to stay in their homes mortgage-free

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors but some of the nuts and bolts of the mortgage game mdash notes for example mdash were never adequately tracked or recorded during the boom In some cases that means nobody truly knows who owns what

To be sure many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere Nevertheless the ruling mdash by a federal judge no less mdash is bound to bring a smile to anyone who has been subjected to rough treatment by a lender Methinks a few of those people still exist

More important the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice They may even be viewed as a fraud on the court

The United States Trustee a division of the Justice Department charged with monitoring the nationrsquos bankruptcy courts has also taken an interest in the White Plains case Its representative has attended hearings in the matter and it has registered with the court as an interested party

THE case involves a borrower who declined to be named living in a home with her daughter and son-in-law According to court documents the borrower bought the house in 2001 with a mortgage from Wells Fargo four and a half years later she refinanced with Mortgage World Bankers Inc

She fell behind in her payments and David B Shaev a consumer bankruptcy lawyer in Manhattan filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure

A proof of claim to the debt was filed in March by PHH a company based in Mount Laurel NJ The $461263 that PHH said was owed included $33545 in arrears

Mr Shaev said that when he filed the case he had simply hoped to persuade PHH to modify his clientrsquos loan But after months of what he described as foot-dragging by PHH and its lawyers he asked for proof of PHHrsquos standing in the case

ldquoIf you want to take someonersquos house away yoursquod better make sure you have the right to do itrdquo Mr Shaev said in an interview last week

In answer Mr Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was US Bank as trustee of a securitization pool But US Bank was not a party to the action

Mr Shaev then asked for proof that US Bank was indeed the holder of the note All that was provided however was an affidavit from Tracy Johnson a vice president at PHH Mortgage saying that PHH was the servicer and US Bank the holder

Among the filings supplied to support Ms Johnsonrsquos assertion was a copy of the assignment of the mortgage But this too was signed by Ms Johnson only this time she was identified as an assistant vice president of MERS the Mortgage Electronic Registration System This bank-owned registry eliminates the need to record changes in property ownership in local land records

Another problem was that the document showed the note was assigned on March 26 2009 well after the bankruptcy had been filed

Mr Shaevrsquos questions about ownership also led to an admission by PHH that along the way it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount

John DiCaro a lawyer representing PHH at the hearing was in the uncomfortable position of having to explain why there was no documentation of an assignment to US Bank He did not return a phone call seeking comment last week Ms Johnson who couldnrsquot be reached for comment did not attend the hearing

According to a transcript of the Sept 29 hearing Mr DiCaro said ldquoIn the secondary market there are many cases where assignment of mortgages assignment of notes donrsquot happen at the time they should It was standard operating procedure for many yearsrdquo

Judge Drain rejected that argument concluding that what had been presented to the court just did not add up ldquoI think that I have a more than 50 percent doubt that if the debtor paid this claim it would be paying the wrong personrdquo he said ldquoThatrsquos the problem And thatrsquos because the claimant has not shown an assignment of a mortgagerdquo

Mr Shaev said he was shocked when the judge expunged the mortgage debt

ldquoWe are in uncharted territoryrdquo he said ldquoRight now I am in bankruptcy court with a house that has no discernible debt on it yet I have a client with a signed mortgage We cannot in theory just go out and sell this house because the title company wonrsquot give a clear title on itrdquo

Among the next steps Mr Shaev said he would take is to file an amended plan or sue to try to get clear title to the property

Late last week PHH appealed the judgersquos ruling But Mr DiCaro and PHH are in something of a bind Either they will return to court with a clear claim on the property mdash including all the transfers and sales that are necessary in the securitization process mdash or they wonrsquot be able to produce that documentation If they do produce it they will then have to explain why they didnrsquot produce it before

Oh what a tangled web these mortgage lenders weave

httpwwwnytimescom20091025businesseconomy25grethtmlem

Opinion

October 25 2009

EDITORIAL

The State of Financial Reform A Step Forward on Pay It sounded good when the Treasuryrsquos pay czar Kenneth Feinberg announced that top executives at Citigroup Bank of America and the other five institutions surviving at taxpayersrsquo expense would see their compensation packages cut in half this year and their cash salaries reduced by 90 percent

If you read the fine print you will discover that these reductions apply only to the remaining two months of 2009 Mr Feinberg might be equally tightfisted when he sets pay for all of 2010 mdash he should be mdash but there is no guarantee And as soon as any of these institutions pay the government back they will be free of the constraints

Mr Feinbergrsquos job was always fated to be a sideshow Far more important are the proposed guidelines that the Federal Reserve has come up with to align the risks taken and the rewards earned by executives traders and loan offers at the nationrsquos 28 biggest banks

Fed officials get the basic idea that bankersrsquo compensation must be structured in a way that makes them think twice before they place bets that could lead their institutions (and the rest of us) over the cliff again Their guidelines unveiled last week are a good start But we fear they may still give banks too much leeway

The Fed says it has also begun a review of current payment practices at the 28 banks and will veto payment structures it does not like It must be ready to impose more specific restrictions if bankers game the system

The Fed has not put any caps on pay It is concerned only with how wages and bonuses can be structured to encourage bankers not to take excessive risks It has offered a menu of suggestions

It suggests that if two traders generated the same amount of profit the one who took more chances should be paid less It suggests that big chunks of bankersrsquo remuneration could be paid out over time mdash to keep more skin in the game And if a bankerrsquos investments were to go sour and lose money a few years down the road some of the remuneration should be clawed back

These are all sound ideas But they are only guidelines mdash not rules For example the Fed expresses concern that golden parachutes could also lead to risky behavior but it does not ban them or say how they should be used And while some European countries are drafting regulations to ensure that 40 to 60 percent of executive bonuses for top bankers are paid out over several years the Fed only suggests that these kinds of deferrals might be an appropriate tool The Fed insists that there can be no one-size-fits-all rules for more than two dozen highly complex banks with different business strategies That may well be true Fed officials say that as their review progresses they may identify some egregious practices to ban outright or salutary formulas to adopt

We still worry about leaving all of these critical details up to the banks mdash even with a promise from the Fed to be more vigilant During the last several decades banks have been given far too much room to write their own rules The economic disaster around us is the result

Too Little Regulation for Derivatives The Obama administration and Congress have vowed to regulate derivatives the complex and often highly speculative financial instruments that were at the heart of the meltdown Two House committees have approved legislation but mdash after heavy lobbying from the banking industry and corporate Americamdash both versions are weak and unlikely to prevent another fiasco

Right now many derivative deals are executed as private one-on-one contracts outside the view of the public or regulators This lack of transparency mdash about participants prices and volumes mdash proved disastrous In the bailout of American International Group tens of billions of taxpayer dollars went to pay the worldrsquos biggest banks for derivative bets gone spectacularly wrong The bills require that many derivatives be traded on public exchanges but then carve out far too many exceptions One huge loophole would exempt derivatives from exchange trading for corporations that use them to hedge operational risks say an airline that wants to lock in fuel prices The supposed logic is that corporate derivative users did not cause the crisis

But such derivatives make up a big chunk of the $592 trillion industry If they are exempted potentially trillions of dollars worth of transactions could avoid the exposure mdash and stability mdash that comes with exchange trading Even worse under the current wording this exemption could be read to apply to many more companies including hedge funds and other investor groups

The stated aim of the exemption is to keep transaction costs low when corporations use derivatives to hedge their various risks But there is no compelling evidence that exchange trading will drive up costs And even if the cost were to rise somewhat transparency is a more important goal

The bill approved by the Financial Services Committee has an additional weakness it denies regulators powers they need to fully police the market For instance they would not have the authority to ban dangerous products and abusive practices Bans are a heavy-handed tool But the ability to impose bans on toxic instruments should be part of the tool kit

Both versions must be improved on the House floor and in the Senate In a sign of what we hope will be tough battles ahead Senator Maria Cantwell Democrat of Washington and a member of the Finance Committee has written to Treasury Secretary Timothy Geithner asking him to explain the administrationrsquos support for the flawed bill from the Financial Services Committee

Insisting on strong derivatives reform is a matter of putting taxpayers first mdash ahead of the big banks and corporate America that are fighting hard for a return to risky business as usual

Some Protection for Consumers A proposed new Consumer Financial Protection Agency is intended to protect Americans from abusive deceptive and predatory lending in mortgages credit cards and many other types of loans So no one should be surprised that big lenders have been working the halls of Congress trying to weaken its powers

The House Financial Services Committee passed a bill last week that would give the agency important responsibilities and at long last bring consumer protection under the watch of a single regulator focused solely on the best interests of consumers But at the same time it would weaken other protections and restrict the agency in ways that could undermine its effectiveness

The biggest problem is that the bill would allow the federal government to block states from imposing their own tougher rules on many banks Such pre-emptive power mdash which big banks lobbied for tirelessly mdash would be limited to instances in which state law is deemed to ldquosignificantlyrdquo interfere with federal regulatory power But that is cold comfort In the past federal pre-emption of state laws has almost invariably led to a lowering of consumer protection standards

Small banks also won their own dangerous concession restricting the new agencyrsquos ability to routinely examine the books of banks with assets under $10 billion That could be an invitation for more bad lending

The bill would also prevent the agency from regulating auto dealers who receive lucrative rewards from lenders for steering car buyers into often overpriced loans And it would restrict the agencyrsquos ability to impose rules on insurance products that are tied to credit including title insurance and mortgage insurance Such products are overpriced for the scant benefits they provide but are heavily marketed precisely because they are so profitable for lenders

The billrsquos supporters say these concessions were necessary to win enough votes to move the bill out of committee and they will be improved upon once the full House debates We canrsquot remember many finance-related bills that improved during the legislative process

One welcome exception was the recent bill that outlawed some egregious practices in the credit card industry That benefited from the high-profile support of President Obama The president has said that he is committed to the creation of a powerful Consumer Financial Protection Agency If that is to happen he and his aides will have to match the banks and their lobbyists blow-for-blow as the legislation advances

httpwwwnytimescom20091025opinion25sun1html

ANAacuteLISIS Economiacutea global

La transicioacuten inmobiliaria en Espantildea JOSEacute A HERCE y PEP RUIZ 25102009

Si las cosas se hacen bien dentro de una deacutecada el sector inmobiliario espantildeol seraacute muy diferente de como ha sido en la precedente Si se hacen mal o no se hace lo que hay que hacer seraacute similar a lo que es hoy y mantendraacute los mismos defectos que se han vivido en el uacuteltimo ciclo En estos momentos pocos reconoceraacuten en el panorama inmobiliario de nuestro paiacutes al boyante sector que existiacutea hace tan soacutelo dos antildeos que ya conviviacutea con las numerosas sentildeales (no tan prematuras) de entonces

El desplome de la actividad el exceso de viviendas terminadas en venta la saturacioacuten inmobiliaria en zonas inverosiacutemiles la escasez de vivienda en alquiler y los titubeos y contradicciones de la vivienda protegida marcan fuertemente una situacioacuten en la que coexisten varios tipos de agentes de la maacutexima relevancia para el dinamismo econoacutemico espantildeol y la satisfaccioacuten de las aspiraciones a una vivienda de los nuevos hogares que no dejan de formarse los promotores las entidades crediticias y los gobiernos central autonoacutemicos y locales

El delirante desarrollo inmobiliario espantildeol de los uacuteltimos antildeos no debe llevarnos sin embargo a dejar de ver algunos elementos de primera magnitud que sin duda estaraacuten en la base del nuevo modelo inmobiliario que se forje en los proacuteximos antildeos Las compantildeiacuteas constructoras espantildeolas han proporcionado viviendas de calidad a millones de hogares que no han dudado en adquirirlas a pares dadas las coacutemodas condiciones financieras que han prevalecido desde la creacioacuten del euro hasta 2006 Por otra parte la actividad residencial y la obra puacuteblica han hecho surgir verdaderas empresas globales en el sector Una buena media docena de las maacutes importantes del mundo son espantildeolas Muchos profesionales pequentildeas medianas y grandes compantildeiacuteas de la construccioacuten y la promocioacuten de viviendas han hecho bien y muy bien su trabajo durante estos antildeos aunque no todos obviamente

Pero una especulacioacuten desaforada un uso maacutes que indebido de la potestad para calificar suelos por parte de las autoridades locales (mal capacitadas para comprender el problema inmobiliario y peor servidas por un peacutesimo sistema de financiacioacuten) y la falta de una inteligencia estrateacutegica adecuada sobre la evolucioacuten del sector se han combinado con otras causas (baratura de la financiacioacuten y presioacuten de la demanda) para producir un descomunal problema de asignacioacuten de recursos que ha acabado reproduciendo en Espantildea los siacutentomas de las hipotecas basura cuando no las habiacuteamos adquirido adelantando el hundimiento del mercado de trabajo y profundizando el ciclo de la actividad

Durante los proacuteximos antildeos no podremos crecer sobre la base de un sector de la construccioacuten (e industrias y servicios asociados que son muchos) que tendraacute que reinventarse De la misma forma habraacute que reinventar los circuitos de asignacioacuten de recursos financieros y productivos hacia nuevas actividades El capital especialmente deberaacute abandonar proyectos arriesgados como los inmobiliarios para aliarse con los de alta tecnologiacutea fabricacioacuten avanzada o servicios de tercera generacioacuten iexclVaya paradoja para lo que hasta hace poco denominaacutebamos capital riesgo

Con todo el sector inmobiliario y de la construccioacuten residencial tendraacute que hacer una transicioacuten dolorosa hacia un nuevo modelo al igual que las entidades financieras demasiado implicadas todaviacutea en una digestioacuten lenta y pesada Es obvio que las nuevas condiciones del

mercado de la vivienda obligan a una poliacutetica de vivienda diferente tanto a escala nacional como regional y local

Con maacutes de un 85 de los hogares residiendo en viviendas de propiedad y el mayor parque de viviendas por habitante de Europa Espantildea es una isla en el mercado inmobiliario continental Pueden achacarse algunas de estas peculiaridades a una cultura intriacutenseca espantildeola como si los espantildeoles fueacuteramos distintos solamente en esto del resto de los europeos Pero parece maacutes razonable intentar explicar el distinto comportamiento por aquellos factores que han forzado ese cambio entre los que indudablemente se encuentra el muy distinto tratamiento fiscal de la vivienda seguacuten el meacutetodo de acceso Cuando una deduccioacuten permite ahorrarse praacutecticamente el 15 del coste de la vivienda y solamente se puede acceder a dicha deduccioacuten comprando la vivienda habitual lo loacutegico es demandar compra y no alquiler

Parte de este enfoque comenzoacute a cambiar en 2004 con el anterior Plan de Vivienda que abriacutea la puerta a la promocioacuten de viviendas de proteccioacuten oficial en reacutegimen de alquiler o en reacutegimen de alquiler con opcioacuten a compra Ademaacutes introduciacutea deducciones por el alquiler aunque soacutelo para una parte de la demanda olvidando que el alquiler puede ser un reacutegimen de acceso general a la vivienda y no solamente un enfoque de poliacutetica para satisfacer a aquellos que no pueden acceder de otro modo En un contexto de mercado muy atomizado las medidas se dirigiacutean a la puesta en circulacioacuten de viviendas en manos de particulares y a mejorar la accesibilidad y la estabilidad de los inquilinos en el mercado de alquiler Nacen al albur de esta liacutenea de actuacioacuten poliacutetica herramientas como la Sociedad Puacuteblica de Alquiler una multiplicidad de agencias municipales de alquiler y bolsas joacutevenes de alquiler e incluso medidas de apoyo a inquilino y propietario a traveacutes del IRPF Y en conjunto las medidas parecen haber tenido eacutexito Poco a poco la tendencia al acceso a la vivienda a traveacutes de la propiedad muestra un ligero cambio de acuerdo con las estadiacutesticas oficiales

El contexto actual no obstante abre una oportunidad relevante para acelerar este proceso Frente a lo que ocurriacutea en 2004 cuando no existiacutean grandes propietarios con viviendas y por tanto la poliacutetica debiacutea enfocarse hacia el oferente minorista ahora existen grandes bolsas de viviendas en manos de unas pocas entidades Sean eacutestas promotores o entidades financieras podemos encontrar stocks de tamantildeo relevante sobre los que existen solamente dos opciones La primera ponerlos en el mercado a precio de saldo corrigiendo el problema de accesibilidad a la vivienda eso siacute pero generando otros dos problemas peacuterdidas para las entidades financieras y las promotoras que arrastran una caiacuteda adicional de precios y de empleo La segunda consiste en intentar retirar estas viviendas del mercado de compra trasladaacutendolas hacia el alquiler

Ciertamente si la medida funcionase supondriacutea un cierto recorte adicional en la demanda de vivienda orientada hacia la compra pero a cambio las ventas no seriacutean forzadas y se mejorariacutea la accesibilidad a la vivienda en un contexto de confianza insuficiente para la compra por parte de las familias Ademaacutes se posibilitariacutea la creacioacuten de grandes parques de alquiler que son la base para que pueda existir un mercado profesionalizado

A partir de estos parques que no tienen por queacute ser puacuteblicos se podraacute generar una poliacutetica de pago por uso por parte de las Administraciones que recurririacutean a ellos en funcioacuten de la demanda de vivienda social Por lo demaacutes la obtencioacuten de rentabilidades de mercado y la especial fiscalidad planteada para estos instrumentos facilitariacutean la creacioacuten de parques de alquiler utilizables a precios de un mercado en el que grandes entidades actuariacutean como compradores (frente a los promotores) como oferentes de alquiler (frente a los inquilinos) y como oferentes de vivienda en compra cuando consideren amortizada la inversioacuten Este modelo existe en todos los paiacuteses de nuestro entorno Son lo que aquiacute se

llamaraacuten SOCIMIS pero en el mundo anglosajoacuten se conoce como REIT (Real Estate Investment Trusts) Soacutelo es cuestioacuten de copiarlo y copiarlo bien Si entre los objetivos de la poliacutetica de vivienda se encuentran el aumento del parque de vivienda en alquiler y el de reorientar la demanda de vivienda protegida hacia el alquiler eacutestos habriacutean de lograrse contando con la enorme cantidad de viviendas ya existentes pero a costa de una importante cesioacuten por parte de todos los agentes implicados Ello sin embargo acelerariacutea la transicioacuten hacia un nuevo modelo inmobiliario en el que las empresas ofrezcan maacutes servicios con maacutes opciones de acceso a la vivienda con una mejor adaptacioacuten de eacutesta al ciclo vital de las familias con nuevas oportunidades de inversioacuten y con la posibilidad de promover una poliacutetica de vivienda maacutes adaptada a las necesidades de los ciudadanos y por tanto un uso optimizado de los recursos puacuteblicos

Necesitamos un nuevo modelo inmobiliario por la sencilla razoacuten de que seguimos necesitando viviendas para que los nuevos hogares puedan desarrollar sus planes vitales y porque hay que desatascar la digestioacuten de cientos de miles de viviendas destinadas a la compra por parte de unos hogares que no pueden comprarlas Los promotores las entidades crediticias y los gobiernos de todo nivel deben poner algo de esfuerzo ceder un tanto en sus pretensiones y desarrollar maacutes imaginacioacuten para crear los nuevos vehiacuteculos que facilitaraacuten una transicioacuten inmobiliaria ineludible pero no evidente Acelerar esta transicioacuten finalmente implica necesidades de financiacioacuten en un contexto en el que es difiacutecil conseguirla Por ello hay que preguntarse si dicha transicioacuten se realizaraacute espontaacuteneamente Seguramente no por lo que una actuacioacuten puacuteblica decidida para su impulso estaacute maacutes que indicada Dejar pasar la oportunidad en cambio abocariacutea al sector inmobiliario a una nueva reencarnacioacuten que a juzgar por los excesos de la presente no seraacute mejor

httpwwwelpaiscomarticuloeconomiaglobaltransicioninmobiliariaEspanaelpepueconeg20091025elpnegeco_4Tes

REPORTAJE vidaampartes

La generacioacuten peter pan estaacute hipotecada Espantildea tiene casi 8 millones de treintantildeeros nacidos al final del baby boom - Estaacuten desencantados y altamente endeudados - Son consumistas y buscan en el ocio la nostalgia de su infancia La familia y el entorno les presionoacute para que tuvieran una casa en propiedad Estos joacutevenes han ido retrasando su emancipacioacuten por su inestabilidad laboral

JOSEP GARRIGA 25102009

En Estados Unidos se les bautizoacute como kidults -del ingleacutes kid (nintildeo) y adult (adulto)- En Latinoameacuterica optaron por un juego de palabras en espantildeol adultescentes por la unioacuten de adulto y adolescenteY en Espantildea los socioacutelogos prefieren definirles como treintantildeeros bajo el siacutendrome de Peter Pan mientras que los expertos en mercadotecnia les llaman Generacioacuten X

En Estados Unidos se les bautizoacute como kidults -del ingleacutes kid (nintildeo) y adult (adulto)- En Latinoameacuterica optaron por un juego de palabras en espantildeol adultescentes por la unioacuten de adulto y adolescente Y en Espantildea los socioacutelogos prefieren definirles como treintantildeeros bajo el siacutendrome de Peter Pan mientras que los expertos en mercadotecnia les llaman Generacioacuten X Constituyen seguacuten los uacuteltimos datos demograacuteficos del Instituto Nacional de Estadiacutestica el segmento de poblacioacuten mayoritario en Espantildea con casi ocho millones de personas y en consecuencia representan una bolsa ingente de consumidores

Son los uacuteltimos hijos del baby boom de los setenta y en general todos responden a los mismos patrones Constituiacutean la generacioacuten mejor preparada pero que se ha dado de bruces con un mundo que ha cambiado repentinamente ante sus narices Ahora deben construirse una nueva realidad y piensan quizaacute con razoacuten que ya estaacuten llegando tarde Son unos joacutevenes que rompieron esquemas abrieron nuevos caminos a base de luchas sociales y de golpe se ven amarrados a una hipoteca o por el contrario tienen que regresar al nido familiar a esa casa de la que ansiaban emanciparse En definitiva un final de trayecto infernal Y se dicen Yo no entiendo nada

El uacutenico refugio que les queda ahora es su retorno a la etapa juvenil Pero como retroceder en el tiempo se antoja imposible mantienen las mismas actitudes y formas de ocio que entonces Por eso se les llama kidults adultescentes o Peter Pan

El problema de los treintantildeeros arranca -y nunca mejor dicho- de su pecado original su propio tamantildeo generacional No es que nacieran muchos nacieron demasiados La tasa de fecundidad alcanzoacute los 28 hijos por mujer feacutertil Este estigma les ha marcado desde entonces masificaron las aulas de las escuelas despueacutes las del instituto las de la Universidad y una vez con el tiacutetulo debajo del brazo las colas de demanda de empleo y las oficinas del paro

El socioacutelogo Enrique Gil Calvo apunta que ademaacutes de su peso demograacutefico los treintantildeeros heredaron el objetivo de emanciparse con un piso de propiedad una cultura enraizada en Espantildea e Italia pero no en el norte de Europa donde el propio Estado promueve y subvenciona el alquiler Aquiacute el Estado del bienestar soacutelo se entiende para la gente mayor en ninguacuten caso para los joacutevenes abunda Pau Miret socioacutelogo del Centro de Estudios Demograacuteficos Y en Espantildea las presiones para comprar una vivienda eran muy fuertes y constantes agrega El porcentaje de vivienda en propiedad en Espantildea se situacutea en el 92 frente al 6 de alquiler

Pero iquestcoacutemo comprar una vivienda con un contrato temporal y sin estabilidad laboral La Generacioacuten X fue la primera que firmoacute hipotecas a 35 y 40 antildeos vista Se hipotecaban no soacutelo por el hecho de comprar un piso sino porque significaba comprarse la emancipacioacuten que ansiacutea todo joven Y los bancos se aprovecharon de este efecto llamada resume Lorenzo Navarrete decano del Colegio de Socioacutelogos de Madrid A esta presioacuten familiar y social -con un alquiler estaacutes tirando el dinero les

recriminaban- se sumoacute la bajada de los tipos de intereacutes y unas entidades financieras que les recibieron con los brazos abiertos

Sin embargo su situacioacuten se asemeja a la del pez que se muerde la cola El primer pilar para la transicioacuten al mundo adulto es el mercado laboral porque supone la base para el resto de transiciones Es decir la compra de la vivienda la creacioacuten de una familia y los hijos Pero si el primer pilar no es lo suficientemente soacutelido o se resquebraja se hunde el resto y con ello incluso la trayectoria vital De ahiacute que la edad de emancipacioacuten en Espantildea se situacutee entre las menores de Europa en el 456 del total de joacutevenes Poco a poco se multiplica el efecto porque hasta que no consiguen el capital para dar la entrada del piso o un contrato estable van aplazando su salida de casa Pero continuacutean pensando que la compra de una vivienda es la mejor inversioacuten incluso como apuesta biograacutefica porque el tiacutetulo universitario no basta insiste Gil Calvo que denomina a este grupo Generacioacuten H por la hipoteca Un informe de Estados Unidos evidencia que los treintantildeeros representan la primera generacioacuten que en teacuterminos relativos gana menos que la de sus propios padres

Es la primera generacioacuten en la historia de la humanidad que no ha tenido que hacer lo que haciacutean sus padres Y esto crea incertidumbre Ademaacutes les ha fallado el toacutetem de la vivienda comenta Gerard Costa profesor de Marketing Social de la escuela de negocios Esade Y Navarrete de acuerdo con este anaacutelisis apunta otra frustracioacuten Se pelearon por todos y con todo el mundo y en muchas ocasiones tiraron la toalla para poder irse Y ahora casi no disfrutan de esas conquistas sociales que ellos consiguieron Es una generacioacuten a la que debemos mucho y ellos a su vez tambieacuten deben mucho pero a los bancos

Este turbulento contexto ha creado seguacuten la mayoriacutea de socioacutelogos una generacioacuten desencantada desorientada perpleja aplastada con sensacioacuten de pesadez con enormes y constantes dudas porque el mapa de rutas que trazaron sus padres ya no les sirve y han de orientarse con uno nuevo en blanco y con unos valores diferentes Es una generacioacuten desencantada que no se ha adaptado que podriacutea romper pero no lo han hecho y esto comporta un desgaste Pero yo el eje lo veo por las dudas ya que se han encontrado sin red de proteccioacuten y tienen una sensacioacuten de oportunidad perdida resume Gerard Costa

Los treintantildeeros casados que buscan descendencia calcan en su mayoriacutea esos paraacutemetros de constantes dudas considera Gil Calvo iquestSabreacute hacer bien de padre se preguntan Estaacuten atemorizados por hacerlo mal Pero incapaces de imponer autoridad a los hijos optan por mimarles y por sobreprotegerles Los protocolos de sus padres no les sirven y ahora carecen de manual de uso comenta Pero incluso en ellos -la pareja- se da una contradiccioacuten culturalmente son transgresores y modernos pero sociopoliacuteticamente conservadores Es una mezcla contradictoria y ambivalente antildeade este socioacutelogo

Ese conservadurismo se aprecia tambieacuten en su inmovilismo laboral y en su visioacuten del mundo del trabajo Para sus padres el eacutexito y progreso profesional representaban una meta en cambio los treintantildeeros tienen otra escala de valores y dan mayor importancia a otra serie de elementos como el ocio y a colmar sus emociones De ahiacute que como subraya Costa las empresas hayan entrado a deguumlello en este segmento de edad

La esloacuteganes publicitarios de la tienda de muebles Ikea reflejan con exactitud la situacioacuten personal y el estado de aacutenimo de los treintantildeeros Donde caben dos caben tres no iba destinado a las parejas que queriacutean ser padres sino a los treintantildeeros llamados boomerang los que regresan a casa de sus padres despueacutes de una etapa frustrada y frustrante de emancipacioacuten Y los hay en nuacutemero Redecora tu vida era un anzuelo para esta generacioacuten que no entiende nada perpetuo y desencantada sentildeala Pilar Alcaacutezar periodista y autora del libro Entre singles dinkis bobos y otras tribus sobre las oportunidades de negocio destinadas a estos grupos de treintantildeeros Y por fin La Repuacuteblica independiente de tu casa es sinoacutemino de buacutesqueda de emancipacioacuten incluso en el seno del hogar Tambieacuten va dirigido a quienes viven solos Y la Generacioacuten X es la maacutes abundante Seguacuten la uacuteltima EPA del tercer trimestre de 2009 en Espantildea hay 539300 viviendas unifamiliares de personas activas en este segmento de edad

El consumo de los treintantildeeros va ligado sobre todo al ocio entendido como retorno y nostalgia de la etapa juvenil porque implica tambieacuten un cambio de valores Antes estaba mal visto que una persona tuviese un punto infantil le llamaban nintildeato pero ahora es diferente antildeade Alcaacutezar Es un segmento

maacutes consumidor Cuando era joven entrevioacute estas cosas pero lo disfrutoacute con limitaciones Ahora lo puede hacer con amplitud incide Costa Y Navarrete apunta su explicacioacuten socioloacutegica El siacutendrome de Peter Pan es la garantiacutea de mantener la equidistancia entre sentirse integrado y al tiempo tambieacuten libre Aun pensando ya como adultos conservan maacutes actitudes y atributos juveniles Una lucha contracultural Tambieacuten es cierto que los teacuterminos juventud y juvenil se han estirado e incluyen a personas de 34 antildeos que son y se sienten joacutevenes

Los estudios de mercado y en definitiva los haacutebitos consumistas de estos treintantildeeros no fallan En Barcelona por ejemplo se han agotado las famosas muntildeecas Baby mocosete No las han comprado los padres para sus hijos sino la mamaacute para su disfrute El pasado fin de semana la peliacutecula de dibujos animados Vicky el Vikingo batioacute record de taquilla La mayoriacutea de espectadores eran treintantildeeros con su prole Lo mismo sucedioacute en 2005 con Mortadelo y Filemoacuten Los ejemplos se extienden a los musicales de Mecano Abba o Queen O a la reedicioacuten de filmes como Star Wars O a los anuncios la recuperacioacuten del espot en blanco y negro del gel Legrain-Pariacutes y el Anda los donuts Y coacutemo no a la play station o el Scalextric

En cuanto al ocio son unos joacutevenes que gastan mucho Pero ahorran en cosas praacutecticas porque no dejan que les tomen el pelo Utilizan las compantildeiacuteas aeacutereas low cost o los outlet de ropa Pero en cambio gastan mucho en satisfacer sus emociones y en caprichos afirma Alcaacutezar Y Gerard Costa lo ejemplifica La figura de Jockey de Batman cuesta maacutes de 200 euros y ha sido todo un eacutexito Y los de Tim Burton se agotaron El Baby mocosete supera tambieacuten los 200 euros

iquestY la jubilacioacuten

Espantildea tiene una piraacutemide de edad embarazada porque predominan los treintantildeeros que suman 79 millones de personas De ellos el 18 procede de la inmigracioacuten La estadiacutestica del INE arroja un dato preocupante el envejecimiento paulatino de la poblacioacuten y las repercusiones para los cuatro pilares del Estado del bienestar las pensiones el sistema nacional de salud la educacioacuten y las ayudas sociales De no aumentar el ritmo de nacimientos Espantildea puede convertirse en un paiacutes de viejos y sin joacutevenes que coticen a la Seguridad Social Y ademaacutes la gente vive mucho maacutes diacutea a diacutea

Sin embargo parece que este problema no inquieta sobremanera a los actuales treintantildeeros Seguacuten una encuesta del grupo asegurador Caser soacutelo el 46 de los entrevistados cree que la Seguridad Social -sanidad y pensiones- tendraacute dificultades en el futuro frente a una media total del 69 El 11 cree que desapareceraacute y el 35 que el Estado reduciraacute las prestaciones

La falta de viviendas y las hipotecas interminables lastran la emancipacioacuten de los treintantildeeros- SAMUEL SAacuteNCHEZ

httpwwwelpaiscomarticulosociedadgeneracionpeterpanhipotecadaelpepusoc20091025elpepisoc_1Tes

TRIBUNA laboratorio de ideas ANTOacuteN COSTAS

Cinco erres para mover la economiacutea Es un despropoacutesito pretender arreglar todos los problemas reformando la contratacioacuten laboral o las pensiones

ANTOacuteN COSTAS 25102009

Dice un refraacuten que a perro flaco todo son pulgas Algo asiacute le ocurre a la economiacutea espantildeola Hasta hace un poco maacutes de un antildeo era un ejemplo a imitar un milagro econoacutemico Creciacutea creaba empleo teniacutea estabilidad presupuestaria y de precios Teniacutea alguacuten defectillo congeacutenito como era su escasa productividad pero en todo caso era una enfermedad asintomaacutetica que no impediacutea crecer Pero una vez ha entrado en recesioacuten todo son males y defectos

La crisis financiera y el fallo de los bancos en suministrar ese bien puacuteblico que es el creacutedito (iquestqueacute hariacuteamos con las empresas eleacutectricas privadas si dejasen de suministrar el servicio puacuteblico) han traiacutedo el hambre de consumo e inversioacuten Ahora todo son paraacutesitos como el desempleo y la pobreza y defectos estructurales iquestQueacute hacer iquestAprovechamos para reformarla o primero remediamos la debilidad del sector privado con maacutes gasto puacuteblico aunque para ello tengamos que endeudarnos

Acogieacutendose a lo de que nunca se debe desaprovechar una buena crisis algunos priorizan reformas profundas aun antes de que el enfermo se recupere El riesgo es que haya que decir lo del cirujano ciacutenico La intervencioacuten fue bien pero el paciente murioacute En sentido contrario es sorprendente la cantidad de males y defectos que desaparecen con una buena alimentacioacuten

Para hacer que la economiacutea vuelva a funcionar va bien pensar en una estrategia con cinco R rescate recuperacioacuten reconversioacuten reforma y reequilibrio

La magnitud del desplome del valor de los activos inmobiliarios y el peso que las operaciones con esos activos teniacutean en el balance de los bancos amenazaron hundir el sistema financiero La primera tarea teniacutea que ser y sigue siendo salir al rescate de los bancos utilizando para ello el dinero de los contribuyentes y provocando deacuteficit puacuteblico Los bancos son un bien puacuteblico pero los banqueros no El hecho de que se utilicen recursos de los ciudadanos para remediar los desaguisados de directivos muy bien pagados que no se hacen responsables de sus fallos ha generado una justa indignacioacuten Maacutes allaacute de la crisis eacutesta es una de las grandes cuestiones pendientes que nos deja esta crisis financiera

La siguiente R es la recuperacioacuten de la actividad econoacutemica Una economiacutea de mercado no funciona si no existe consumo e inversioacuten privada Cuando desaparecen como es el caso hay que salir al rescate de la demanda Eso genera maacutes gasto puacuteblico y como con la crisis caen los ingresos por impuestos tambieacuten maacutes deacuteficit

iquestA queacute damos prioridad a corto plazo a la recuperacioacuten o al deacuteficit Imaginen a un piloto de una aeroliacutenea con problemas que cuando el avioacuten auacuten estaacute despegando decide sacar potencia a los motores para ahorrar combustible El desastre El conflicto entre recuperacioacuten y deacuteficit hay que resolverlo en el medio plazo

La tercera R es la de la reconversioacuten industrial y financiera Una recesioacuten no es soacutelo una simple caiacuteda temporal de la demanda Al contrario es como un vendaval que a la vez que se lleva por delante empresas y modelos de negocio obsoletos libera energiacuteas acumuladas que

hacen surgir nuevos negocios y empresas Maacutes de la mitad de las grandes empresas de la lista de Fortune nacieron durante una recesioacuten Esta destruccioacuten creadora obliga a sectores y empresas a reestructurarse o desaparecer

Eso es lo que ocurrioacute como recordaraacuten los menos joacutevenes en los antildeos ochenta cuando tuvimos que llevar a cabo una fortiacutesima reconversioacuten industrial Lo mismo hay que hacer ahora con el sector de la construccioacuten o el turiacutestico entre otros Han de transformarse desde modelos de negocio que en muchos casos son auacuten artesanales en verdaderas industrias Como dije aquiacute en otra ocasioacuten se trata de mejorar el modelo productivo no de cambiarlo Eso exige una profunda reforma empresarial en la que los protagonistas son los empresarios y trabajadores Pero el sector puacuteblico ha de ayudar mediante planes que fomenten esa reconversioacuten y la reforma Planes que tambieacuten generan deacuteficit puacuteblico

La cuarta R es la de la reforma de las instituciones y reglas que rigen la conducta de los agentes econoacutemicos pero tambieacuten de los actores poliacuteticos Pretender que todos nuestros problemas se arreglen reformando las formas de contratacioacuten laboral o las pensiones es un despropoacutesito reflejo en muchos casos de una cierta pereza intelectual Los problemas con las instituciones y reglas van maacutes allaacute del mercado laboral Una reforma evidente es la de los mecanismos de retribucioacuten de altos directivos Si no se contempla la reforma desde una perspectiva amplia la percepcioacuten de injusticia y agravio bloquearaacute cualquier avance en este terreno

La uacuteltima R es la del reequilibrio de las cuentas puacuteblicas Es de sentido comuacuten que no se puede vivir mucho tiempo con niveles elevados de deacuteficit y deuda El riesgo seriacutea la portugalizacioacuten o italianizacioacuten de nuestra economiacutea en el sentido en que esos dos paiacuteses se estancaron a inicios de esta deacutecada por su elevado deacuteficit e incapacidad de transformarse La clave estaacute en que los deacuteficits a corto plazo vayan acompantildeados de poliacuteticas de recuperacioacuten reconversioacuten y reforma creiacutebles Y que el reequilibrio afecte tanto a los ingresos como a los gastos De hecho hay margen para hacer de los gastos un instrumento socialmente maacutes equitativo y eficiente

iquestCuaacutel es la estrategia maacutes adecuada para combinar esas cinco R Los manuales no nos lo dicen La respuesta pertenece al campo del arte de la poliacutetica Tiene mucho que ver con el olfato cliacutenico de los poliacuteticos con su intuicioacuten acerca de lo que en cada momento es socialmente aceptable Y con su decisioacuten para hacerlo

Hace falta poliacutetica Buena poliacutetica

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ANAacuteLISIS Carreras amp capital humano

Stock options y despido improcedente JOSEacute MARIacuteA LASTRAS 25102009

Los problemas de las opciones sobre acciones las stock options que tantas turbulencias provocaron en el pasado fueron finalmente finiquitadas por dos sentencias del Tribunal Supremo en las que se declaroacute su vinculacioacuten con la actividad laboral y por consiguiente su naturaleza salarial Desde entonces a traveacutes de distintas resoluciones el alto tribunal ha ido solventado todas las controversias que esta compleja figura ha ido suscitando en el aacutembito juriacutedico

Entre tales cuestiones podemos mencionar la relativa al ejercicio del derecho de la opcioacuten sobre las acciones cuando el trabajador ya no forma parte de la plantilla por haber sido objeto de un despido reconocido por la empresa como improcedente Una reciente sentencia del pasado mes de julio ha venido a incidir sobre este tema

El problema se plantea cuando el plazo para el ejercicio de dicho derecho se inicia con posterioridad al momento en el que la relacioacuten que uniacutea al trabajador con la empresa ha concluido y el plan que regula las stock options exige inexcusablemente que el trabajador forme parte integrante de la plantilla para poder proceder a tal ejercicio

En estos casos la doctrina del Tribunal Supremo es concluyente la empresa no puede negar al trabajador el derecho al ejercicio de las opciones La razoacuten estriba en el hecho de que la empresa no puede unilateralmente neutralizar dejar sin efecto un contrato de opcioacuten vaacutelidamente suscrito sin una causa contractualmente liacutecita y menos auacuten por una causa que ha reconocido como improcedente no ajustada a derecho Admitir esto supondriacutea contravenir una de las reglas fundamentales del derecho civil la que establece que no se puede dejar al arbitrio de uno de los contratantes el cumplimiento de los contratos

Considera al respecto el tribunal que el despido improcedente admitido como tal por la empresa y practicado unos meses antes de que el trabajador pudiese ejercitar el derecho de opcioacuten no puede constituir un hecho indiferente y ha de ser valorado como una conducta unilateral de la obligada por la oferta de opcioacuten para situarse en condiciones tales que se impide o al menos se trata de impedir el ejercicio de tal derecho

Por todo ello concluye que el despido improcedente deberaacute equipararse a las situaciones pactadas en el plan en las que la baja tiene lugar por causas ajenas a la voluntad del trabajador por lo que llegado el plazo deberaacute permitirse al antiguo trabajador el ejercicio de la opcioacuten

httpwwwelpaiscomarticulocarrerascapitalhumanoStockoptionsdespidoimprocedenteelpepueconeg20091025elpnegser_7Tes

REPORTAJE Primer plano

Un rebote que da que pensar La subida bursaacutetil aviva el debate sobre la fina liacutenea roja entre optimismo y burbuja

DAVID FERNAacuteNDEZ 25102009

El Pentaacutegono facilitoacute a comienzos de octubre la cifra de estadounidenses que se habiacutean alistado al ejeacutercito en los nueve primeros meses del antildeo 169000 Este nuacutemero supera en 5000 personas la meta que se habiacutea fijado la Administracioacuten de Obama para todo 2009 y es la cantidad maacutes alta desde 1973 cuando se abrioacute por completo el alistamiento voluntario al Ejeacutercito De forma paralela el Dow Jones el iacutendice bursaacutetil maacutes influyente del mundo superaba la cifra psicoloacutegica de los 10000 puntos tras acumular una subida del 53 desde sus miacutenimos de marzo

La teoriacutea acadeacutemica dice que la Bolsa es un indicador adelantado de la economiacutea para lo bueno y para lo malo Y ahora con su rebote estariacutea descontando una salida de la recesioacuten Sin embargo mientras vuelven los diacuteas de vino y rosas a los mercados los ciudadanos de la principal potencia econoacutemica del planeta ven tan difiacutecil lograr un empleo que muchos de ellos optan por ingresar en el Ejeacutercito pese a las constantes noticias de bajas en Irak y Afganistaacuten Esta contradiccioacuten lleva a cuestionarse si el tradicional hueco entre Main Street (la realidad de la calle) y Wall Street (la realidad de las finanzas) se ha ampliado hasta niveles poco sostenibles

Las consecuencias del estallido de la uacuteltima burbuja la inmobiliaria vinculada a las hipotecas basura auacuten se estaacuten pagando Ello no impide que en el mercado se empiece a especular acerca de cuaacutel seraacute el proacuteximo activo preso de la especulacioacuten iquestSeraacute la renta variable cuyas valoraciones anticipan una recuperacioacuten econoacutemica y de los beneficios empresariales auacuten por confirmar iquestSe daraacute la siguiente burbuja en el aacutembito de las materias primas con un oro que ha superado la cota de los 1000 doacutelares por onza iquestO se gestaraacute en el mercado de deuda donde los Gobiernos han acudido de forma masiva para financiar sus planes de rescate

Nouriel Roubini profesor de la Universidad de Nueva York saltoacute a la fama por ser casi el uacutenico economista en alertar de la crisis financiera que se avecinaba Desde entonces se ha abonado a las tesis maacutes pesimistas (tras la quiebra de Lehman Brothers llegoacute a pedir el cierre temporal de los mercados) Roubini alerta ahora de que hay un claro riesgo de burbuja en la renta variable Los mercados han subido demasiado alto demasiado pronto y demasiado raacutepido explicoacute durante su intervencioacuten en uno de los actos celebrados en torno a la uacuteltima cumbre del Fondo Monetario Internacional (FMI) celebrada en Estambul a principios de octubre Veo un riesgo de correccioacuten especialmente cuando los inversores se den cuenta de que la recuperacioacuten no va a ser tan raacutepida es decir en forma de V sino maacutes bien en forma de U Esto podriacutea ocurrir en el uacuteltimo trimestre de este antildeo o en el primero de 2010 seguacuten Roubini

Durante los primeros meses de 2009 el paacutenico se apoderoacute de los inversores Se especulaba entonces con el colapso del sistema financiero y una crisis econoacutemica similar a que la originoacute la Gran Depresioacuten Este caldo de cultivo hundioacute las Bolsas en todo el mundo En el caso de EE UU el Dow Jones tocoacute su nivel maacutes bajo desde 1997 En marzo y abril pasados algunos indicadores econoacutemicos empezaron a emitir sentildeales de cierto optimismo mientras que los

resultados empresariales auacuten siendo malos no fueron catastroacuteficos Unido a ello los bancos centrales rebajaron los tipos de intereacutes a niveles proacuteximos a cero mientras que los Gobiernos aprobaban medidas de estiacutemulo econoacutemico por valor de dos billones de doacutelares La consecuencia de estos factores positivos se ha traducido en la siguiente cifra las Bolsas mundiales han aumentado su capitalizacioacuten en maacutes de 20 billones desde marzo pasado

Ya nadie habla de Gran Depresioacuten Pero la bautizada como Gran Recesioacuten sigue ahiacute El flujo de datos macro y microeconoacutemicos es mixto Unos diacuteas toca la de cal y otros la de arena Tras el fuerte rebote acumulado iquestseguiraacuten subiendo las Bolsas iquestO por el contrario nos aproximamos a una correccioacuten

Todaviacutea no hemos alcanzado una normalizacioacuten del contexto econoacutemico Estamos en una burbuja de liquidez originada por los Gobiernos y las autoridades monetarias Soacutelo una burbuja asiacute explica que los activos de riesgo como las acciones tengan subidas cercanas al 60 en ocho meses sin que exista una correlacioacuten semejante en la mejora de la situacioacuten econoacutemica advierte Stuart Thomson gestor de renta fija de Ignis Asset Management gestora que administra un patrimonio de 100000 millones Soacutelo podremos saber cuaacutel es el nuevo escenario de normalidad cuando todo el exceso de liquidez haya sido retirado del sistema algo que baacutesicamente no ocurriraacute hasta 2011 antildeade

El sector financiero hundioacute las Bolsas y ha sido tambieacuten el que ha capitaneado la recuperacioacuten de los mercados Los resultados de los grandes bancos en EE UU estaacuten dando municioacuten a aquellos que justifican la subida de la renta variable En el tercer trimestre de 2009 Goldman Sachs multiplicoacute por casi cuatro veces sus beneficios respecto a 2008 mientras que el resultado neto de JPMorgan fue siete veces mayor

Pero como ocurre con las cifras econoacutemicas siempre hay quien ve la botella medio vaciacutea Los maacutes esceacutepticos acerca del vigor de la renta variable advierten que la mejoriacutea en los resultados de los bancos se debe a un contexto de tipos de intereacutes muy favorable para los maacutergenes de intermediacioacuten y ademaacutes la recuperacioacuten estaacute sustentada en sus divisiones de banca de inversioacuten y de gestioacuten de activos mientras que el aacuterea de banca minorista sigue muy deacutebil Los community banks que hacen negocio prestando a los estadounidenses para comprar casas financiar pequentildeos negocios y concediendo otros creacuteditos al consumo lo siguen haciendo mal En lo que va de antildeo estas 7000 entidades han registrado peacuterdidas conjuntas de 2700 millones recordaba Eric Etherige en un reciente reportaje publicado en The New York Times

Con independencia del debate acerca de si se estaacute gestando o no una burbuja en la renta variable donde siacute parece haber unanimidad es en el hecho de que la fuerte recuperacioacuten bursaacutetil ha disminuido de forma considerable el nuacutemero de gangas que habiacutea en el mercado hace tan soacutelo unos meses El instrumento maacutes utilizado por los analistas para determinar si las acciones estaacuten caras o baratas es el PER (price earnings ratio por sus siglas en ingleacutes) Esta ratio indica el nuacutemero de veces que el beneficio por accioacuten de una compantildeiacutea estaacute contenido en su cotizacioacuten Cuanto maacutes alta sea maacutes caros estaraacuten los tiacutetulos y viceversa

Las compantildeiacuteas del Dow Jones por ejemplo cotizan a 145 veces su beneficio operativo un 33 maacutes caras que en junio pasado cuando este indicador tocoacute su miacutenimo al situarse en 11 veces En el parqueacute espantildeol ocurre algo similar con las valoraciones de las empresas El PER de la Bolsa espantildeola en septiembre pasado era de 1509 veces Esta cifra supone un encarecimiento considerable frente al PER de 767 veces de enero pasado aunque estaacute en liacutenea con las valoraciones del mercado en los antildeos previos al estallido de la burbuja inmobiliaria

Es precisamente en el tema de la valoracioacuten donde maacutes chocan los expertos El SampP 500 estaacute cotizando a un muacuteltiplo de valoracioacuten que se observa normalmente soacutelo en la cima

de mercados alcistas destaca el uacuteltimo informe de estrategia Lombard Odier La uacutenica vez que cotizoacute por encima del muacuteltiplo de valoracioacuten de 15 veces fue durante la burbuja tecnoloacutegica y ya sabemos lo que pasoacute despueacutes con las rentabilidades de la inversioacuten sentildeala este banco privado

Otros analistas se desmarcan de esta visioacuten del mercado No se puede decir que la Bolsa esteacute cara Su valoracioacuten se encuentra lejos del maacuteximo histoacuterico y ademaacutes las rentabilidades por dividendo de muchas acciones siguen siendo muy atractivas argumenta Viacutector Manuel Garciacutea Romero director general de Valoacuterica una de las principales gestoras espantildeolas de fondos de inversioacuten libre (hedge funds)

Las empresas estaacuten dando muestras de solidez pese a la crisis Sin embargo siacute que nos encontramos en un momento delicado porque los inversores estaacuten descontando un comportamiento mejor de la economiacutea y de las empresas en el futuro y esta previsioacuten se tiene auacuten que confirmar Ahora mismo la valoracioacuten de la Bolsa estaacute proacutexima a su fair value o precio justo pero si en los proacuteximos meses se rebaja el optimismo actual tendraacute que haber forzosamente una correccioacuten reconoce el responsable de Valoacuterica

Esta radiografiacutea del mercado es compartida por Juan Luis Garciacutea Alejo director de anaacutelisis de Inversis Gestioacuten En su opinioacuten el rebote bursaacutetil ha dejado unas valoraciones que no son exageradas puesto que las expectativas de beneficios que descuentan los inversores son compatibles con las previsiones macroeconoacutemicas que maneja el consenso del mercado

Garciacutea Alejo explica ademaacutes que la dinaacutemica es muy favorable para la Bolsa La caiacuteda de la prima de riesgo [diferencial de rentabilidad extra que se les exige a las acciones frente a la deuda puacuteblica] tiene mucho que ver con el estado de aacutenimo Otro factor que este analista considera que ayuda a sostener la tendencia es la poliacutetica monetaria de los bancos centrales Con tipos proacuteximos al cero por ciento iquestdoacutende voy a poner mi dinero A pesar de todos estos factores que insuflan viento en la vela bursaacutetil Garciacutea Alejo tambieacuten matiza que a corto plazo las revalorizaciones se van a moderar Si me preguntan si la Bolsa va a continuar subiendo al mismo ritmo que en los uacuteltimos meses la respuesta es no

Los mercados financieros son vasos comunicantes que tienden a retroalimentarse De forma paralela a la mejoriacutea de la renta variable se ha despertado tambieacuten el mercado de fusiones y adquisiciones (MampA por sus siglas en ingleacutes) circunstancia que a su vez ha animado las cotizaciones de las compantildeiacuteas implicadas en los movimientos corporativos asiacute como de sus respectivos sectores Basta repasar los matrimonios (algunos de ellos todaviacutea son pedidas de mano) para darse cuenta de hasta queacute punto se ha animado el negocio de MampA Dell y Perot Systems Kraft y Cadbury

Volkswagen y Porsche Xerox y Affiliated Computers Walt Disney y Marvel Merk y Schering-Plough

iquestSe ha preguntado usted cuaacutel puede ser la siguiente burbuja financiera iquestQueacute le parece el auge de las fusiones Una empresa puede comprar otra racionalizarla reducir sus gastos y despedir a parte de su plantilla Ademaacutes si logra reducir la competencia quizaacute logre subir un poco los precios ironizaba en un reciente artiacuteculo Matthew Lynn columnista de Bloomberg News En su opinioacuten el auge de los movimientos corporativos crearaacute una burbuja bursaacutetil conforme aumente el nuacutemero de compantildeiacuteas pretendidas Ahora bien la gente en los mercados deberiacutea estar pensado en coacutemo impedir que se inflen nuevas burbujas en lugar de empezar otra Es muy posible que haya un boom de fusiones Pero si eso ocurre soacutelo podraacute extraerse una conclusioacuten no hemos aprendido nada de la crisis que padecemos en los uacuteltimos 12 meses

Otro siacutentoma de que el mercado quizaacute haya olvidado demasiado pronto errores que desembocaron en el crash financiero de 2008 abrazando un gusto prematuro por el riesgo es el apetito que los inversores muestran por los bonos basura (los que emiten las empresas con menor solvencia) iquestSe estaacute repitiendo la historia en el mercado europeo de high-yield Asiacute titula SampP un informe publicado esta semana En este estudio los expertos de la agencia de calificacioacuten crediticia advierten de que los uacuteltimos datos en el mercado de bonos de alto rendimiento sugieren que los inversores podriacutean no haber prestado atencioacuten a las lecciones del pasado

Este informe concluye que la ausencia de rentabilidad en los mercados monetarios y en los bonos empresariales con grado de inversioacuten (los emitidos por los grupos maacutes solventes) estariacutean forzando a nuevos inversores a entrar en el mercado europeo de bonos de alto rendimiento comprimiendo los diferenciales entre la deuda calificada con grado de inversioacuten y la deuda basura mientras que el nuacutemero de emisioacuten de estos bonos se mantiene en niveles histoacutericamente bajos Los mercados globales han experimentado una de las peores crisis de liquidez desde la Gran Depresioacuten y esto deberiacutea llevar a los inversores a mantener cierta disciplina Sin embargo de acuerdo con las uacuteltimas transacciones en el segmento de los bonos de alto rendimiento esta disciplina no se estariacutea aplicando

El renovado apetito por el riesgo que hay en el mercado no se extiende a todos los inversores De hecho los pequentildeos ahorradores se han perdido en gran medida el rebote de la Bolsa Hay dos datos que confirman que el dinero que ha impulsado las cotizaciones ha procedido principalmente de inversores institucionales (fondos y planes de pensiones) El primero es el volumen de contratacioacuten el segundo la avalancha de dinero que ha ido a parar desde el comienzo de antildeo a los fondos maacutes conservadores

En cuanto al volumen de contratacioacuten sigue estando en miacutenimos de los uacuteltimos antildeos De enero a septiembre la negociacioacuten de renta variable en el mercado espantildeol ascendioacute a 638006 millones de euros un 3554 menos que en el mismo periodo del antildeo anterior Esta cifra contrasta con el crecimiento en la deuda corporativa (927) La teoriacutea bursaacutetil sostiene que las tendencias de los iacutendices son maacutes sostenibles cuando vienen acompantildeadas de una contratacioacuten alta Quien entroacute en miacutenimos en renta variable tiene un perfil muy profesional Al pequentildeo inversor y maacutes con la que ha caiacutedo en los uacuteltimos dos antildeos no le bastan dos trimestres buenos en Bolsa para volver a la renta variable explica Garciacutea Alejo de Inversis Gestioacuten

El otro factor que sugiere que los minoritarios no han disfrutado del tiroacuten bursaacutetil tiene que ver con las categoriacuteas de fondos que han obtenido mayores suscripciones netas desde el inicio de 2009 En Espantildea el mayor flujo de dinero lo siguen canalizando los fondos maacutes conservadores Seguacuten la clasificacioacuten de VDOS Stochastics los productos de renta fija euro a largo plazo encabezan la clasificacioacuten de captaciones patrimoniales con 2090 millones seguidos de los de renta fija garantizados con 990 millones

En EE UU esta tendencia se repite Los fondos de renta fija han atraiacutedo 18 veces maacutes dinero que los de renta variable en 2009 (254600 millones frente a soacutelo 14500 millones) a pesar de la fuerte subida del Dow Jones El conservadurismo de los inversores cobra auacuten maacutes peso si se tiene en cuenta que los estadounidenses tienen auacuten 345 billones de doacutelares en activos monetarios de acuerdo con los datos de Investmens Company Institute

El riesgo es que gran parte de ese dinero en activos de bajo riesgo (y tambieacuten de baja rentabilidad) empiece a llegar a la renta variable animado por los reacuteditos logrados por las Bolsas en los uacuteltimos meses y que su desembarco coincida como ha sucedido en otras burbujas con el uacuteltimo tramo de la fase alcista del mercado

El dinero faacutecil ya se ha hecho y con la actual dependencia de las Bolsas de lo que ocurra con los beneficios empresariales los inversores no deberiacutean ir detraacutes del mercado Ademaacutes mientras las Bolsas de los paiacuteses emergentes sigan cotizando con una prima injustificable respecto a los mercados desarrollados mantendriacuteamos tambieacuten una perspectiva prudente indican desde Lombard Odier Un consuelo para los inversores que esteacuten planteaacutendose incrementar la exposicioacuten al riesgo en sus carteras es que los analistas descartan que en el caso de llegar la correccioacuten devuelva a las Bolsas a sus niveles de marzo El Ibex podriacutea corregir algo pero mientras haya un exceso de liquidez esa correccioacuten entendida como tal una caiacuteda superior al 15 no se va a producir sostiene el director de renta variable de una de las principales sociedades de Bolsa espantildeolas Los tipos de intereacutes estaacuten muy baratos pero hay un factor diferencial con anteriores burbujas y es que el dinero en circulacioacuten pese a la liquidez artificial es sensiblemente inferior al que habiacutea hace 18 meses Eso hace que la burbuja no pueda ser tan grande En 2007 todo el dinero en circulacioacuten contando el apalancamiento era casi cuatro veces superior al que habiacutea en realidad Ahora esa ratio puede ser como mucho de 15 veces antildeade este experto En un reciente seminario con clientes en Espantildea David Shairp estratega jefe de mercados globales de la gestora de JPMorgan deslizaba otro argumento para el optimismo los inversores tienen auacuten una excesiva cantidad de liquidez en sus carteras Aunque lejos del maacuteximo del 60 alcanzado a finales de 2008 la cantidad de dinero en fondos monetarios en EE UU es de casi el 40 de la capitalizacioacuten del mercado muy por encima de la media histoacuterica Todaviacutea hay mucha municioacuten que puede llegar a los activos de riesgo Los bancos centrales hacen lo que pueden para penalizar a los que guardan efectivo a traveacutes de unos tipos de intereacutes bajiacutesimos

Otro de los argumentos que esgrimen aquellos que defienden que la Bolsa tiene un suelo soacutelido por lo menos en el corto plazo no tiene nada que ver con los fundamentales ni con el flujo de fondos de un activo a otro sino con una operacioacuten cosmeacutetica que se suele dar en el mercado por estas fechas y que algunos califican con el eufemismo de rally de final de antildeo En los uacuteltimos meses del ejercicio los inversores tienden a incrementar sus posiciones en aquellos valores o activos que mejor lo han hecho en el antildeo Esta operacioacuten se conoce como la estrategia de vestir la ventana y pretende producir una foto a final de antildeo positiva en las carteras escogiendo aquellos valores que se espera que suban maacutes explican desde Socieacuteteacute Geacuteneacuterale

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ENTREVISTA RAGHURAM RAJAN Profesor de la Universidad de Chicago

El riesgo es que el creacutedito vuelva a descontrolarse ALICIA GONZAacuteLEZ 25102009

Raghuram Rajan (Bhopal India 1963) estaacute especializado en la relacioacuten entre crecimiento econoacutemico y sector financiero En 2005 alertoacute de la gran amenaza que suponiacutean los novedosos productos bancarios que minimizaban el riesgo Fue una descripcioacuten clarividente del colapso del sistema financiero que se produjo dos antildeos despueacutes Es verdad que no eligioacute un buen momento -su intervencioacuten estaba prevista para honrar el positivo legado de Alan Greenspan- pero tambieacuten es cierto que cuando se estaacute encima de la ola nadie quiere oiacuter verdades incoacutemodas

Pregunta Se habla mucho de nuevas burbujas ya en marcha iquestestaacute la recuperacioacuten en riesgo

Respuesta Sean las burbujas que sean las que se esteacuten creando auacuten tardaraacuten un tiempo asiacute que quizaacutes tengamos algo de margen El verdadero problema es que la poliacutetica monetaria no estaacute sirviendo para impulsar el creacutedito porque no quiere ser impulsado pero estaacute incentivando todo lo demaacutes Decidir cuaacutendo se empieza a tensar la poliacutetica monetaria incluso aunque el creacutedito no esteacute creciendo es una decisioacuten difiacutecil porque si esperas demasiado alientas todas esas burbujas entre ellas sin duda el creacutedito La preocupacioacuten es si se descontrola de nuevo el creacutedito y eacutese es un riesgo real

P Pero son tantos los elementos en juego en las estrategias de salida que parece maacutes faacutecil fracasar que tener eacutexito

R Es faacutecil fracasar pero tambieacuten es faacutecil mantener esta poliacutetica durante demasiado tiempo Uno de los riesgos es el de los desequilibrios globales con esas enormes cantidades de deuda emitida que en alguacuten momento la gente va a decir iexclbasta Y eacutese es un riesgo por el que sin duda deberiacuteamos estar preocupados Visto en perspectiva la primera parte [de la crisis] pareciacutea relativamente sencilla se trataba de gastar dinero y bajar tipos de intereacutes Ahora la tarea es entender cuaacutendo esta relajacioacuten monetaria es demasiada y hay que empezar a retirarla pero simplemente no lo puedes hacer porque el sector privado no se estaacute recuperando el sector puacuteblico ha hecho todo lo que podiacutea y tendremos que sufrir unos cuantos antildeos bajo crecimiento si es necesario Parece que confiamos en que cuando la financiacioacuten del sector puacuteblico se frene el sector puacuteblico va a repuntar de inmediato Y eso no va a pasar

P iquestLa financiacioacuten de los paiacuteses emergentes se ve amenazada por la elevada deuda de los paiacuteses desarrollados

R Los paiacuteses emergentes estaacuten todaviacutea en una posicioacuten relativamente coacutemoda Es cierto que sus finanzas tienen peores expectativas pero tampoco mucho peor Antes si un inversor teniacutea que decidir entre un bono de un paiacutes desarrollado y el de un paiacutes emergente automaacuteticamente elegiacutea el del paiacutes desarrollado porque era maacutes seguro Ahora puede que no sea tan claro No digo que los paiacuteses en desarrollo no vayan a tener que subir sus tipos de intereacutes [para atraer inversores] pero la diferencia entre unos y otros se va a estrechar

P iquestNo estaacuten tardando en materializarse las reformas

R En realidad el G-20 no puede hacer ninguna reforma Es algo que tiene que hacer cada paiacutes individualmente y eso implica cambios poliacuteticos que no son siempre faacuteciles Mire por ejemplo Estados Unidos El debate sobre la reforma del sistema de salud estaacute siendo tan complicado que ha paralizado cualquier otra reforma incluidas las del sector financiero Tambieacuten los desequilibrios globales exigen cambios y reformas decisivas por parte de cada paiacutes y no se pueden hacer de la mantildeana a la noche

P iquestY la propuesta de aplicar una especie de tasa Tobin a la banca

R Creo que simplemente es algo estuacutepido La idea que hay detraacutes de ese planteamiento si lo analizamos en serio es que el sistema financiero es demasiado grande y estaacute haciendo cosas inapropiadas Si es asiacute yo esperariacutea un objetivo maacutes concreto y acotado que simplemente penalizar las transacciones De todas formas la tasa Tobin es como un conejo de feria que cada cierto tiempo vuelve y especialmente el sentimiento de hacer los bancos maacutes pequentildeos resurge siempre que hay problemas Pero el coste es tan elevado que no funcionariacutea

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El Ibex se desmarca del PIB El perfil internacional de las cotizadas lleva a la Bolsa espantildeola a liderar las alzas

Espantildea seraacute el uacuteltimo paiacutes en salir de la recesioacuten entre las principales potencias econoacutemicas del planeta Eacuteste es el diagnoacutestico que hizo el Fondo Monetario Internacional (FMI) en su uacuteltima cumbre celebrada en Estambul a principios del mes de octubre El producto interior bruto (PIB) caeraacute un 38 en 2009 y un 07 en 2010 seguacuten caacutelculos del FMI Soacutelo Irlanda lo haraacute peor dentro de la Eurozona El organismo multilateral alertoacute ademaacutes de que con una tasa de paro superior al 20 el consumo de los espantildeoles seguiraacute siendo muy pobre el proacuteximo antildeo

Con estos ingredientes lo loacutegico seriacutea pensar que la Bolsa espantildeola tambieacuten se pusiera en el furgoacuten de cola en cuanto a las revalorizaciones se refiere Sin embargo no es asiacute Maacutes bien ocurre al contrario El Ibex 35 encabeza las subidas anuales entre los principales iacutendices mundiales con un 276 frente al 141 del Dow Jones el 182 del Footsie britaacutenico el 193 del Dax alemaacuten o el 161 del Nikkei japoneacutes El vigor de la renta variable espantildeola soacutelo es superado por los mercados de paiacuteses emergentes como Brasil cuyo iacutendice el Bovespa gana un 759 en 2009

La Bolsa espantildeola es ahora menos que nunca (quizaacute nunca lo haya llegado a ser) un termoacutemetro fiable del PIB La internacionalizacioacuten que han emprendido las compantildeiacuteas cotizadas en la uacuteltima deacutecada ha diversificado sus fuentes geograacuteficas de ingresos por lo que su exposicioacuten al consumo interno es cada vez menos determinante De hecho durante los seis primeros meses de 2009 las empresas del Ibex 35 han generado casi el 51 de sus ventas fuera de nuestras fronteras

Se llama Bolsa espantildeola porque hay que llamarla asiacute pero los valores que maacutes peso tienen son grupos con una vocacioacuten no ya internacional sino de liderazgo internacional Esto provoca que la evolucioacuten del iacutendice sea todo menos un fiel reflejo de la economiacutea explica Juan Luis Garciacutea Alejo director de anaacutelisis de Inversis Gestioacuten El mercado espantildeol tiene un claro sesgo latinoamericano destacando su exposicioacuten a Brasil que hace que merezca cotizar con una cierta prima frente a otras Bolsas Por tanto no se puede hacer la asociacioacuten de ideas de que como me preocupa la evolucioacuten de la economiacutea espantildeola no invierto en renta variable nacional antildeade este experto

Otra caracteriacutestica que marca el devenir de la Bolsa espantildeola es el enorme peso que tienen las grandes compantildeiacuteas en el iacutendice Cualquier movimiento en su cotizacioacuten va a determinar el rumbo que tome el mercado en su conjunto Las dos principales compantildeiacuteas del Ibex 35 por capitalizacioacuten bursaacutetil Banco Santander y Telefoacutenica suman un peso en el iacutendice del 4561 Si se le antildeaden BBVA Iberdrola y

Repsol la ponderacioacuten de los blue chips en el selectivo es del 71 Los movimientos de concentracioacuten y las exclusiones de negociacioacuten han disparado la concentracioacuten de poder en el Ibex Hace cinco antildeos por ejemplo el peso de las cinco mayores empresas era soacutelo del 58

En otros mercados la aportacioacuten de las compantildeiacuteas estaacute mucho maacutes diversificada En el Dax por ejemplo los cinco valores que maacutes pesan soacutelo aportan el 418 en el Footsie esta ponderacioacuten es del 322 y en el Dow Jones apenas supera el 314

La composicioacuten tan peculiar de la Bolsa espantildeola con un peso sectorial muy relevante de los bancos queda patente si se observa lo que ha aportado cada valor a la subida del Ibex desde

miacutenimos Tras hundirse por debajo de los 7000 enteros el 9 de marzo el iacutendice selectivo ha recuperado 4980 puntos El Banco Santander ha aportado el 35 de esa revalorizacioacuten (1770 puntos) y el BBVA el 17 (870 puntos)

Las compantildeiacuteas de mayor tamantildeo ofrecen al inversor dos ventajas sobre los pequentildeos valores mayor presencia internacional y sobre todo mayor liquidez Esto explica el mejor comportamiento relativo del Ibex 35 frente al Ibex Medium Caps y el Ibex Small Caps en lo que va de antildeo De los 123 valores que cotizan en el Iacutendice General de la Bolsa de Madrid 62 compantildeiacuteas acumulan revalorizaciones superiores al 20 en 2009 La pregunta ahora es si muchos de ellos habraacuten agotado ya su potencial por lo menos en el corto plazo

En julio se rompieron resistencias teacutecnicas importantes y vemos un escenario claramente alcista Eso siacute hay sectores claramente sobrevalorados como el sector bancario domeacutestico espantildeol Su exposicioacuten al negocio inmobiliario sigue sin depurarse comenta Miguel Freijo director de ventas de IG Markets

Los precios objetivos de consenso del mercado recopilados por Factset sentildealan que el potencial medio de las compantildeiacuteas del Ibex 35 en estos momentos es de soacutelo el 6 Los valores que tendriacutean maacutes recorrido alcista hasta llegar a las valoraciones que fijan los analistas son

Grifols Ferrovial Gamesa

Acciona e Iberdrola Renovables En cambio los tiacutetulos que ven maacutes sobrevalorados los expertos son los de Sacyr Vallehermoso Banco Sabadell Acerinox Bankinter y

Telecinco

Un aspecto que puede compensar el encarecimiento de las cotizadas tras la subida desde miacutenimos es la remuneracioacuten al accionista La rentabilidad media por dividendo del Ibex se situacutea en el 379 por encima del reacutedito que ofrecen muchos activos de bajo riesgo -

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Opinioacuten

TRIBUNA MIGUEL BOYER SALVADOR

Perspectivas econoacutemicas MIGUEL BOYER SALVADOR 23102009

Pese a los deacuteficit y el endeudamiento los Gobiernos no deben relajar todaviacutea sus esfuerzos para restablecer la salud del sector financiero y el apoyo a la demanda global con poliacuteticas de expansioacuten macroeconoacutemica En el uacuteltimo mes se han publicado informes del FMI y de la OCDE que coinciden en que la situacioacuten econoacutemica mundial ha mejorado sustancialmente con China en recuperacioacuten Estados Unidos a punto de tocar fondo y los dos principales paiacuteses de la Eurozona -Alemania y Francia- mostrando ya tasas intertrimestrales positivas de crecimiento Ambas instituciones coinciden en que el rebote incipiente de las economiacuteas se estaacute produciendo relativamente pronto y en que ello es debido a las fuertes medidas de estiacutemulo presupuestario de muchos Gobiernos asiacute como a las bajadas draacutesticas de tipos de intereacutes y a las inyecciones de liquidez de los bancos centrales Estas actuaciones han salvado a la economiacutea mundial de un escenario auacuten maacutes sombriacuteo

Las previsiones para Espantildea no pintan tan mal como interpretan ciertos analistas y aficionados

Abaratar el despido no es una panacea para crear empleo en medio de una crisis Pero las fuerzas que impulsan el rebote actual son de naturaleza transitoria y disminuiraacuten en el curso de 2010 Es demasiado pronto para que los Gobiernos relajen sus esfuerzos para restablecer la salud del sector financiero y el apoyo a la demanda global con poliacuteticas de expansioacuten macro-econoacutemica A pesar de los amplios deacuteficit y de una deuda creciente en muchos paiacuteses los estiacutemulos presupuestarios deben ser sostenidos hasta que la recuperacioacuten tenga una base soacutelida

Las recomendaciones ante las perspectivas de una recuperacioacuten -probablemente lenta y deacutebil- no pueden ser maacutes claras y llenas de loacutegica econoacutemica En el caso de la economiacutea espantildeola las dificultades son mayores por la dimensioacuten de las caiacutedas del sector de la construccioacuten y del empleo A pesar de ello las previsiones del FMI para Espantildea -una caiacuteda interanual del PIB del 38 para 2009 y otra del 07 para 2010- no pintan tan mal como las interpretaciones de ciertos analistas y aficionados pues la cifra para 2009 es inferior a la media de la UEM y a las de paiacuteses como Alemania Italia y Reino Unido Ademaacutes pronosticar una caiacuteda de unas deacutecimas negativas para 2010 entre -075 y -03 puede tornarse en ligeramente positiva con igual probabilidad ya que el margen de error cuando las cifras son de deacutecimas en torno a cero puede ser del 200 como ha sido la diferencia entre las previsiones de julio y de octubre del FMI para Alemania en 2010 Por otra parte en las previsiones para 2012 Francia habraacute superado el alto nivel de PIB del antildeo 2008 con un 102 y Alemania y Espantildea recuperaraacuten un 98 de aqueacutel por delante de Italia e Irlanda En 2014 seguacuten el Fondo Espantildea estaraacute creciendo al mismo ritmo que Estados Unidos por encima de Alemania e Italia

Entre los dilemas de poliacutetica econoacutemica que se presentan ahora a los Gobiernos el espantildeol ha optado por unos Presupuestos del Estado que frenan renglones de gasto y se dirigen a contener el ritmo de crecimiento del deacuteficit con subidas tributarias que tendraacuten impacto a

mediados de 2010 Es una opcioacuten respetable por ser una decisioacuten valiente por impopular que ha recibido el apoyo del Banco de Espantildea

Mi opinioacuten personal estaacute del lado de las recomendaciones del FMI y de la OCDE que he resentildeado antes La prioridad es sostener los estiacutemulos expansivos de la poliacutetica monetaria y presupuestaria para reforzar el ritmo de recuperacioacuten de la economiacutea espantildeola Reforzar la expansioacuten es la receta mejor tanto para contribuir a que se reabsorba el deacuteficit como para combatir el desempleo Es un lugar comuacuten desde la teoriacutea keynesiana que las economiacuteas no son ni funcionan como los hogares ni siquiera como las empresas Un mayor gasto puacuteblico bien elegido estimula el crecimiento y puede reducir el deacuteficit en vez de agrandarlo Por eso paiacuteses como EE UU (con un deacuteficit previsto del 135) y Reino Unido (con otro del 145) a pesar de tener endeudamientos del 87 y del 75 -mucho mayores que Espantildea- no estaacuten paralizados por la histeria del deacuteficit como escribe Brittan en el Financial Times

Un suplemento de ingresos del orden de 6400 millones de euros como preveacute recaudar el Gobierno con la subida de impuestos podriacutea financiarse con emisioacuten de deuda puacuteblica sin grandes problemas Si son aproximadamente acertadas las previsiones del FMI los tipos de intereacutes permaneceraacuten bajos hasta al menos el antildeo 2012 y Espantildea terminaraacute este antildeo con una deuda bruta del orden del 53 del PIB frente a una media del 78 de los mayores paiacuteses europeos

La subida de impuestos en coyuntura de recuperacioacuten incipiente seraacute -a mi juicio- contraproducente si soacutelo sirve para reducir el deacuteficit y tanto maacutes cuanto que afecta a las familias de rentas medias y bajas que tienen mayor propensioacuten al consumo Pero si se destina a sostener los estiacutemulos a la demanda global y al empleo podriacutea ser adecuada ya que el multiplicador del gasto puacuteblico tiene maacutes efecto que el contractivo de un alza tributaria

Las recomendaciones de la llamada escuela de la oferta son importantes para el crecimiento a largo plazo pero son erroacuteneas para afrontar una crisis econoacutemica salvo que coincidan con las recomendaciones de estirpe keynesiana (como por ejemplo una bajada de impuestos)

La recomendacioacuten de abaratar el despido para crear empleo yerra en el timing y en el objetivo Primero desconoce la imposibilidad para un Gobierno de plantear esa reforma mientras cada mes caen en el paro decenas de miles de trabajadores Los sindicatos lo tomariacutean como una provocacioacuten y reaccionariacutean aacutesperamente Pero despueacutes es que el abaratar el despido no es una panacea para crear empleo en medio de una crisis seguacuten lo presenta un manido eslogan El muy serio problema de las ampliacutesimas fluctuaciones del empleo en nuestro paiacutes con fenomenales creaciones de puestos de trabajo en periodos de auge seguidas de caiacutedas de la ocupacioacuten y aumentos del paro tambieacuten extraordinarios no se debe a que haya maacutes diacuteas por antildeo en las indemnizaciones por despido que en otros paiacuteses Lo demuestra ademaacutes de un anaacutelisis de causa y efecto el caso de Irlanda que con una flexibilidad total en los contratos laborales ha tenido una experiencia semejante a la espantildeola tras crecer el empleo entre 1994 y 2007 a la tasa media del 42 anual ha sufrido una caiacuteda de eacuteste del 92 en el conjunto de 2008-2009 del mismo orden que la espantildeola (-75)

Las excesivas fluctuaciones del empleo tienen causas mucho maacutes profundas que el coste del despido en las estructuras de la demanda agregada y del sistema productivo espantildeol (o irlandeacutes) El factor fundamental es el gran peso de la inversioacuten en construccioacuten en Espantildea y el consiguiente en la generacioacuten del valor antildeadido y en el empleo En 2007 la inversioacuten

en construccioacuten en Espantildea y en Irlanda era del 157 del PIB en la primera y del 156 en la segunda frente al 9 en EE UU Alemania Francia Reino Unido e Italia La inversioacuten es la componente maacutes volaacutetil del PIB en todos los paiacuteses pero en Espantildea tiene mayor peso y mayores fluctuaciones y determina mucho maacutes que en otros paiacuteses grandes oscilaciones del empleo

Cuando se reduzca como es de esperar el excesivo peso de la construccioacuten -que ademaacutes exige inevitablemente plantillas en gran parte temporales- disminuiraacuten sustancialmente los enormes vaivenes del empleo que hemos experimentado en los noventa del siglo XX y en la crisis actual

Con las lecciones que sacaraacuten los Gobiernos y los bancos centrales del trance actual mantendraacuten -cuando pase la depresioacuten- los tipos de intereacutes en niveles suficientemente altos para no engendrar burbujas inmobiliarias al tiempo que los otros bancos aumentaraacuten la prudencia en la concesioacuten de creacuteditos La construccioacuten seguiraacute siendo importante en Espantildea aunque se reduzca a la mitad (unos cuatro puntos y medio del PIB) la residencial y la inversioacuten total seguiraacute siendo -en porcentaje del PIB- bastante superior a la media en la Eurozona Ese cambio en el patroacuten de crecimiento ayudaraacute a reducir el deacuteficit de la balanza de pagos la deuda externa y la temporalidad de los contratos

Lo maacutes difiacutecil de ese cambio seraacute expandir el sector de los servicios para mantener un crecimiento suficiente del PIB y del empleo Ello exige en el medio y largo plazo una fuerte inversioacuten en todos los tramos de educacioacuten y modificar los contratos laborales para contribuir tambieacuten a la reduccioacuten de la excesiva temporalidad actual que dantildea la formacioacuten profesional de los trabajadores la productividad y la innovacioacuten en las empresas Eacutese es un fin alcanzable con soacutelo dos tipos de contratos -uno indefinido y otro por tiempo determinado- y no la cantilena de abaratar el despido para crear empleo

La tarea no es nada faacutecil pero es necesaria si queremos prolongar el extraordinario eacutexito de una economiacutea que ha multiplicado por ocho su PIB per caacutepita desde 1950 y que ha convergido ya mucho con las de los paiacuteses maacutes desarrollados de Europa

Miguel Boyer Salvador es ex ministro de Economiacutea y Hacienda

Wall Street on the lam By Eugene Robinson Friday October 23 2009 Slashing executive salaries bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying but it shouldnt be Its like arresting jaywalkers while ignoring the bank robbery thats happening in broad daylight down the block

Dont get me wrong The Obama administrations pay czar Kenneth Feinberg is right to put a lid on compensation at the Not-So-Magnificent Seven Citigroup Bank of America General Motors Chrysler GMAC Chrysler Financial and the unforgettable AIG Twenty-five of the biggest earners at each of those firms will have their overall compensation cut roughly in half and most of that will come as restricted company stock not cash This means that what they ultimately reap when they are eventually allowed to sell the stock will depend on how well the company performs -- which will depend on how well the executives do their jobs

Tying pay to performance What a concept

Feinberg even muscled outgoing Bank of America chief executive Kenneth Lewis into accepting no pay or bonus for this year But Lewis will still have an estimated $70 million retirement package to keep him warm at night so hold your tears

Its nice to know that there must be some pooh-bah at B of A Citigroup or AIG who will have to live without the new $90000 Porsche Panamera he was planning to buy But Feinbergs writ of imperial decree doesnt extend beyond those seven companies and the rest of Wall Street gives no indication of remotely understanding what the big deal is about compensation Goldman Sachs for example has a bonus pool this year of at least $16 billion and perhaps as much as $23 billion

But all this is just a sideshow The main event is the limited far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown -- and if unaddressed will lead inexorably to the next crisis

Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy -- by allocating capital most efficiently to the companies that could put it to best use -- into an institution whose primary mission was to serve itself

The vast over-the-counter trade in instruments known as derivatives nominally worth a staggering $600 trillion worldwide is largely an exercise in make-believe Firms make highly leveraged investments in exotic securities whose true value is opaque Then they hedge these investments by buying insurance against potential losses although the insurer doesnt have a fraction of the money it would need to make good on all its promises

All this investing and hedging generate huge transaction fees and big profits which can be skimmed off the top each year Everythings fine until theres some disruption in the real economy -- a downturn in the housing market say If the disruption is severe enough the web of make-believe deals starts to unravel At which point the government steps in and bails everybody out

The White House and Treasury Department have proposed reforms that would ameliorate but not eliminate this ridiculous cycle What the administration wont do is outlaw some kinds of

derivative products or transactions officials say that if they went down that road they would always be one step behind Wall Streets inventiveness and greed I think it would be worth a try

The administration did propose that derivatives transactions go through clearinghouses and be conducted on transparent regulated exchanges But as reform legislation begins to work its way through Congress Wall Street firms -- including companies that received bailout funds -- have boosted their spending on lobbying and political donations

As a result legislation approved Wednesday by the House Agriculture Committee -- which has jurisdiction over the futures markets -- would exempt up to 30 percent of derivatives transactions from new regulations A bill approved Thursday by the House Financial Services Committee that would create a Consumer Financial Protection Agency strongly opposed by most luminaries on Wall Street was amended in the committee to exclude mortgage insurers title insurers accountants lawyers and others

Banks meanwhile are jacking up overdraft charges and instituting new kinds of credit card fees before any new limits kick in Hey get it while you can

Capping salaries and bonuses is fine But we need to pay attention to the guys in ski masks with bulging bags of money slung over their shoulders Theyre about to jump into the getaway car

Opinion

October 23 2009

OP-ED COLUMNIST

The Chinese Disconnect By PAUL KRUGMAN Senior monetary officials usually talk in code So when Ben Bernanke the Federal Reserve chairman spoke recently about Asia international imbalances and the financial crisis he didnrsquot specifically criticize Chinarsquos outrageous currency policy

But he didnrsquot have to everyone got the subtext Chinarsquos bad behavior is posing a growing threat to the rest of the world economy The only question now is what the world mdash and in particular the United States mdash will do about it

Some background The value of Chinarsquos currency unlike say the value of the British pound isnrsquot determined by supply and demand Instead Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market mdash a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country

Therersquos nothing necessarily wrong with such a policy especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money In fact the system served China well during the Asian financial crisis of the late 1990s The crucial question however is whether the target value of the yuan is reasonable

Until around 2001 you could argue that it was Chinarsquos overall trade position wasnrsquot too far out of balance From then onward however the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre First of all the dollar slid in value especially against the euro so that by keeping the yuandollar rate fixed Chinese officials were in effect devaluing their currency against everyone elsersquos Meanwhile productivity in Chinarsquos export industries soared combined with the de facto devaluation this made Chinese goods extremely cheap on world markets The result was a huge Chinese trade surplus If supply and demand had been allowed to prevail the value of Chinarsquos currency would have risen sharply But Chinese authorities didnrsquot let it rise They kept it down by selling vast quantities of the currency acquiring in return an enormous hoard of foreign assets mostly in dollars currently worth about $21 trillion

Many economists myself included believe that Chinarsquos asset-buying spree helped inflate the housing bubble setting the stage for the global financial crisis But Chinarsquos insistence on keeping the yuandollar rate fixed even when the dollar declines may be doing even more harm now Although there has been a lot of doomsaying about the falling dollar that decline is actually both natural and desirable America needs a weaker dollar to help reduce its trade deficit and itrsquos getting that weaker dollar as nervous investors who flocked into the presumed safety of US debt at the peak of the crisis have started putting their money to work elsewhere

But China has been keeping its currency pegged to the dollar mdash which means that a country with a huge trade surplus and a rapidly recovering economy a country whose currency should be rising in value is in effect engineering a large devaluation instead

And thatrsquos a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand By pursuing a weak-currency policy China is siphoning some of that inadequate demand away from other nations which is hurting growth almost everywhere The biggest victims by the way are probably workers in other poor countries In normal times Irsquod be among the first to reject claims that China is stealing other peoplesrsquo jobs but right now itrsquos the simple truth So what are we going to do

US officials have been extremely cautious about confronting the China problem to such an extent that last week the Treasury Department while expressing ldquoconcernsrdquo certified in a required report to Congress that China is not mdash repeat not mdash manipulating its currency Theyrsquore kidding right

The thing is right now this caution makes little sense Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard Under current conditions this would actually help the US economy by making our exports more competitive

In fact some countries most notably Switzerland have been trying to support their economies by selling their own currencies on the foreign exchange market The United States mainly for diplomatic reasons canrsquot do this but if the Chinese decide to do it on our behalf we should send them a thank-you note The point is that with the world economy still in a precarious state beggar-thy-neighbor policies by major players canrsquot be tolerated Something must be done about Chinarsquos currency httpwwwnytimescom20091023opinion23krugmanhtml

October 24 2009 1010 am

Adjustment and the dollar

Whenever exchange rates enter into discussion certain zombie fallacies mdash ideas that you kill repeatedly but refuse to die mdash inevitably make their appearance What Irsquom hearing a lot now is the old line that exchange rates have nothing to do with international imbalances the trade deficit is the difference between investment spending and savings and thatrsquos all there is to it

Itrsquos a fallacy that John Williamson of the Institute for International Economics calls the doctrine of immaculate transfer So let me try killing the zombie once again

The starting point is to imagine what the world might look like if it (1) returns to more or less full employment (2) experiences a significant reduction in imbalances mdash in particular a much lower US trade deficit

For (2) to happen the US must start spending more within its means overall spending will have to fall relative to GDP Correspondingly spending in the rest of the world must rise

But thatrsquos not the end of the story Suppose that spending in the United States falls by $500 billion while spending in the rest of the world rises by $500 billion Other things equal most of that decline in US spending would fall on US-produced goods and services Remember even if you buy Chinese stuff at Walmart much of the price represents US distribution and retailing costs The world you might say is a long way from being truly flat

Meanwhile a much smaller fraction of the rise in spending abroad will fall on US products So other things equal this reallocation of spending would lead to an excess supply of US goods and services an excess demand for goods and services produced elsewhere (Trade economists know that Irsquom talking about the transfer problem)

So something has to give mdash specifically the relative price of US output and along with it such things as US relative wages has to fall

There are three ways this could happen (1) deflation in the United States (2) inflation in the rest of the world (3) a depreciation of the dollar against other currencies Leave (2) aside on the grounds that central banks will fight it Then the choice is between (1) and (3)

And herersquos the thing deflation is hard (ask Spain) because prices are sticky in nominal terms How do we know that Lots of evidence See for example A Sticky Price Manifesto by Larry Ball and some guy named Mankiw But the most compelling evidence mdash familiar to international macro people but oddly uncited by most domestic macroeconomists mdash comes from exchange rates

The first person to make this point was probably none other than Milton Friedman (cue Brad DeLong on the decline of the Chicago School) but the really influential quantitative analysis was by Michael Mussa

Mussa pointed out that a funny thing happens when countries move from fixed to floating exchange rates the nominal exchange rate becomes much more variable of course but so does the real exchange rate mdash the exchange rate adjusted for price levels Meanwhile relative inflation rates remain within a narrow band The obvious interpretation is that once the exchange rate is freed it bounces around a lot while domestic prices in domestic currency are sticky and donrsquot move much

Herersquos an updated version of Mussarsquos point The top figure shows quarterly log changes in the US-Germany real exchange rate the bottom figure divides this into nominal exchange rate changes and inflation differentials The Mussa point is crystal clear

So the bottom line to narrow international imbalances we need a lower relative price of US output Because prices are sticky by far the easiest way to get there is dollar depreciation

httpkrugmanblogsnytimescom20091024adjustment-and-the-dollarmore-5249

October 23 2009 848 am

Whatrsquos in a name Since I wrote about Chinarsquos currency in todayrsquos column I had to confront the issue of what to call the darn thing In fact I sometimes think that the whole renminbiyuan issue is a sinister

plot by the Chinese designed specifically to deter people from discussing Chinese currency policy (Note to literalist readers thatrsquos a joke)

So renminbi is the name of Chinarsquos currency but yuan is the denomination of bills the unit in which prices are measured etc The closest parallel I can think of is Britainrsquos currency which is sterling but whose unit is the pound

In the case of Britain however everyone is easy on talking about the poundrsquos value the poundrsquos exchange rate and so on if you talk about sterlingrsquos value most non-Britons will have no idea what yoursquore talking about But for whatever reason using yuan in the same way draws disapproval

But herersquos the thing talking about the number of renminbi per dollar is also as I understand it wrong mdash as wrong as talking about the number of sterling per dollar Renminbi is the currency but not a unit of the currency

The Times stylebook recommends hellip evasion mdash try to avoid using either term and just talk about ldquoChinese currencyrdquo I get the motivation but you end up going through a lot of circumlocutions and eating up crucial page space

So I did what I could hellip

httpkrugmanblogsnytimescom20091023whats-in-a-name-3

October 21 2009 1009 am

Is Japan on the fiscal brink This article in todayrsquos Times stresses the rise in government debt which is true enough But itrsquos important to realize that the bond market is conspicuously not worried

Thus when the article says

For jittery investors Japanrsquos rising sea of debt is the stuff of nightmares the possibility of an eventual sovereign debt crisis where the country would be unable to pay some holders of its bonds or a destabilizing collapse in the value of the yen

In the immediate term Mr Fujiirsquos remarks prompted concerns of a supply glut in bond markets sending prices on 10-year Japanese government bonds down 0087 yen to 9956 yen and yields to their highest point in six weeks

itrsquos worth noticing what that 6-week high yield on 10-year bonds is namely 136 Thatrsquos actually the lowest interest rate being paid by any advanced economy two percentage points lower than Germanyrsquos rate If investors fear a default or a destabilizing collapse in the yen that fear certainly isnrsquot reflected in Japanrsquos borrowing costs

The reason Japanese bond yields are so low is of course that investors expect much lower inflation in Japan than elsewhere mdash in fact the spread between ordinary bonds and inflation-linked bonds suggests that investors expect substantial deflation in Japan over the next five years hardly what yoursquod see if they were worried about an imminent collapse in the yen

Oh and the CDS spread on Japanese debt is slightly higher than that of Germany but nowhere near the levels of countries that are in clear and present fiscal danger

So is Japan on the fiscal brink Mr Market doesnrsquot seem to think so

httpkrugmanblogsnytimescom20091021is-japan-on-the-fiscal-brink

Speech Chairman Ben S Bernanke

At the Federal Reserve Bank of Boston 54th Economic Conference Chatham Massachusetts

October 23 2009

Financial Regulation and Supervision after the Crisis The Role of the Federal Reserve October 23 2009 The theme of the Federal Reserve Bank of Bostons Economic Conference this year--reevaluating regulatory supervisory and central banking policies in the wake of the crisis--is certainly timely Not much more than a year ago we and our international counterparts faced the most severe financial crisis since the Great Depression Fortunately forceful and coordinated policy actions averted a global financial collapse and since then aided by a range of government programs financial conditions have improved considerably However even though we avoided the worst financial and economic outcomes the fallout from the crisis has nonetheless been very severe as reflected in the depth of the global recession and the deep declines in employment both here and abroad With the financial turmoil abating now is the time for policymakers to take action to reduce the probability and severity of any future crises

Although the crisis was an extraordinarily complex event with multiple causes weaknesses in the risk-management practices of many financial firms together with insufficient buffers of capital and liquidity were clearly an important factor Unfortunately regulators and supervisors did not identify and remedy many of those weaknesses in a timely way1 Accordingly all financial regulators including of course the Federal Reserve must take a hard look at the experience of the past two years correct identified shortcomings and improve future performance

Supervisors in the United States and abroad are now actively reviewing prudential standards and supervisory approaches to incorporate the lessons of the crisis For our part the Federal Reserve is participating in a range of joint efforts to ensure that large systemically critical financial institutions hold more and higher-quality capital improve their risk-management practices have more robust liquidity management employ compensation structures that provide appropriate performance and risk-taking incentives and deal fairly with consumers On the supervisory front we are taking steps to strengthen oversight and enforcement particularly at the firmwide level and we are augmenting our traditional microprudential or firm-specific methods of oversight with a more macroprudential or systemwide approach that should help us better anticipate and mitigate broader threats to financial stability

Although regulators can do a great deal on their own to improve financial regulation and oversight the Congress also must act We have seen numerous instances when weaknesses and gaps in the regulatory structure itself contributed to the crisis many of which can only be addressed by statutory change Notably to promote financial stability and to address the extremely serious problem posed by firms perceived as too big to fail legislative action is

needed to create new mechanisms for oversight of the financial system as a whole to ensure that all systemically important financial firms are subject to effective consolidated supervision and to establish procedures for winding down a failing systemically critical institution without seriously damaging the financial system and the economy In the rest of my remarks I will elaborate on each of these areas

Strengthening Regulations and Guidance First I would like to report on changes already under way to strengthen the regulatory standards that limit the risks taken by financial firms and establish the capital and liquidity buffers that they must hold Through the course of the crisis it became increasingly clear that many firms lacked adequate capital and liquidity to protect themselves as well as the financial system as a whole These problems became apparent not just in the United States but around the world necessitating an internationally coordinated response The Federal Reserve has played a key part in the international effort working through organizations such as the Basel Committee on Bank Supervision and the Financial Stability Board For example we were extensively involved in the Basel Committees recent decisions to strengthen capital requirements for trading activities and securitizations and we continue to work with domestic and foreign supervisors to raise capital requirements for other types of on- and off-balance-sheet exposures2

By conducting the Supervisory Capital Assessment Program popularly known as the stress test US supervisors took a significant step toward ensuring that our banks hold adequate levels of high-quality capital3 Led by the Federal Reserve the program evaluated the capital needs of 19 of the largest US banking organizations by estimating their expected losses and earnings capacity through the end of 2010 under a more-adverse-than-expected macroeconomic scenario Firms that were not projected to have enough high-quality capital under this scenario were required to raise additional capital within six months The release of the assessment results last spring increased investor confidence in the banking system and helped open the public equity markets to these institutions Since January 1 the 19 participating firms have raised more than $150 billion of incremental Tier 1 common equity primarily through share issuances exchanges and asset sales increasing their average Tier 1 Common ratios from 53 percent at the end of last year to 75 percent on June 30 of this year4 As one indication of improved market confidence in those firms their subordinated debt spreads have fallen by nearly one-half since the completion of the assessment

Additional steps are necessary to ensure that all banking organizations hold adequate capital Internationally the Financial Stability Board has called for significantly stronger capital standards and the Group of Twenty has committed to develop rules to improve both the quantity and quality of bank capital5 The Federal Reserve supports these initiatives The structure of capital requirements should also be reviewed For example to reduce the tendency of current capital requirements to promote credit growth in booms and to restrict credit during downturns the Federal Reserve has supported international efforts to develop capital standards that would be countercyclical Countercyclical standards would require firms to build larger capital buffers in good times and allow them to be drawn down--but not below prudent levels--during more-stressed periods We also are working with our domestic and international counterparts to develop capital and prudential requirements that take account of the systemic importance of large complex firms whose failure would pose a significant threat to overall financial stability Options under consideration include assessing a capital surcharge on these institutions or requiring that a greater share of their capital be in the form of common equity For additional protection systemically important institutions could

be required to issue contingent capital such as debt-like securities that convert to common equity in times of macroeconomic stress or when losses erode the institutions capital base

The crisis also highlighted weaknesses in liquidity management by major firms Short-term secured funding of long-term potentially illiquid assets--through repurchase agreements and asset-backed commercial paper conduits for example--became unavailable or prohibitively costly during the worst phases of the crisis both here and abroad In response the Federal Reserve helped lead the Basel Committees development of revised principles for sound liquidity risk management which in the United States are being incorporated into new interagency guidance that reemphasizes the importance of rigorous stress testing to determine adequate liquidity buffers6 Together with our domestic and international counterparts we are also considering quantitative standards for liquidity exposures similar to those for capital adequacy with the goal of ensuring that internationally active firms can fund themselves even during periods of severe market instability With supervisory encouragement large banking organizations have for the most part already significantly increased their liquidity buffers and are strengthening their management of liquidity risk

In addition to insufficient capital and inadequate liquidity risk management flawed compensation practices at financial institutions also contributed to the crisis Compensation not only at the top but throughout a banking organization should appropriately link pay to performance and provide sound incentives In particular compensation plans that encourage even inadvertently excessive risk-taking can pose a threat to safety and soundness The Federal Reserve has just issued proposed guidance that would require banking organizations to review their compensation practices to ensure they do not encourage excessive risk-taking are subject to effective controls and risk management and are supported by strong corporate governance including board-level oversight7

A fundamental element of effective financial regulation is protecting consumers from unfair and deceptive practices The recent crisis clearly illustrated the links between consumer protection and the safety and soundness of financial institutions We have seen that flawed financial instruments can both harm families and impair financial stability Strong consumer protection helps to preserve household savings and to provide families access to credit on terms that are fair and well matched with their financial needs and resources At the same time effective consumer protection promotes healthy competition in the financial marketplace supports sound lending practices and increases confidence in the financial system as a whole

The Federal Reserve has taken several important steps to strengthen the protections provided consumers and ensure that these protections effectively respond to market changes and emerging risks As well-informed consumers are better able to make decisions in their own best interest effective disclosures are the first line of defense against improper lending The Federal Reserve has pioneered the use of extensive consumer testing to improve the clarity of disclosures notably for mortgages and credit cards However we have learned that even the best disclosures may not always sufficiently protect consumers from unfair practices Accordingly we have written rules providing strong substantive protections for mortgage borrowers and credit card users For example last year the Board adopted new regulations under the Home Ownership and Equity Protection Act to better protect consumers with higher-priced mortgages These rules strengthen underwriting restrict prepayment penalties and require escrow accounts for property taxes and insurance The rules also address deceptive mortgage advertisements and unfair practices related to real estate appraisals and mortgage servicing More recently the Board adopted new credit card rules to increase transparency and protect consumers from a variety of unfair and deceptive acts and practices

rules that were largely incorporated into subsequent legislation We are currently working on rulemakings in the areas of overdraft protection reverse mortgages and gift cards

Making Supervision More Effective Let me turn from regulation (the development of rules and standards that govern banks practices) to supervision (ongoing oversight and enforcement to ensure that the rules are being followed) As I noted earlier the events of the past two years revealed serious failures in risk management at regulated financial firms that in turn underscored the need for supervisors to identify weaknesses in a more timely way and to more effectively ensure financial institutions remedy the problems The nature and causes of these failures have been outlined in reports issued by a variety of domestic and international groups in which we participate8 As a complement to those efforts we at the Federal Reserve set up a number of working groups drawing on expertise from throughout the Federal Reserve System to evaluate all aspects of our oversight of banking organizations and to develop strategies to improve the quality of our supervision

Two important themes have emerged from these efforts First they have reaffirmed the importance of effective consolidated supervision particularly at large complex organizations so that supervisors can properly understand risks and exposures that cross legal entities and business lines Second we must combine a systemwide or macroprudential perspective with firm-specific risk analysis to better anticipate problems that may arise from the interactions of firms and markets To support these approaches we are strengthening our supervisory processes to include analyses that draw on multiple disciplines updated surveillance tools and more timely information so that supervisors can identify emerging risks sooner and respond more effectively I will address each of these themes in turn

First recent experience confirms the value of supervision of financial holding companies--especially the largest most complex and systemically critical institutions--on a consolidated basis supplementing the supervision that takes place at the level of the holding companys subsidiaries Large financial institutions manage their businesses in an integrated manner with little regard for the corporate or national boundaries that define the jurisdictions of functional supervisors in the United States and abroad For example a nonbank subsidiary of a financial holding company may originate a mortgage loan sell it to an investment banking affiliate to be packaged and distributed as a security which in turn may be purchased by an investment vehicle supported by a liquidity facility from a bank affiliate Because financial operational and reputational linkages span large and complex financial firms the risks borne by such firms cannot be adequately evaluated through supervision focused on individual subsidiaries alone Instead effective supervision must involve greater coordination among consolidated and functional supervisors and an integrated assessment of risks across the holding company and its subsidiaries

In recognition of these points the Federal Reserve Board issued guidance a year ago that updated our approach to consolidated supervision tying it more explicitly to the systemic significance of individual holding companies and their business lines such as core clearing and settlement activities and activities in critical financial markets9 Strengthened consolidated supervision also supports improved oversight of institutions compliance with consumer protections Indeed building on a pilot project we launched in 2007 we recently announced a consumer compliance examination program for nonbank subsidiaries of bank holding companies as well as of foreign banking organizations10

Second our supervisory approach should better reflect our mission as a central bank to promote financial stability The extraordinary pressure on financial firms last fall underscored how profoundly interconnected firms and markets are in our complex global

financial system Thus any effort to address systemic risks will require a more systemwide or macroprudential approach to the supervision of systemically critical firms More generally supervisors must go beyond their traditional focus on individual firms and markets to try to identify possible channels of financial contagion and other risks to the system as a whole

To improve consolidated supervision and increase the macroprudential focus of our oversight we are improving existing supervisory tools and developing new ones For example drawing on our experience with the recent capital assessment program we have increased our emphasis on horizontal reviews which focus on particular risks or activities across a group of banking organizations Although we have conducted horizontal reviews before the Supervisory Capital Assessment Program of the past spring was both broader in scope and conducted differently than many previous horizontal reviews It involved a broad simultaneous review of several types of risk exposures at the included banking organizations covering a majority of the assets of the US banking system Examiners applied the same stress parameters to each firm highlighting the relative strengths and weaknesses among them Because we simultaneously evaluated potential credit exposures across all the firms we were also better able to consider the systemic implications of financial stress under adverse economic scenarios Building on the success of this initiative we will conduct more frequent broader and more comprehensive horizontal examinations evaluating both the overall risk profiles of institutions as well as specific risks and risk-management issues

The increased complexity of the firms we supervise and the need to consider the systemic implications of problems at individual firms underscore the importance of increased collaboration within the Federal Reserve System itself among examiners and other specialists The Federal Reserves ability to draw on expertise from a range of disciplines was essential to the success of the Supervisory Capital Assessment Program and it will be a central feature of our supervision in the future For example we are using a multidisciplinary approach to develop an enhanced quantitative surveillance program for systemically critical institutions This program will incorporate supervisory information firm-specific data analysis and market-based indicators to identify developing strains and imbalances that may affect multiple institutions as well as specific firms Our economic and market researchers will work in concert with examiners market operations specialists and other experts within the Federal Reserve System Their efforts will incorporate periodic scenario analysis so we can better understand the consequences of economic shocks for both individual firms and the financial system Off-site quantitative analysis will complement our traditional on-site supervision but will be independently conducted to provide an alternative perspective to traditional examination findings

To support and complement these initiatives we are working with the other federal banking agencies to develop more-comprehensive information-reporting requirements for the largest firms Traditional bank regulatory reports have not been sufficiently complete or timely to support continuous monitoring and analysis of the dynamic and diverse business activities of the largest most complex organizations These firms should report systematic frequent and consistent information on material firm-wide exposures funding and liquidity profiles and operating performance Enhanced reporting requirements should not only help supervisors identify potential vulnerabilities at individual institutions and in the banking sector more broadly but should also prompt institutions to better track their own risks

When risk-management shortcomings are identified even if losses have not yet materialized supervisors must hold management accountable and make sure that weaknesses receive proper attention at senior levels and are resolved promptly We will ensure that important supervisory concerns are communicated promptly and at a high level with more frequent

involvement of senior bank management and boards of directors and senior Federal Reserve officials This approach proved especially effective during the recent Supervisory Capital Assessment Program and in other circumstances where clear expectations for prompt remediation were forcefully communicated to large banking organizations Of course we will use the full range of enforcement tools at our disposal as necessary to achieve important supervisory objectives

Need for Legislative Action Though the Federal Reserve and other supervisors in the United States and abroad are strengthening the existing regulatory and supervisory framework it remains critical for the Congress to close regulatory gaps and provide supervisors with additional tools for anticipating and managing systemic risks The recent financial crisis clearly demonstrated that risks to the financial system can arise not only from banks but also from other financial firms--such as investment banks or insurance companies--that traditionally have not been subject to the type of regulation and consolidated supervision applied to bank holding companies To close this gap the Congress should ensure that all systemically important financial institutions are subject to a robust regime for consolidated prudential supervision Large complex financial firms that do not own a bank but that nonetheless pose risks to the overall financial system must not be permitted to avoid comprehensive and effective supervisory oversight Consolidated supervision of systemically important institutions together with tougher capital liquidity and risk-management requirements for those firms is needed not only to protect the firms stability and the stability of the financial system as a whole but also to reduce firms incentive to grow very large in order to be perceived as too big to fail

To further ameliorate the too-big-to-fail problem the Congress should create a new set of authorities to facilitate the orderly resolution of failing systemically important financial firms In most cases federal bankruptcy laws work appropriately for the resolution of nonbank financial institutions However the bankruptcy code does not always protect the publics strong interest in avoiding the disorderly collapse of a nonbank financial firm that could destabilize the financial system and damage the economy In light of the experience of the past year it is clear that we need an option other than bankruptcy or bailout for such firms A new resolution regime for nonbanks analogous to the regime currently used by the Federal Deposit Insurance Corporation for banks would permit the government to wind down a failing systemically important firm in a way that reduces the risks to financial stability and the economy Importantly to restore a meaningful degree of market discipline and to address the too-big-to-fail problem it is essential that there be a credible process for imposing losses on the shareholders and creditors of the firm Any resolution costs incurred by the government should be paid through an assessment on the financial industry and not borne by the taxpayers

Beyond strengthening and extending consolidated supervision and making provisions for the safe unwinding of failing systemically important firms there remains the broader objective of monitoring and addressing emerging systemic risks Because of the size diversity and complexity of our financial system that task may exceed the capacity of any individual supervisor The Federal Reserve supports the creation of a systemic oversight council made up of the principal financial regulators By combining the expertise and information of all the relevant agencies and departments the council would be in the best position to identify developments that threaten the stability of the system as a whole The council could be charged among other things with monitoring risk exposures that cut across firms and

markets analyzing potential spillovers among financial firms or between firms and markets that could lead to financial contagion identifying regulatory gaps coordinating the responses of its member agencies to emerging systemic risks identifying systemically important firms and periodically reporting to the Congress and the public about emerging systemic risks and recommended approaches for dealing with those risks In addition to further encourage a more comprehensive and holistic approach to financial oversight all federal financial supervisors and regulators--not just the Federal Reserve--should be directed and empowered to take account of risks to the broader financial system as part of their normal oversight responsibilities

Conclusion As we work together to build on the progress already made toward securing a sustained economic recovery we cannot lose sight of the need to reorient our supervisory approach and to strengthen our regulatory and legal framework to help prevent a recurrence of the events of the past two years As I have described today the Federal Reserve has been actively engaged in this process We are working with our domestic and international counterparts to strengthen the standards governing bank capital liquidity risk management incentive compensation and consumer protection among other areas We are also improving supervision and giving it a greater macroprudential focus through enhanced consolidated supervision and through the development of new supervisory tools--including comprehensive horizontal reviews off-site quantitative evaluations and more extensive information gathering We are moving quickly to bring unresolved issues to the attention of senior management and requiring prompt responses

Regulators and supervisors can do a great deal but comprehensive financial reform requires action by the Congress Strengthening consolidated supervision setting up a mechanism (such as a systemic oversight council) to identify and monitor risks to financial stability and creating a framework that allows for the safe unwinding of failing systemically critical firms are among the essential ingredients of a new system that will reduce the probability of future crises and greatly mitigate the severity of any that occur We at the Federal Reserve look forward to working closely with the Congress as the legislative process evolves

Footnotes

1 Numerous studies confirm these points See for example Group of Thirty (2009) Financial Reform A Framework for Financial Stability (520 KB PDF) (Washington Group of Thirty January) Markus Brunnermeier Andrew Crockett Charles Goodhart Avinash D Persaud and Hyun Shin (2009) The Fundamental Principles of Financial Regulation (18 MB PDF) Geneva Reports on the World Economy--Preliminary Conference Draft (Geneva International Center for Monetary and Banking Studies January) The de Larosiegravere Group (2009) The High-Level Group on Financial Supervision in the EU (443 KB PDF) (Brussels European Commission February) Financial Services Authority (2009) The Turner Review A Regulatory Response to the Global Banking Crisis (12 MB PDF) (London FSA March) International Monetary Fund (2009) Global Financial Stability Report Responding to the Financial Crisis and Measuring Systemic Risks (Washington IMF April) and UK Parliament House of Lords Select Committee on Economic Affairs (2009) Banking Supervision and Regulation HL Paper 101-I and HL Paper 101-II session 2008-09 (London The Stationary Office Limited June) Return to text

2 See Bank for International Settlements (2009) Basel II Capital Framework Enhancements Announced by the Basel Committee press release July 13 and Basel Committee on

Banking Supervision (2009) Enhancements to the Basel II Framework (188 KB PDF) (Basel Switzerland Bank for International Settlements July) Return to text

3 For more on the Supervisory Capital Assessment Program see Ben S Bernanke (2009) The Supervisory Capital Assessment Program speech delivered at the Federal Reserve Bank of Atlanta 2009 Financial Markets Conference held in Jekyll Island Ga May 11 Return to text

4 The average Tier 1 Common ratio as of June 30 2009 has been adjusted to reflect the completion of Citigroups exchange offer in September 2009 Return to text

5 See Group of Twenty (2009) Leaders Statement The Pittsburgh Summit press release September 25 Return to text

6 See Basel Committee on Banking Supervision (2008) Principles for Sound Liquidity Risk Management and Supervision (153 KB PDF) (Basel Switzerland Bank for International Settlements September) and Office of the Comptroller of the Currency Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation Office of Thrift Supervision and National Credit Union Administration (2009) Agencies Seek Comment on Proposed Interagency Guidance on Funding and Liquidity Risk Management joint press release June 30 Return to text

7 See Board of Governors of the Federal Reserve System (2009) Federal Reserve Issues Proposed Guidance on Incentive Compensation press release October 22 Return to text

8 See for example the Presidents Working Group on Financial Markets (2008) Policy Statement on Financial Market Developments (136 MB PDF) policy statement (Washington US Department of the Treasury March 13) Financial Stability Forum (2008) Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience (399 KB PDF) (Basel Switzerland FSF April 7) and Senior Supervisors Group (2008) Observations on Risk Management Practices during the Recent Market Turbulence (373 KB PDF) (Basel Switzerland Bank for International Settlements March 6) Return to text

9 See Board of Governors of the Federal Reserve System Division of Banking Supervision and Regulation and Division of Consumer and Community Affairs (2008) Consolidated Supervision of Bank Holding Companies and the Combined US Operations of Foreign Banking Organizations Supervision and Regulation Letter SR 08-9 CA 08-12 (October 16) Return to text

10 See Board of Governors of the Federal Reserve System Division of Consumer and Community Affairs (2009) Consumer Compliance Supervision Policy for Nonbank Subsidiaries of Bank Holding Companies and Foreign Banking Organizations Consumer Affairs Letter CA 09-8 (September 14) Return to text

httpwwwfederalreservegovnewseventsspeechbernanke20091023ahtm

23102009

Gloves are coming off in the fight to stop Blair

A strange coalition to block Tony Blair has emerged consisting of British conservatives and leaders of smaller Benelux countries The UK press reported yesterday that Conservative foreign affairs spokesman William Hague has warned EU ambassadors that appointing Tony Blair to the job would be seen as a hostile act ndash which is quite an extraordinary procedure Jean-Claude Juncker has also become much more open about his hostility to Blair Jean Quatremer has the following quote from him ldquoJe ferai tout pour qursquoune certaine personne ne devienne pas preacutesident du Conseil europeacuteenrdquo The anti-Blair bandwagon is rolling Germanyrsquos position will be crucial Quatremer reports that Germany Christian Democrat MEPs signed a petition against Tony Blair as council president

Another sign that the bandwagon is moving against Blair are the persistent rumours that David Milliband is considered a candidate for the job High Representative as the Guardian reports

ECB opposed to hedge fund rules The ECB has warned the European Commission and the European Parliament not to adopt a go-it-alone approach to hedge fund regulation as this would lead to a loss of competitiveness against non-EU financial centres In its legal opinion the ECB made the point that the hedge funds would simply move outside the jurisdiction of the EU and continue from there This is an extraordinary story as reported by the FT in the sense that the ECB acts clearly beyond its legal mandate in protection of institutions with which the ECB does not even have direct relationship In doing so the ECB clearly strengthens the position of the UK which had hitherto raised objections to the Commissionrsquos proposal and which now look a lot less likely to be adopted in its current form

Fed implements a light version of bonus rules Another example whether the Europeans are more eager to regulate while the Americans are much less so is the question of bank bonuses The Fed yesterday implemented a set of guidelines for banks to reduce excessive risk taking But as the FT pointed out the proposals do not adopt the recommendations of the Financial Stability Board to defer 40-60 of the bonuses

France has the largest state sector in the OECD The latest OECD statistics are out on the state-versus-private share of the economy and the

French are fretting about their status as the country in the OECD with the second largest state share of 52 after Sweden with 54 The UK has 44 Germany 45 the US 37 as Les Echos reports The French state is also the third largest employer in the entire OECD region

Monetising debt in Ireland ndash how it works We picked up this interesting snippet from the Irish Times via the Irish economy blog Mike Casey writes

ldquoWhen Nama [the Irish bank bailout scheme] is up and running the banks will be able to borrow far greater amounts from the ECB Some of this money may be lent to the private sector (one hopes) but it is likely that substantial funds will be made available to the Government to finance the budget deficit

This may be the main reason why the Irish banks were not nationalised If they had been nationalised this transfer of funds could not occur since the ECB cannot lend directly to governmentrdquo The Irish economy blog post by Karl Whelan goes on to say why this is not true

Is the German press anti-European One of the breathtaking changes we have observed from Brussels over the years is the extent by which the German press has mutated from enthusiasm about European integration to outright contempt As the coalition negotiations are moving into the final phase there is now the inevitable discussion about jobs FT Deutschland writes that the biggest loser is going to be the current economics minister Theodor zu Guttenberg as insiders consider himself a suitable candidate for the European Commission which in the view of the paper is the ultimate loser-job The paper writes that the suitable candidates for Commission jobs would be older end-of-career politicians

What about Germanyrsquos deficit busting coalition agreement As far as the actual content of the coalition agreement is concerned we are still in the noise phase The two parties agreed what they thought to be a legal trick (legal under the German constitution but totally illegal under European law of course but they donrsquot seem to care) to create an special purpose vehicle that would keep a certain part of the countryrsquos deficits outside the system The latest is that they will not be able to implement the scheme for this year but only for 2010 At this point the German media still provide more confusion than clarity We will get back to the story once there is an actual deal on the table

On the return of the bubble Writing in the FT Gillian Tett says the bubble is back She quotes from a letter from a market insider who wrote that after previous shocks it took several years until the market were back to champagne corking mode This time it has taken only months The reason are the ultra-low nominal interest rates which have led to a renewed amount of leverage in the system The extremely low spreads in the bond markets are mainly the result of excess liquidity

Naked Capitalism has a wonderful entry about the return of the hedge fund manage John Meriwether the guy who run Long Term Capital Management and whose character stoodmodel for the lead character in Bonfire of the Vanities The line is that Meriwether is back it must be a bubble

httpwwweurointelligencecomarticle581+M5ebe2cac0d30html

Oct 22 2009

Swedish Banks Could They Get Burned By Heavy Baltic Exposure Concerns are growing that the Swedish financial sectors significant exposure to the rapidly contracting Baltic states will lead to a sharp rise in loan losses for two of Swedens leading banks - Swedbank and SEB Nevertheless stress tests by Swedens central bank and the Swedish financial supervisory authority which were released in June 2009 show these banks should meet minimal capital requirements even under extreme scenarios RGE however believes these Swedish banks are still vulnerable to a crisis of confidence Swedish Banking System Under Stress

o Double-digit economic contractions in Latvia and Lithuania pushed Swedbank to its third consecutive quarterly loss in October 2009 but there were fewer new impaired loans than in the previous three months

o FT Swedbank has lifted its core tier one capital ratio from 74 in October 2008 to 123 currently ndash among the highest in Europe ndash after two large rights issues and has set aside SEK20 billion ($29 billion) in loan loss provisions (October 20 2009)

o August 18 Swedbank launched the second rights issue in less than a year with a 15 billion Swedish kronor ($21 billion) capital increase in response to mounting loan losses (WSJ)

o In late July Moodys placed four Swedish banks on review for possible downgrades Those banks with lower capital adequacy ratios compared with their exposure to asset classes with the highest expected losses (eg construction shipping and real estate) face the greatest risk for a potential downgrade

o In late May Swedens central bank said it was boosting foreign currency reserves to enable it to lend to Swedish banks if needed a measure which analysts linked to the Baltic situation

o EIU It may not be too long before the Swedish state has to step in with direct financial support

Exposure to Baltics o Swedish-based institutions are main financial intermediaries in the rapidly contracting

Baltics (see economic outlooks for Estonia Latvia Lithuania) Downturn in Baltics could hurt Swedish banks potentially endangering financial stability and tightening credit conditions at home

o Swedish banks have issued loans equivalent to roughly 20 of Swedenrsquos GDP to the Baltics

o Swedbank and SEB jointly control btwn 50-75 of bank lending market in each Baltic country

o For Swedbank in 2008 the Baltic states represented 17 of lending and 25 of operating profit while the respective figures for SEB were 13 and 12

o According to Danske Bank the loans could cost Sweden a total of 2 to 6 of its GDP over several years depending on how many Baltic borrowers default during the recessions (see Reuters article for details of exposure broken down by bank)

o See related spotlight issue Latvias Currency Peg in Doubt Will All The Baltics Be Forced To Devalue

What do stress test scenarios show

o June 2 In its baseline scenario Swedens central bank said it expected loan losses in 2009 and 2010 at major Swedish banks to total 170 billion Swedish crowns ($228 bn) just under 40 of these losses are expected to stem from the bank groups operations in the Baltic countries and the rest of eastern Europe

o June 10 Swedens Financial Supervisory Authority released its stress test scenarios which assume very high credit loss levels of around 34 in the Baltics over the three-year period through 2011 Scenarios are improbable but not impossible All of the banks retain adequate buffers in these scenarios with respect to the minimum regulatory capital requirements This is due to high capital buffers at the outset and strong underlying earnings

o Under Fitchs stress testing the impact on Swedbanks capital base is potentially material under two of the four stress test scenarios Swedbanks tier one capital would fall below 1 Fitch says SEBs recent capital increase provides a sufficient buffer to absorb credit losses in the region

o Rogovic and Stokes Under the conditions assumed in the central banks and financial supervisory authoritys stress tests (see reports below) the Swedish banks meet the minimal statutory capital requirement of 4 if the stress test scenario were to become reality however banks could face a crisis of confidence Of Swedens major banks Swedbank looks particularly vulnerable

o Moreover fast-deteriorating economic situation means Baltic losses could exceed the central bankrsquos assumptions of 10 of their loan books souring (Lex)

o Capital Economics says if Baltic losses rose to 15 Swedbank and SEBrsquos tier one ratios would fall to 5-6 (via Lex)

o The good news is Swedbank SEB and Nordea have bolstered their defenses with rights issues taking tier one ratios to about 10 says Lex

Rapid Expansion in Lending Abroad Enhanced Banking Sectors Vulnerability

o From 2004-07 Swedish banks engaged in a rapid expansion in lending to other countries and increased borrowing in intl financial markets balance sheets of Swedish banks rose from 190 of GDP in 2003 to more than 270 in 2008 (SEB)

o Because of Swedish banks relative dependence on financing from abroad Swedish banks were vulnerable when global liquidity was choked off (SEB)

Swedish Banks Could They Get Burned By Heavy Baltic Exposure Oct 22 2009 httpwwwrgemonitorcom683Nordicscluster_id=8029

ECB warns Brussels on hedge fund rules By Ralph Atkins in Frankfurt and Nikki Tait in Brussels Published October 22 2009 1515

Europersquos controversial plans to regulate hedge and private equity funds were dealt a fresh blow on Thursday when the European Central Bank warned the proposals would put the industry at a significant competitive disadvantage

The opposition voiced by the Frankfurt-based ECB which feared a go-it-alone approach in Europe would backfire is likely to be seized upon by the alternative investment fund sector ndash and influence the extensive re-writing of the proposals that is already under way

FSA warns on cost of new EU hedge fund rules - Oct-15 Tough EU timetable for fund regulation - Oct-06 EU plans for hedge fundrules lsquoflawedrsquo - Sep-12 In depth hedge funds - Dec-20

Hedge funds have warned that business could be driven out of Europe as a result of the plans to regulate the sector for the first time on a pan-continent basis

The UK had also voiced strong opposition accusing the European Commission of producing ldquonaiumlverdquo proposals

The ECB said it supported ldquothe intention to provide a harmonised regulatory and supervisory frameworkrdquo for alternative investment fund managers in the European Union But it urged the Commission ldquoto continue the dialogue with its international partners in particular the US to ensure a globally coherent regulatory and supervisory frameworkrdquo

In a legal opinion published on its website the ECB warned that funds could simply shop around to find a country where the policing of the sector was less stringent ldquoAn internationally co-ordinated response is necessary given the highly international nature of the industry and the consequent risks of regulatory arbitrage and evasionrdquo it said

It also warned that some of the provisions of the proposed legislation ndash for instance on so-called ldquoshort sellingrdquo ndash could unfairly penalise hedge and private equity funds unless they were applied across the financial services sector

The commissionrsquos proposed legislation ndash which would require the registration and regulation of all ldquoalternative investment fundsrdquo on a pan-EU basis ndash is currently in the hands of the European Parliament and member states Both need to give approval before it can become law and both have pledged to make significant amendments Even Commission officials now acknowledge that the drafting was rushed and that some changes are needed

At present Sweden which currently holds the EU presidency is driving a heavy programme of possible changes in fairly technical discussions with diplomats from other member states It aims to have established some consensus by the end of the year

Meanwhile in the parliament lawmakers have also had two preliminary committee debates on the matter and also made clear their desire to revise the initial text substantially

The member states and the parliament will meet next year to hammer out a commonly-agreed text but this is unlikely to take place before late spring or early summer A vote in the full parliament therefore seems unlikely before the second half of 2010

httpwwwftcomcmss05f81b6d4-bf12-11de-8034-00144feab49ahtml

MARKETS

Rally fuelled by cheap money brings a sense of foreboding by Gillian Tett Published October 22 2009 1807 | Last updated October 22 2009 1810

Earlier this month I received a sobering e-mail from a senior recently-retired banker This particular man a veteran of the credit world had just chatted with ex-colleagues who are still in the markets ndash and was feeling deeply shocked

ldquoForget about the events of the past 12 months the punters are back punting as aggressively as everrdquo he wrote ldquoHighly leveraged short-term trades are back in vogue as players jostle to load up on everything from Reits [real estate investment trusts] and commercial property commodities emerging markets and regular stocks and bonds

ldquoOh I am sure the banksrsquo public relations people will talk about the subdued atmosphere in banking but donrsquot you believe itrdquo he continued bitterly noting that when money is virtually free ndash or at least at 05 per cent ndash traders feel stupid if they donrsquot leverage up

ldquoAny sense of control is being chucked out of the window After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few monthsrdquo he added He finished with a despairing question ldquoWas October 2008 just a dress rehearsal for the crash when this latest bubble burstsrdquo

I daresay this missive reflects some element of hyperbole But I have quoted it at length because the question is becoming more critical Six months ago the financial system was in deep distress reeling from a meltdown Now despair and panic have been replaced not simply by relief ndash but in some quarters euphoria Never mind the high-profile rally that has occurred in the equity markets what is perhaps most stunning is the less visible rebound in debt and derivatives markets as risk assets have displayed what Barclays describes as a ldquostellar performancerdquo

In the corporate bond world for example spreads have collapsed for both risky and investment grade credit Emerging market spreads have shrunk too Meanwhile publicly traded real estate markets (the EPRA index) have soared some 70 per cent according to Barclays helping to spark a surge in its overall measure of market risk appetite ndash a pattern that is reflected even more dramatically in similar metrics compiled by Goldman Sachs

No doubt many brokers would like to attribute this to fundamentals After all last yearrsquos crash in asset prices was so extreme that some rebound was almost inevitable And recent macro-economic data have been quite encouraging particularly when compared with what was seen a year earlier

Yet if you talk at length to traders ndash or senior bankers ndash it seems that few truly believe that fundamentals alone explain this pattern Instead the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home because most banks simply do not want to use that cash to make loans Hence the fact that the prices of almost all risk assets are rallying ndash even as non-risky assets such as Treasuries bounce too

Now some western policymakers like to argue ndash or hope ndash that this striking rally could be beneficial in a way even if it is not initially based on fundamentals After all the argument goes if markets rebound sharply that should boost animal spirits in a way that could eventually seep through to the ldquorealrdquo economy

On this interpretation the current rally could turn out to be akin to the firelighter that one uses to start a blaze in a pile of damp wood

Yet what worries me is that it is still very unclear that that pile of damp wood ndash aka the real economy ndash truly will catch fire in a sustainable way if the current stock of firelighters comes to an end After all much of the current economic rebound seems to reflect stimulus packages (and flattering year-on-year comparisons) that will end next year And while there are still plenty of firelighters around ndash in the form of monetary stimulus and ultra low market rates ndash there seems to be a good chance of a future interest rate shock as central banks implement their exit strategies Meanwhile the securitisation sector could yet deliver another credit shock next year since that is the one part of the financial system that has not started working yet ndash but where government support measures are supposed to stop next spring

So I like my e-mail correspondent am growing uneasy Perhaps the optimistic ldquofirelighter-igniting-the-damp-woodrdquo scenario will yet come to play but we will probably not really know whether the optimists are correct for at least another six months

In the meantime it is crystal clear that the longer that money remains ultra cheap the more traders will have an incentive to gamble (particularly if they privately suspect that todayrsquos boom will be short-lived and want to score big over the next year) Somehow all this feels horribly familiar I just hope that my sense of foreboding turns out to be wrong Gillian Tett Rally fuelled by cheap money brings a sense of foreboding October 22 2009 httpwwwftcomcmss0064f0ff2-bf2c-11de-a696-00144feab49ahtml

naked capitalism Thursday October 22 2009

John Meriwether is back risk must be too Submitted by Edward Harrison of Credit Writedowns

John Meriwether the 62-year old former Salomon bond trader and LTCM wizard is back for what is this his fourth go round

For those of you who donrsquot remember the 1980s John Meriwether was the biggest of the lsquobig swinging dicksrsquo on Wall Street leading Salomon Brothers to huge profits in its fixed income division Lionized in the eponymous book ldquoLiarrsquos Pokerrdquo and inspiration for Bonfire of the vanities Meriwether and Salomonrsquos rise marked the change from a bulge bracket culture dominated by deal makers and IBD (Investment banking Division) white shoe bankers to one dominated by the foul-mouthed traders and math geek quants of fixed income The change at Goldman Sachs from a firm dominated by IBD to one dominated by trading is testament to this Unfortunately for Meriwether his career path since reaching the top has been rather rocky

First there was the enormous Treasury bond scandal in which Meriwether subordinate Paul Mozer put in fake Treasury bids on behalf of clients in an attempt to corner the market for on-the-run securities Lax oversight got Meriwether a $50000 fine and Salomon a $290 million fine the largest ever to that date Salomon head John Gutfreund resigned and Warren Buffett came in to serve as Chairman (Phibro which was recently offloaded to Occidental Petroleum by Citigroup is a Salomon Brothers company by the way) Meriwether left

Soon Meriwether was back at it at Long-Term Capital Management the Greenwich-based hedge fund he founded in 1993 and which was famously leveraged 100 to 1 not including derivatives exposure of $1 trillion on a capital base of $5 billion This company produced spectacular 40+ profits year after year before going spectacularly bust in 1998 after Russia devalued its currency and defaulted on its debt (see Frontlinersquos recent video which has a part on LTCM)

Meriwether miraculously was able to start again literally the next year helped by a bubble in shares which increased appetite for risk He started JWM Partners in 1999 After years of gains this fund too produced staggering losses (44 last year) and was liquidated

Now that shares are up some 60 in US markets guess what John W Meriwether is backhellip and hersquos taking investors This one is called JM Advisors Management also based in Greenwich

The fund is expected use the same strategy as both LTCM and JWM to make money so-called relative value arbitrage a quantitative investment strategy Mr Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s

The strategy described by the Nobel Prize-winning economist Myron Scholes as being akin to a giant vacuum cleaner ldquosucking up nickels from all over the worldrdquo can be highly successful in periods following market dislocations

Relative value trades profit by betting on unusual pricing relationships between securities anticipating a return to an historically modelled ldquonormalrdquo state between them

Traders say the strategy has the potential to deliver huge returns in the current market with many banksrsquo proprietary trading desks having scaled back their operations and far fewer hedge funds in existence

I bet the money is pouring in

The timing here is interesting given what is happening in mortgages and banking Meriwether was at the center of the creation of the mortgage-backed securities market with his colleague Lewis Ranieri Franklin Bank Corp a bank run by Ranieri was recently seized by the FDIC as it ran into difficulties in the financial crisis due to poor lending The seizure cost taxpayers $16 billion

However the much more important tidbit on the mortgages front comes in terms of foreclosure activity Because of an August ruling by the Kansas Supreme Court (Yves linked out to a story on this today) we could be seeing some major changes in the way foreclosures happen A post at Credit Writedowns ldquoWhy mortgages arenrsquot modified and what a ruling stopping foreclosures meansrdquo chronicles the case in greater detail

Sources

Meriwether setting up new hedge fund ndash Sam Jones FT (also with the FT Alphaville Team) Meriwether ndash FT Lex

httpwwwnakedcapitalismcom200910john-meriwether-is-back-risk-must-be-toohtml

Government at a Glance 2009 OECD Directorate for Public Governance and Territorial Development Publication Date 22 Oct 2009

Findings

How can governments address current fiscal social and environmental challenges

Governments around the world acted on an unprecedented scale and scope to address the global crisis of 2008 While necessary these actions severely increased deficit and debt levels making public sector reforms that can lead to cost savings critical In addition rising unemployment illustrates that the social implications of the global economic crisis have not yet been fully felt Meanwhile governments are also looking for policy solutions to climate change poverty ageing populations migration and a host of other long-term concerns

Designing and implementing policies and programmes to address these challenges is a daunting task It draws on the capacity of governments to serve the public interest and to strengthen frameworks for well-functioning markets In addition it is imperative that governments act in a transparent and accountable manner Calls for government transparency and accountability have gained increased support in the context of the public and private failures that contributed to the financial crisis as well as the scale of government intervention and spending that the crisis has induced Within government itself transparency has greatly increased in importance over the past decade The number of central governments identifying transparency as a core value almost doubled between 2000 and 2009 (see Figure)

Presenting data up to 2007 Government at a Glance cannot yet track the effects of the crisis on government operations However its indicators provide insights into governmentrsquos capacity to deal with current and future challenges as well as the options governments face when trying to reduce deficits and debts

The 2009 edition of Government at a Glance can be found out httpwwwoecdorggovindicatorsgovataglance

11 General Government revenues as a percentage of GDP (1995 and 2006) httpwwwoecdorgdocument3303343en_2649_33735_43714657_1_1_1_100html

tralia

2006 1995

12 Revenue per capita (2006)

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000

MexicoPoland

Slovak RepublicHungary

KoreaPortugal

Czech RepublicGreece

New ZealandJapanSpain

AustraliaSw itzerland

ItalyUnited Kingdom

GermanyOECD29Canada

United StatesIrelandFranceBelgiumAustria

NetherlandsFinlandIceland

Sw edenDenmarkNorw ay

Luxembourg

2006 US Dollars PPP

13 Annual real percentage of change in revenue per capita (from 2000 to 2006)

-1 0 1 2 3 4 5 6 7 8

GermanyCanada

United StatesSw itzerland

AustriaItaly

FranceBelgiumMexico

NetherlandsPortugal

LuxembourgDenmarkSw eden

FinlandOECD29Norw ay

AustraliaGreece

United KingdomSpainJapan

Slovak RepublicIreland

HungaryNew Zealand

PolandIceland

Czech RepublicKorea

21 Structure of general government revenues as a percentage of GDP (2006)

Taxes other than social contributions Social contributions Grants + Other revenues

23 Structure of general government revenue (1995 and 2006)

DNK AUS NZL IRL GBR CHE SWE ITA LUX USA BEL ESP NOR FIN PRT AUT FRA POL NDL DEU SVK CZE

Taxes other than social contribut ions Social contribut ions Grants

31 Distribution of general government revenues across levels of government (2006)

eden Ita

Central government State government Local government Social security

41 General Government expenditures as a percentage of GDP (1995 amp 2006)

tralia

2006 (or closest year available) 1995

42 Government expenditures per capita (2006)

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000

MexicoPoland

Slovak RepublicKorea

HungaryCzech Republic

PortugalNew Zealand

SpainGreece

JapanAustralia

Sw itzerlandOECD29

IrelandItaly

GermanyCanada

United KingdomIcelandFinland

United StatesBelgium

NetherlandsFranceAustria

DenmarkSw edenNorw ay

Luxembourg

2006 US Dollars PPP

43 Annual real percentage change of government expenditures per capita (2000-2006)

0 2 4 6 8 10

JapanSlovak

Sw itzerlandMexicoAustria

DenmarkCanadaNorw ay

GermanyBelgiumFrance

AustraliaSpain

PortugalItaly

NetherlandsSw edenOECD29Greece

United StatesFinland

New ZealandIceland

LuxembourgUnited Kingdom

PolandIrelandCzech

HungaryKorea

72 General government expenditures on individual and collective goods as a percentage of GDP (2006)

Collective goods Individual goods

51 General Government expenditures by function as a percentage of GDP (2006) (Last updated 19-Oct-2009)

General public

services Defence

Public order and

safety

Economic affairs

Environmental protection

Housing and community amenities

Health Recreation culture and

religion Education Social

protection Total

Sweden 77 17 13 48 04 07 68 11 71 227 543 France 69 18 13 29 08 19 72 15 60 223 527 Hungary 96 14 22 63 07 11 55 17 58 177 518 Denmark 60 16 10 35 05 05 70 16 77 218 512 Italy 87 14 19 59 08 07 70 08 45 182 499 Austria 67 09 15 46 04 06 72 10 59 206 493 Finland 65 15 15 45 03 03 68 11 58 204 489 Belgium 84 10 16 50 06 04 69 13 58 172 483 Portugal 69 13 19 38 05 06 72 10 71 160 463 Netherlands 73 15 17 47 08 10 59 14 51 164 456 Germany 60 11 16 33 05 09 62 06 40 212 454 United Kingdom 49 25 26 28 10 09 71 09 58 159 443 Czech Republic 49 12 22 70 12 12 72 13 49 127 438 Poland 59 12 18 44 06 12 47 11 60 169 438 Greece 82 23 11 45 06 04 47 03 23 180 424 Norway 39 15 10 37 06 06 72 11 58 162 417 Iceland 48 01 14 59 07 06 81 36 83 81 417 New Zealand 53 10 19 42 13 07 66 11 74 103 399 Canada 73 10 16 34 05 09 73 09 72 92 392 Luxembourg 40 02 09 45 10 06 46 17 45 164 386 Spain 46 11 18 50 09 09 56 15 43 128 385 Slovak Republic 51 18 22 42 07 09 54 09 42 124 377 United States 48 43 21 37 00 06 77 03 62 70 367 Japan 50 09 14 36 12 06 71 02 38 122 361 Ireland 35 05 14 45 06 13 77 06 41 96 337 Korea 40 28 14 64 10 12 41 09 47 37 302 OECD26 60 14 16 45 07 08 65 11 56 152 435

52 Change in general government expenditures as a percentage of GDP (1995 and 2006)

General public

services Defence

Public order and

safety

Economic affairs

protection Total

Sweden -30 -07 -01 -12 02 -20 05 -08 00 -38 -108 France -12 -07 00 -09 03 03 07 04 -06 00 -17 Denmark -43 -02 00 -08 00 -02 01 -01 02 -27 -80 Italy -54 02 -01 14 01 -01 17 00 -02 -01 -26 Austria -20 -01 -01 -09 -09 -05 -05 -01 -03 -16 -70 Finland -13 -05 00 -44 00 -05 06 -01 -11 -54 -127 Belgium -38 -05 02 00 -01 01 08 04 -01 -08 -37 Portugal -20 -04 03 -15 00 -01 16 02 09 39 29 Netherlands -32 -05 03 -01 -01 -53 21 02 -02 -40 -108 Germany -07 -03 -01 -78 -05 01 -01 -02 -03 05 -93 United Kingdom -10 -06 04 -06 05 -01 15 00 11 -15 -03 Czech Republic 05 -06 -05 -132 01 02 13 02 06 08 -106 Greece -76 06 05 -02 01 00 09 01 -03 27 -31 Norway -22 -10 00 -32 -04 -03 03 -02 -07 -18 -95 Canada -51 -04 -03 -08 -01 -01 12 -01 -15 -20 -93 Luxembourg 00 -03 02 -02 -03 -04 -03 02 01 -01 -10 Spain -29 -03 -02 -07 01 -02 03 01 -03 -19 -59 United States -18 03 02 01 00 -01 10 00 03 -04 -03 Ireland -40 -05 -04 -09 01 05 16 02 -09 -30 -75 Korea 15 00 02 12 03 03 28 05 10 18 94 Times series missing Australia Hungary Iceland Japan Mexico New Zealand Poland Slovak Republic Switzerland amp Turkey Year 2005 New-Zeland Norway and United-Kingdom

Oct 22 2009

Fed Announces Measures to Regulate Financial Sector Compensation Overview Large bonus payouts continued in 2008 despite bank write-downs and bailouts Better-than-expected earnings in 2009 have led banks to set pay and bonuses for 2009 and later years that match the compensation of the boom years To prevent talent exodus and attract talent from downsizing banks many banks are raising base salaries to offset the legal cap on bonuses as well as guaranteeing bonuses In early 2009 the US Treasury began regulating compensation at financial institutions particularly those drawing TARP funds But later in 2009 the Treasury Congress and the Fed have focused on regulating compensation practices and bonuses at all the publicly traded financial and non-financial companies These measures are deterring banks and investors from participating in government programs leading many banks to pay back the TARP money quickly and causing an exodus of talent to unregulated financial institutions Measures to Claw Back Bonuses o On October 22 2009 the Fed announced measures to reform compensation structure at

financial institutions as part of the wider financial sector regulation Supervisors will review the policies and practices at 28 large banks to determine their consistency with risk-appropriate incentive compensation Supervisors will rectify improper compensation programs at these firms and monitor the firms compliance with supervisory principles The guidelines will cover all employees (such as senior executives traders or mortgage officers) who can affect the risk profile of the firm Supervisors will also review compensation practices at regional community and other banking organizations not classified as large and complex (Federal Reserve Board)

o Fed Chairman Ben Bernanke Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking contributing to bank losses and financial instability Compensation should be tied to longer-term performance and not create risk for the firm or the financial system (Federal Reserve Board October 22 2009)

o According to a WSJ report on October 21 2009 the Treasury pay czar Kenneth Feinberg will reduce compensation for the 25 highest-paid employees at seven firms receiving government aid and the compensation for 175 employees by an average of 50 and salaries by an average of 90

o On October 14 2009 the WSJ estimated that compensation at the 23 top US banks and securities firms will rise 20 yy in 2009 to US$140 billion which will exceed the peak compensation of 2007 Improving credit conditions and the market rally are boosting revenues helping firms increase compensation Paying back the TARP money is also easing compensation restrictions on banks

o September 21 2009 The Conference Board Task Force made the following recommendations for publicly traded companies 1) ensure that the board of directors oversees executive compensation 2) establish a clear link between pay strategy and performance 3) eliminate compensation practices like excessive golden parachutes

severance payments and retirement plans 4) restrict refunds of income and excise taxes for executives 5) eliminate excessive perks such as the use of corporate jets 6) introduce clawback provisions for executives guilty of misconduct 7) ensure transparency on compensation dialogue between boards and shareholders and the fees paid to compensation consultants These proposals are backed by companies such as ATampT Cisco and HP as well as by the UKs corporate governance review head Sir David Walker Microsoft recently announced that starting in 2009 it will have a non-binding shareholder vote on executive pay every three years

o July 31 2009 The US House passed legislation to mandate annual shareholder (non-binding) votes on executive compensation at big public companies and financial institutions require regulators to adopt rules to ensure compensation structures dont cause excessive risk-taking at financial institutions and increase disclosures of compensation at big financial firms

o July 16 2009 The Treasury delivered say-on-pay legislation to Congress that would require all publicly traded companies to give shareholders a non-binding vote on executive compensation at any annual meeting held after December 15 2009 Compensation under scrutiny would include salaries bonuses stock and option awards and compensation for senior executive officers like golden parachutes and pensions It also mandates a shareholder vote on golden parachutes in the case of a merger and acquisition The Treasury also delivered draft legislation to Congress to ensure that compensation committees are independent These reforms will require Congress approval (US Treasury)

o June 10 2009 The Treasury laid out an interim final rule on compensation for financial institutions receiving TARP funds with more stringent pay restrictions on publicly traded companies than those proposed The rule stated that compensation should be tied to long-term value creation and conditioned on a wide range of internal and external metrics not just stock price Companies should ask executives to hold stock for longer periods of time and create incentives that match the time horizon of risks for those involved at different levels in designing selling and packaging simple and complex financial instruments Compensation committees should conduct and publish risk assessments of pay packages to contain risk-taking and re-examine golden parachutes and retirement packages to assess whether they are aligned with shareholder interests The rule institutes the say on pay requirement giving shareholders a non-binding vote on executive compensation and proposes legislation giving the Securities and Exchange Commission (SEC) the power to make compensation committees more independent adhering to standards similar to those included in the Sarbanes-Oxley Act (US Treasury)

o For institutions receiving TARP funds the Treasury proposals seek to reconcile with measures introduced under the fiscal stimulus bill The proposals limit bonuses paid to senior executive officers and the most highly compensated employees and expand the limits imposed on golden parachutes to payments made in connection with a change in control of the company They also appoint a special master to review and approve the compensation of executives and the 100 most highly compensated employees Additionally the master would oversee the review of bonuses retention awards and other compensation paid before February 17 2009 and where appropriate negotiate reimbursements to the government In addition the proposals allow shareholders to vote to approve executive compensation packages consistent with the regulations of the SEC prohibit payments to cover taxes due on compensation and require the disclosure of additional perks (US Treasury)

Large Bonuses Continue

o New York Attorney-General Andrew Cuomos Report on July 30 2009 showed that nine banks that received US$175 billion in TARP funds had paid out US$326 billion in bonuses during 2008 Banks such as JPMorgan Goldman Sachs (GS) MS and Citi topped the list For these banks bonus payments exceeded profit or losses in 2008 and large numbers of employees received bonuses of over US$1 million In most cases bonus payments had little correlation with banks profitability or the amount of TARP funds received

o Instances like MLs CEO John Thain seeking a bonus in 2008 and allocating US$4 billion in bonuses for his employees and AIGs planned bonus payments in early 2009 caused concerns in Congress that TARP funds were being used by banks to pay for compensation There were growing criticisms that compensation was not determined by bank performance and was causing excessive leverage and risk-taking in the financial sector

o New York State Comptroller The size of the bonus pool in 2008 was still the sixth largest on record Since 2002 firms like GS MS Merrill Lynch Lehman Brothers and Bear Stearn have paid US$312 billion in salaries and benefits and US$187 billion in bonuses Bonuses have accounted for almost 60 of total compensation

o According to some reports CEOs at banks like Citi UBS GS MS and BoA deferred bonuses in 2008 Some banks including BoA announced plans to delay bonuses for two to three years and make it in stock payments rather than cash Following government takeovers the exit packages for the CEOs of Fannie Mae Freddie Mac and AIG were canceled

o Compensation for private equity firms CEOs and hedge fund managers has diverged from average wages and shareholder returns and is noted as one of the reasons for increases in income inequality during the recent boom

Formulating a Bonus Structure o FT The current regulation will not reduce the share of compensation extracted from

profits (which can instead be used to build capital) Intrusive regulation is justified to contain pay wars between banks in the short term and to contain risk-taking in the long term (October 15 2009)

o Dwight Cass BreakingViews Rather than regulators imposing direct restrictions and caps on pay scales they should get the power to impose broader rules to govern structural aspects of compensation They should stress equity and make pay policies accountable to shareholders (061009)

o Andrew Hill FT Government regulations and capital requirements to restrict risk-taking will make bonuses hard to pay (071609)

o John Berry Bloomberg Pro-cyclical compensation system encourages risk-taking as immediate beneficiaries are unaffected by future losses (091208)

o Economist Compensation should be based on long-term performance rather than share prices Severance payments should be performance based (061109)

o Matthew Lynn Bloomberg Unbalanced remuneration with excessive pay during booms and pay cuts during losses and laying off workers in down times lead to excessive risk-taking Bonuses should be reclaimed if companies have losses (060308)

o Martin Wolf FT Risk-taking has been disguised as value-creation Companies need to pay bonus and parts of salaries in restricted stocks that are redeemable over the years and aligned with business realities (011508)

httpwwwrgemonitorcom101Labor_Markets_and_Offshore_Outsourcingcluster_id=5416

Oct 22 2009

EM Forex Will the Rally Continue Overview EM currencies have rallied strongly since March 2009 against the US$ recovering a large part of the loses incurred at the center of the global crisis (July 2008 to March 2009) Elevated global liquidity weak US$ improvements in risk appetite rebounding commodity prices and relatively stable emerging markets fundamentals in comparison to past episodes of crisis are behind the recovery Furthermore higher growth and wider interest rate differentials compared to advanced economies have played in favor of EM currencies Finally IMF credit line facilities and the FED currency swap options to strategically important EM countries (Brazil South Korea Mexico and Singapore) helped in mitigating BOP risks

However uncertainties about the shape of the global recovery profit taking and revival of global risk aversion remain the main concerns Moreover miscalculations on the implementation of exit strategies around the globe as well as intervention and the imposition of capital controls post a significant risks

Outlook

o According to Brazilian central bank President Henrique Meirelles ldquoemerging-market currencies that have been appreciating as economies recover from a global recession may become volatile as markets overprice assetsrdquo (Bloomberg 101609)

o According to TD Securities ldquoThe general risk appetite is improving and that should favor emerging-market currenciesrdquo Leading the way is the Brazilian Real which has outperformed other EM currencies against the dollar (Bloomberg 93009)

o Emerging market currencies will have a ldquodeeper correctionrdquo before strengthening prior to year end according to Brown Brothers (Bloomberg 81109)

o Bank of America Securities-Merrill Lynch believes the worst of the slump in emerging market crisis has already past However Eastern European currencies may be an exception potentially dropping an additional 10 (Bloomberg 4209)

Regional Performance

Asia (ex-Japan) Asian currencies have appreciated at a lesser pace than other EM currencies against the US$ so far this year (to October 21) The Indonesian Rupiah (IDR up 18 YTD) the South Korean Won (KRW up 68 YTD) and the Indian Rupee (INR up 5 YTD) lead the way while the Taiwanese Dollar (TWD up 14 YTD) and the Philippine Peso (PHP up 13 YTD) are the worst performers

Latin America LatAm currencies are leading the EM pack with strong appreciations against the US$ in Brazil (BRL up 334 YTD) Colombia (COP up 186 YTD) and Chile (CLP up 182 YTD) The Mexican Peso (MXN up 56 YTD) and the Argentine Peso (ARS down 96 YTD) are the laggards

Eastern Europe Middle East and Africa (EMEA) In the EMEA region the South African Rand (ZAR up 285 YTD) the Czech Koruna (CZK up 115 YTD) and the Bulgarian Lev (BGN 8 YTD) lead the way strengthening against the US$ On the other side of the spectrum are the Russian Ruble (RUB 11 YTD) and the Romanian Leu (RON 09 YTD)

Recent EM market Dynamics

o With regards to Brazils capital controls and its impact on other EM countries David Lubin an emerging-markets economist at Citigroup in London said that he sees little chance of countries in Central and Eastern Europe adopting similar measures although he cautioned that investors should never say never However other analysts point out that other countries might follow I see this as a real statement of intent This could be the thin end of the wedge Theres a crunch coming and the only route is the Brazilian route - I think we will see more moves like this according to Neil Mellor a currencies analyst at The Bank of New York Mellon in London (WSJ 102209)

o According to the IMF ldquoThe return of some appetite for risk in international markets has contributed to depreciation of the dollar and yen and appreciation of emerging market currenciesrdquo However there is a risk that there could be another crisis of confidence and currencies could adjust abruptly (IMF 1009)

o Currency volatility in emerging Europe during the months after September 2008 was no different than that of advanced economies This is in contrast to other emerging market countries where relative currency volatility increased substantially and for longer (Oxford Analytica via Forbes 101409)

o Investors are now differentiating between emerging market currencies after initially discarding the variations between each economyrsquos outlook After a widespread decline in EM currencies post-September 2008 aggressive central bank measures helped bring stability in various countries (Oxford Analytica via Forbes 9309)

o The rally in EM currencies is dying but Brown Brothers believes this ldquomay provide a good opportunity to buy some of these currencies at a discountrdquo Analysts and investors believe the correction in process is temporary and the overall outlook for EM currencies is still positive (Forexpros 71709)

o The carry trade is prevalent once again as stimulus plans and near-zero interest rates in developed economies are boosting investor confidence in emerging markets Speculators fled the strategy last year during the financial crisis but global conditions are now creating a more profitable environment for carry trades (Bloomberg 41409)

httpwwwrgemonitorcom57cluster_id=14441

Opinion

October 22 2009

OP-ED CONTRIBUTOR

Whorsquos Looking at the Fedrsquos Books By WILLIAM A BARNETT Lawrence Kan ON Tuesday Senator Jeff Merkley Democrat of Oregon and Senator Bob Corker Republican of Tennessee introduced legislation to allow the Government Accountability Office to audit some of the Federal Reserversquos lending programs Different bills calling for more comprehensive Fed audits already have widespread support in the House and Senate Expanding this oversight is long overdue

After the financial turmoil of the last year it should be clear that we depend on the Fed for high-quality financial data and that the Fed should be held to the highest standards of transparency And yet we cannot be assured of either of these things unless the Fed is subjected to a thorough audit of its numbers I worked on the staff of the Federal Reserve Board 30 years ago and I know that without comprehensive audits to double-check Federal Reserve data the risk exists of inadequate and sloppy accounting from the Fed

Consider the data the Fed presented last year on nonborrowed reserves Nonborrowed reserves are total bank reserves minus money borrowed by banks and held as reserves Clearly the money borrowed cannot exceed the total reserves so nonborrowed reserves should not be negative Yet for a few months last year the Fed reported banksrsquo nonborrowed reserves at billions of dollars below zero In its calculations of nonborrowed reserves the Fed included in borrowed reserves new forms of bank borrowing not being held as reserves Such incompetent accounting would not survive an unconstrained fully informed audit

The information the Fed releases on bank deposits is similarly biased and contaminates data on the money supply and thereby on the liquidity of the economy produced by Federal Reserve policy In order to evade reserve requirements which mandate that a certain fraction of deposits be held in reserve and not lent out many banks sweep much of their checking account deposits into shadow money-market-deposit savings accounts before reporting those deposits to the Fed Since such accounts have no reserve requirements this allows the banks to decrease the amount of total reserves theyrsquore required to have But the liquidity provided to the economy from checking accounts is the pre-sweeps amount not the reported post-sweeps amount

Why does the Fed not require banks to go public with their real checking account deposit data If the Fed doesnrsquot see it as a problem that banks evade reserve requirements on checking accounts why doesnrsquot it just remove those requirements Such evasion would be less likely to continue in the face of a comprehensive audit by the Government Accountability Office

But while the Fed needs to be audited substantially creating an independent data institute to monitor the Fedrsquos monetary and financial data would be better than expanding a Government Accountability Office audit An independent institute would have the highest specialized expertise to produce economic data for the Fed

Neither an independent monitoring institute nor mdash a reasonable second best mdash an expanded Congressional audit would constrain the Fedrsquos ability to act in the countryrsquos best interests It would simply ensure that the country knew what the Fed was doing and why

William A Barnett is a professor of macroeconomics at the University of Kansas and the editor of the journal Macroeconomic Dynamics httpwwwnytimescom20091022opinion22barnett-1htmlthampemc=th

High-Frequency Trading and Dark Liquidity Pools in Equity Markets SEC Pushes for Transparency Oct 22 2009

Overview FT July 28 Flash orders have come under increasing scrutiny recently as US securities regulators look for ways to regulate dark pools These anonymous electronic trading venues which do not display public quotes for stocks [until after the trade occurred] have flourished in recent years In June both the SEC and the European Commission announced reviews of the impact of off-exchange equity trading platforms with respect to market access price transparency and liquidity deepening or fragmentation One important difference dark pools are currently exempted from certain obligations under special pre-trade transparency waivers rdquo

SEC Clampdown SEC on October 21 2009 seeks public comment on three proposals with a view to increase transparency in OTC equity markets or dark liquidity pools The first rule requires actionable Indications of Interest (IOIs) (ie buy and sell quotes) to be made publicly available The second proposal would lower the trading volume threshold applicable to alternative trading systems (ATS) for displaying best-priced orders Currently if an ATS displays orders to more than one person it must display its best-priced orders to the public when its trading volume for a stock is 5 or more Todays proposal would lower that percentage to 025 for ATSs including dark pools that use actionable IOIs The third proposal would require the dark pool to disclose that it was their venue that executed the trade These proposals aim at preventing a two-tiered market with respect to access and pricing information

The number of active dark pools transacting in stocks that trade on major US stock markets has increased from approximately 10 in 2002 to approximately 29 in 2009 For the second quarter of 2009 the combined trading volume of dark pools was approximately 72 of the total share volume in these stocks with no individual dark pool executing more than 13

Do Flash Orders Create a Two-Tiered System

o In a July 27 letter to the SEC Senator Charles E Schumer requested that the SEC act to prohibit the use of so-called flash orders in connection with optional display periods currently permitted by DirectEdgersquos Expedited Liquidity Program NASDAQrsquos Flash order program and BATSrsquos Bolt Optional Liquidity Program Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public allowing those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activityThis kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system where a privileged group of insiders receives preferential treatment depriving others of a fair price for their transactionsIf the SEC fails to curb this practice I plan to introduce legislation in the US Senate to prohibit the use of flash orders

High-Frequency Trading Frontrunning or just a Faster Car o FT Lex July 28 It is worth distinguishing between the illegal and the irritating

Frontrunningndashor trading ahead of customer ordersndashis the former Successfully employing the biggest nerds and the best millisecond-saving technology is not

o Bloomberg July 28 Traders say that speed was always an integral part of trading success Ben Townson of New York-based BlackBox Group ldquoWersquove built a racecar that is optimized for driving fast Is that an advantage Yes Is it an unfair advantage Nordquo (see also Emanuel Derman)

o Rick Bookstaber The risk of a HFT cataclysm is constrained by the lack of feedback and lack of tight coupling

o August 4 2009 New York Stock Exchange statistics show that Goldman Sachs is the most active member firm by volume of shares traded by ldquoprogram tradingrdquo or computer-assisted trading In the latest period posted on the NYSErsquos Web site July 20-24 Goldman Sachs and its subsidiaries traded 9248 million shares roughly double the 4637 million traded by its nearest competitor in the week Morgan Stanley (Bloomberg) Moreover Goldmans Q2 revenues from equity trading US$518 billion (almost double to next competitor ie Citi) and its Q2 VaR jumped to $245 million as risk-taking on equity prices jumped to $60 million in the quarter from $38 million in the prior three months See Goldmans letter to clients via ZeroHedge

o Joe Saluzzi (via FT) If 3 of market participants possibly with similar trading strategies control 70 of trading volume we should be worried about market cornering and liquidity suddenly disappearing For example what caused the market to sell off so fast in March And why is it rising so fast now Could it be that short squeezes are at work We dont know Moreover joining the computer arms race is inefficient

o Tabb Group LLC via ZeroHedge Potential profits are about US$15-25 billion a year for privileged access to market data

Algorithms and Herding

o BloombergAbout 46 of daily volume is handled through high-frequency strategies according to estimates by NYSE Euronext (up to 70 according to Lex)The transactions are made by about 400 of the 20000 firms trading stocks in the US according to Tabb Group LLC a New York-based financial services consultant Each makes bets in hundredths of a second to exploit tiny price swings in equities and discrepancies in futures options and exchange-traded funds See also Quant Funds

o Bernard Donefer of Baruch College via ZeroHedge July 12 Algorithmic trading prompts several regulatory concerns Firstslicing and dicing decreases market bid-offer size which reduces market liquidity and promotes fragmentation Second high-speed trading adds noise to the pricing Algorithmic trading also disadvantages retail orders and could lead to trading control issues

o Paul Wilmott It has been said that the October 1987 stock market crash was caused in part by something called dynamic portfolio insurance another approach based on algorithms The problem was the sheer number of people following the strategy and the market share that they collectively controlled If a fall in the market leads to people selling according to some formula and if there are enough of these people following the same algorithm then it will lead to a further fall in the market and a further wave of selling and so on mdash until the Standard amp Poorrsquos 500 index loses over 20 percent of its value in single day Oct 19 Black Monday Dynamic portfolio insurance caused the very thing it was designed to protect against

o Lawrence Summers Instead of asking why the market fell 500 points in one day [in 1987] it might be more important to know why the market reached 2700 in the first place

Low margin requirements by encouraging positive feedback trading may well have encouraged the market increase setting the stage for the crash

o ShinMorris Liquidity Black Holes In a game between short term traders with privately known trading limits and long horizon traders with a residual demand curve the short term traders will sell just because others sell once the price reaches the limit price Result is a V-shaped pattern in prices as seen eg on Black Monday in 1987 LTCM in 1998

MiFID Review in Europe

o In the EU the Financial Instruments Directive (MiFID) introduced in November 2007 aims at increasing competition between exchanges and over-the-counter (OTC) equity trading by mandating the best execution of equity trades (an initiative not extended to corporate bonds) The industrys response is Project Turquoise a plan by Europersquos largest investment banks to provide buy-side with direct low-cost share trading and access to hidden pools of liquidity that are off-exchange to avoid market impact (meaning price movement during large order execution)

o In June 2009 EU authorities plan a review of MiFID upon concerns that the introduction of enhanced competition between banks OTC equity trading platforms such as Project Turquoise or MTF Chi-X and the public exchanges could lead to amplified liquidity fragmentation and increased fee and pricing opacity instead of higher transparency as envisaged by the commission (see IMF Euro Area Policies Country Report July 2007) Moreover dark pools are currently exempted from certain obligations under special pre-trade transparency waivers (FT EDHEC)

httpwwwrgemonitorcom66Capital_Market_Intermediariescluster_id=14254

Will Germany Finance Tax Cuts Through Off-Balance Sheet Vehicles

Oct 21 2009

Overview On October 21 2009 German newspapers reported that the German government was planning on financing tax cuts through off-balance sheet vehicles With the help of this accounting trick Germany will manage to reduce taxes in an effort to stimulate the economy while at the same time complying with a recently adopted deficit cap The German government has announced a record budget deficit for 2010 due to increased spending as a result of Germanys large stimulus plan and a decrease in tax revenues

The German Budget

o Germanys deficit with respect to its GDP is expected to reach 37 in 2009 and 6 in 2010 according to the German government following an almost balanced budget of -01 in 2009

o Germanys debt with regards to its GDP is estimated at 79 for 2009 and 87 for 2010 up from 67 in 2008 according to the IMF (WEO April 2009)

o On August 25 the German federal Statistics office (Destatis) announced that the German public deficit reached euro173 billion in the first half of 2009 which is equivalent to 15 of GDP During the same period in 2008 Germany managed to run a surplus of euro7 billion While government spending increased by 35 in H1 2009 tax revenues fell 11 during the same period

o On June 25 Germany presented it budget for 2010 An additional euro 100 billion including stimulus measures and banking-sector aid will make up the largest deficit in post-war history According to the new balanced-budget law the allowed amount would only be euro8 billion (June 2009 Handelsblatt - in German)

o On October 7 2009 the European Commission issued a warning about Germanys large deficit which is usually the step before an excessive deficit procedure is opened up EU rules say that during a recession governments can overshoot the deficit as a temporary and exceptional measure

o To return public debt to a sustainable path UniCredit calculated that the primary balance (budget balance minus debt interest payments on debt) with regards to GDP would have to be increased by close to 1 pp This corresponds to savings or additional revenues of almost EUR25 billion To bring the debt ratio back below 60 in the next 20 years the primary balance would have to be increased by 2 pp (25 June 2009 UniCredit)

The Deficit Law

o In June 2009 Germany introduced a law to its constitution that will only allow federal deficits of up to 035 with regards to GDP during normal times starting in 2016 After 2020 regional state deficits will be abolished Parliament can suspend the rule in the event of ldquonatural catastrophes or other unusual emergency situations

o In order to comply with the law Germany will have to implement spending cuts or raise taxes starting in 2011 on despite weaker tax revenue rising welfare bills stimulus

measures and spending for bank bailouts Spending cuts worth euro37 billion have been announced but are not specifically defined yet (June 2009 Handelsblatt - in German)

o On October 8 2009 the German newspaper Handelsblatt reported that till 2013 Germany will have to raise taxes or cut spending equivalent to 343 billion euros in order to comply with the debt brake Even if growth should be one percentage point higher than expected - 5 in 2009 and 125 in 2010 - the hole in governments finances will still stand at 29 billion euros Therefore even if the economy improves more than expected the coalition will not enjoy ample scope with regards to public finances (Handelsblatt October 8 2009)

o The chancellor has also realized how difficult this will be Last week Merkel brought up the possibility of taking advantage of a special clause in a recently passed debt ceiling law that imposes a maximum deficit of 035 percent of GDP by 2016 The clause allows the government in extraordinary emergency situations to borrow more money than it would normally be permitted to do (Spiegel October 12 2009)

Will Germany be able to Comply

o The newly elected government coalition consisting of the Christian Democrats (CDU) as well as the Free Democrats (FDP) has been campaigning for lower taxes in the range of 15-35 billion euros While the FDP Secretary General sees leeway for the necessary tax cuts this view might come as a surprise to the European Commission which is set to open an excessive deficit procedure against Germany(WSJ Octover 8 2009) In addition Handelsblatt reported on October 7 2009 that the economic council of the Wise Men sees no room for significant tax cuts and demanded that tax cuts go hand in hand with spending cuts The reduced tax burden will not prove to be self-financing by stimulating growth according to the council (Handelsblatt October 8 2009)

o On October 21 2009 German newspapers reported that the newly elected government was considering to finance the tax cuts with the help of off-balance sheet vehicles The idea behind all this is to install a special purpose entity which now borrows something like euro40bn from the capital market and uses the money in future years to pay for deficits in the social security system Thus the recorded deficit for this year would skyrocket but it would be lower in the years to come making it possible to meet German constitutional requirements for deficit reduction even if taxes are cut The Frankfurter Allgemeine Zeitung argued in a commentary that this accounting trick was deceiving the German voter (Sebastian Dullien RGE Europe EconoMonitor October 21 2009)

o Only two ways of consolidating public-sector finances remain strict austerity or higher taxes In the past it was above all the latter that was used to reduce debt However this will encounter problems as from 2011 higher social security contributions especially in the health sector seem inevitable as well (Deutsche Bank Research October 2009)

o Handelsblatt reported on October 7 2009 that the economic council of the Wise Men demanded that tax cuts go hand in hand with spending cuts The reduced tax burden will not prove to be self-financing by stimulating growth according to the council

o Klaus Zimmermann the head of the German economic research institute DIW stated that the government showed no intention to reduce the debt burden As a result the governments room to maneuver will diminish(Handelsblatt - in German October 7 2009)

o By making the budget priority number one for the years to come Germany is risking a vicious circle of shrinking tax revenues and rising taxes (Wolfgang Muumlnchau Financial Times 25 June 2009)

o In an interview with Financial Times Deutschland Jurgen von Hagen from the Institute for International Economics said Germanyrsquos fiscal policy has been totally misguided as it persistently ignored the inter-relationship between deficits and growth Debt ceilings such as the recently agreed constitutional change do not work as they are too mechanistic and lead to policy mistakes (via Eurointelligence 26 June 2009)

o European Commission on Germanys budget deficit As the additional revenue from higher economic growth might be limited the consolidation efforts will likely need to rely on tax increases andor expenditure cuts(European Commission Public Finances in EMU - 2009)

o Germanys decision to adopt the balanced-budget law was a unilateral act not discussed with its EMU partners risking instability of the euro zone (Wolfgang Muumlnchau Financial Times 21 June 2009)

21102009

Liderazgo y Cambio

John Mack consejero delegado de Morgan Stanley cuenta coacutemo se salvoacute el banco

En medio a las tinieblas profundas de la crisis financiera mundial en septiembre de 2008 John Mack se enfrentoacute al momento maacutes criacutetico de su carrera al frente de la direccioacuten ejecutiva de Morgan Stanley El banco de inversioacuten estaba praacutecticamente sin caja el precio de sus acciones buceaba en direccioacuten a un soacutelo diacutegito ya que los inversores habiacutean perdido totalmente la confianza en el sector financiero Mack estaba bajo fuerte presioacuten del secretario del Tesoro Timothy Geithner mdashen la eacutepoca jefe de la Reserva Federal de Nueva Yorkmdash y de los jefes de Geithner el entonces secretario del Tesoro Henry Paulson y el presidente de la Fed Ben Bernanke Ellos dijeron a Mack que soacutelo una fusioacuten salvariacutea el banco preferentemente con JPMorgan Chase amp Co y por soacutelo 1 doacutelar

Mack sin embargo que contoacute esa historia durante un reciente Congreso sobre Liderazgo de Wharton teniacutea en mente otra estrategia cuyo objetivo era salvar a Morgan Stanley conservando por un lado miles de empleos y por otro uno de los nombres maacutes conocidos de Wall Street El plan dependiacutea primordialmente del flujo de dinero de caja por parte de inversores externos Pero el esfuerzo de Mack para negociar ese acuerdo un domingo por la tarde con el principal banco de Japoacuten mdashMitsubishi UFJ Financial Groupmdash era interrumpido a cada momento por llamadas de Geithner y Paulson insistiendo en que eacutel contactara con Jamie Dimon consejero delegado de JPMorgan Chase

Despueacutes de la segunda interrupcioacuten ahora por Paulson Mack recuerda que casi no le quedaban maacutes argumentos ldquoHaciacutea tres o cuatro minutos que yo estaba al teleacutefono cuando mi asistente me dijo lsquoiexclTim Geithner estaacute en la otra liacutenea y quiere hablar con usted inmediatamentersquordquomdash Mack dijo que respondioacute sin pensar ldquoDiga a Tim Geithner que se vaya ardquo

El resto pertenece a los archivos de la historia de las finanzas Mack siguioacute hablando por teleacutefono hasta que Mitsubishi estuvo de acuerdo en invertir 8400 millones de doacutelares en Morgan Stanley mdashla mayor inversioacuten externa jamaacutes hecha por una empresa financiera japonesa Despueacutes de eso cerroacute un acuerdo con los oacuterganos reguladores que transformaba el banco de inversioacuten en un holding bancario una decisioacuten que daba a la empresa una flexibilidad mucho mayor para negociar en medio de una crisis que se desarrollaba con mucha rapidez Poco maacutes de un antildeo despueacutes el nuevo Morgan Stanley es una soacutelida institucioacuten de corretaje cuyo negocio ha sido comprado por Salomon Smith Barney Mack planea dejar el puesto de consejero delegado a finales del antildeo pero permaneceraacute en la

empresa como miembro del consejo de administracioacuten

Eacutel dijo que su principal motivacioacuten desde el inicio de la crisis era conservar Morgan Stanley intacto Eacutel contoacute lo que dijo a Paulson Bernanke y Geithner la primera vez que conversaron por teleacutefono aquel domingo decisivo ldquoDeacutejenme que les haga una pregunta a los tres Tengo 45000 trabajadores En Nueva York AIG Lehman Brothers Bear Stearns Merrill Lynch perdieron muchos empleosmdash en total unos 45000 empleos perdidos Desde el punto de vista de la poliacutetica puacuteblica iquesttiene sentido la fusioacuten de Morgan Stanley con JPMorgan Chaserdquo

Separando el hecho de la ficcioacuten

Aunque Mack haya hablado durante una hora citando aquiacute y alliacute en su charla varias intrigas de grueso calibre dentro y fuera del Gobierno la principal leccioacuten sobre liderazgo que eacutel dice haber aprendido con la crisis financiera de 2008 ha sido la necesidad de mantener los trabajadores mdashtanto los de nivel ejecutivo como los menos graduadosmdash bien informados sobre la situacioacuten de manera que comprendan que sus preocupaciones son la principal prioridad de la empresa

ldquoTuvimos varias reuniones con las personas y yo intentaba transmitirles lo siguiente lsquoVoy a explicar lo que estaacute ocurriendo aquiacute estaacuten los hechos que ustedes necesitan saber queacute es rumor y queacute no lo esrdquo observoacute Mack ldquoEn nuestra primera reunioacuten las acciones de la empresa estaban cayendo despueacutes de la divulgacioacuten del informe de beneficios Entonces dije ldquoSi quieren vender sus acciones vendan no vamos a vigilar quieacutenes estaacuten vendiendo y quieacutenes no Es preciso que ustedes se sientan coacutemodos con la situacioacuten en que se encuentranrdquo

Aquel que asistioacute a la charla de Mack pensando que eacutel hablariacutea sobre su infancia de hijo de inmigrantes libaneses en Carolina del Norte o sobre su odisea por las altas esferas de Morgan Stanley su breve periplo al frente de otras dos empresas financieras de gran tamantildeo antes de regresar a la direccioacuten ejecutiva de Morgan Stanley en 2005 o por queacute una empresa de primera liacutenea como esa casi desaparece aquel que fue pensando en oiacuter historias asiacute se equivocoacute de auditorio Mack sabiacutea que teniacutea una historia curiosa de guerra que contar vivida desde dentro del bunker de la crisis financiera de 2008 y estaba determinado a contarla En realidad eacutel dijo que se sentiacutea libre para revelar detalles exclusivos ya que buena parte de lo que iba a decir seriacutea publicado en el libro de Andrew Ross Sorkin reportero de The New York Times (Despueacutes de relatar la profana reaccioacuten que tuvo ante la llamada de Geithner Mack hizo una pausa hizo un gesto con los hombros y dijo ldquoEstaacute en el librordquo provocando las risas de los asistentes)

Morgan Stanley al igual que otros bancos de Wall Street estaba fuertemente apalancado con inversiones de tiacutetulos respaldados en hipotecas y otras inversiones de alto riesgo Alrededor de septiembre de 2008 la empresa mdashcreada en 1933 cuando la Ley Glass-Steagall promulgada en la eacutepoca de la recesioacuten obligoacute el desmembramiento de JP Morgan amp Co originalmdash habiacutea reconocido en cerca de 15700 millones de doacutelares los preacutestamos e inversiones de amortizacioacuten dudosa

Pero la verdadera mecha de la crisis mundial fue el colapso del rival Lehman Brothers El viernes 22 de septiembre de 2008 Mack recibioacute una llamada de Geithner pidieacutendole que fuera a una reunioacuten urgente en Manhattan donde estariacutean otros ejecutivos financieros importantes para discutir el inminente colapso de Lehman La limusina de Mack se quedoacute atascada en el traacutefico Eacutel ordenoacute entonces al conductor que cogiera el carril bici ldquoLlegamos alliacute en cinco minutos Fue demasiado raacutepidordquo dice eacutel ldquoAlgunos ciclistas nos tiraban cosasrdquo

Pero cuando Mack llegoacute al lugar de la reunioacuten eacutel y los demaacutes liacutederes de bancos privados se negaron a hacer lo que el Departamento del Tesoro les pediacutea que hicieran crear un ldquobanco malordquo que se quedara con los llamados activos toacutexicos de Lehman Brothers ldquoEra obvio que el secretario Paulson no teniacutea capital poliacutetico para ir a Washington a pedir maacutes dinero despueacutes de haber rescatado Freddie Fannie y Bear Stearns mdashpor eso pidioacute a Wall Street que lo ayudara La conversacioacuten en torno a la mesa se puede resumir asiacute lsquoMire Hank si hicieacuteramos lo que usted estaacute pidiendo iquestqueacute haraacute cuando AIG esteacute en dificultadesrsquordquo

Pero la suspensioacuten de pagos de Lehman anunciada aquel domingo por la noche el 14 de septiembre llevoacute a los mercados a una espiral descendente y acaboacute con la confianza del consumidor en las empresas financieras inclusive con la confianza que eacutel teniacutea en Morgan Stanley ldquoComenzamos aquella semana con 181 millones de doacutelares en caja mdashno en valores inmobiliarios tampoco en tiacutetulos del Tesoro ni en acciones de IBM sino en dineromdash porque sabiacuteamos que habriacutea carreras al bancordquo dijo Mack El primero diacutea de negociaciones despueacutes del colapso de Lehman las acciones de Morgan Stanley cayeron cerca de un 30

Iroacutenicamente el banco continuaba siendo rentable Mack y otros ejecutivos habiacutean decidido adelantar el informe trimestral de beneficios de la empresa en un diacutea para aquel martes por la tarde pero la decisioacuten no tuvo praacutecticamente ninguacuten impacto positivo

ldquoLa idea era insistir encontrar otras fuentes de capitalrdquo recuerda Mack Fue entonces cuando Morgan Stanley recurrioacute a las uacutenicas personas que teniacutean los recursos necesarios mdashbanqueros y altos ejecutivos de bancos chinos asiacute como al Grupo Mitsubishi de Japoacuten En cierto momento el banco llegoacute incluso a establecer contacto con el millonario americano Warren Buffet Mack conversoacute tambieacuten con banqueros importantes de Wall Street y se enfadoacute con Dimon de JPMorgan Chase cuando percibioacute que el consejero delgado trataba detalles y se comunicaba con sus subordinados sin su conocimiento

ldquoEn el mundo de los negocios hay que ser directordquo dijo Mack a Dimon durante una conversacioacuten acalorada ldquoNo quiero que me eviterdquo Pero era todo un ejercicio de obtencioacuten de informacioacuten No le culpo por eso Tal vez yo hubiera hecho lo mismordquo

Bromas y monitores de presioacuten sanguiacutenea

En el peor momento de la crisis Mack dijo que intentoacute transmitir un aura de confianza y buscoacute rebajar la tensioacuten con humor ldquoTodo lo que seacute es que no podiacutea dejar que mis empleados se dieran cuenta de lo preocupado que estaba Creo que ellos nunca lo percibieron Intenteacute muchas veces rebajar la presioacuten ante lo que estaba sucediendordquo

Mack teniacutea un medidor de presioacuten sanguiacutenea en su mesa que eacutel y otros ejecutivos usaban en broma en los momentos maacutes criacuteticos (es verdad que un ejecutivo tuvo que ser llevado al hospital porque su nivel de estreacutes era demasiado alto) Cuando un compantildeero le comentoacute en una ocasioacuten que estaba molesto porque su familia insistiacutea en comer frente a eacutel sabiendo que estaba en ayuno aquella semana a causa de una festividad judiacutea Mack mandoacute entregar una pizza en su casa cada hora durante siete horas seguidas ldquoEacutel me dijo que la empleada estaba encantada con la ideardquo

Seguacuten Mack las conversaciones estimulantes las reuniones abiertas y las bromas fueron esenciales para que su empresa venciera la crisis Su evidente preocupacioacuten por los empleados fue fundamental en el enfrentamiento cada vez maacutes fuerte que tuvo con Paulson Geithner y

Bernanke antildeadioacute ldquoDiscrepeacute con ellos pero no estoy molesto Su trabajo es proporcionar estabilidad financiera mientras el miacuteo es proteger la empresa y hacer que funcione No fue bajo ni cruel soacutelo fue algo praacutectico Ellos hicieron un trabajo excelenterdquo

Finalmente Mack les dijo ldquoTengo el mayor respeto por los tres mdashlo que hacen por este paiacutes soacutelo lo hariacutea un patriota Pero yo tengo 45000 trabajadores Por eso no hareacute lo que me pidenrdquo dijo Mack en referencia a la oferta de 1 doacutelar de JPMorgan Chase Y colgoacute el teleacutefono

Un antildeo despueacutes Morgan Stanley continuacutea activa y proacutespera El uno de enero Mack hoy con 64 antildeos pasaraacute sus funciones de consejero delegado al actual presidente adjunto James Gorman Aunque no haya discutido su visioacuten sobre el futuro de la empresa ahora recuperada eacutel dijo que el sector financiero en general estaacute tomando medidas impactantes para reducir el total de apalancamiento empleado que fue un factor criacutetico desencadenante del colapso de 2008 Habraacute eacutenfasis tambieacuten sobre la gestioacuten de riesgo Los salarios de Wall Street ldquoestaban fuera de controlrdquo porque las empresas no queriacutean que sus mejores profesionales se fueran a trabajar para los fondos hedge a principios de los antildeos 90 antildeadioacute Deberiacutea haber habido maacutes eacutenfasis en el eacutexito a largo plazo y para eso las acciones de la empresa podriacutean haber sido usadas para el pago de salarios ademaacutes de fondos de ldquorestitucioacutenrdquo que reduciriacutean las bonificaciones en caso de un mal rendimiento

Mack sin embargo continuacutea creyendo en los mercados ldquoTengo oro tengo tiacutetulos del Tesoro protegidos contra la inflacioacuten (TIPS) tengo acciones de una cierta empresa integrada de petroacuteleo y participacioacuten en una sociedad abierta de gas y petroacuteleo [] y estaacute claro poseo acciones de Morgan Stanleyrdquo dijo en respuesta a una pregunta de la audiencia ldquoHabraacute otra crisisrdquo antildeadioacute posteriormente ldquopero ya no estareacute por aquiacuterdquo Publicado el 21102009

httpwwwwhartonuniversianetindexcfmfa=viewArticleampid=1790amplanguage=spanish

21102009

Finanzas e Inversioacuten

Las sentildeales de recuperacioacuten traen una pregunta iquestes el momento de subir tipos

Las sentildeales de que las economiacuteas maacutes importantes del planeta han pasado ya lo peor de la crisis y comienzan un periodo de recuperacioacuten ya han llegado La recesioacuten mundial estaacute finalizando seguacuten indicoacute el pasado 1 de octubre el Fondo Monetario Internacional (FMI) en su informe World Economic Outlook presentado en Estambul El organismo elevoacute sus previsiones de crecimiento mundiales ante el fuerte tiroacuten de Asia y las sentildeales positivas en el resto del planeta El organismo explicoacute que las economiacuteas avanzadas golpeadas de manera excepcional por la crisis financiera y el colapso del comercio mundial muestran ahora signos de estabilizacioacuten gracias en su mayor parte a una respuesta poliacutetica sin precedentes Y como no podiacutea ser de otro modo ante estas muestras de optimismo los inversores de todo el mundo ya comienzan a hacerse la siguiente pregunta iquestya ahora queacute Quieren saber cuaacuteles van a ser los pasos que van a seguir los bancos centrales a partir de ahora es decir si ha llegado ya el momento de comenzar a subir unos tipos de intereacutes -que se encuentran anormalmente bajos- para dar aire a una actividad brutalmente golpeada por la crisis

Los principales bancos centrales del mundo la Reserva Federal de Estados Unidos (Fed) el Banco Central Europeo (BCE) y el Banco de Japoacuten (BoJ) se encuentran ante una situacioacuten delicada El dilema es que si comienzan a subir los tipos de intereacutes demasiado pronto la recuperacioacuten que ya se ha iniciado puede verse dantildeada y la economiacutea puede volver a ahogarse Si de lo contrario encarecen el precio del dinero demasiado tarde pueden generase riesgos inflacionistas y la posibilidad de que se creen burbujas

Discrepancias en la Fed En Estados Unidos ya se comienza a ver coacutemo despueacutes de un antildeo de unanimidad casi perfecta sobre el rumbo a seguir los dirigentes de la Fed parecen divididos sobre la orientacioacuten a dar a su poliacutetica monetaria Este organismo bajoacute las tasas al 025 en diciembre de 2008 y su Comiteacute de Poliacutetica Monetaria (FOMC) estima oficialmente seguacuten el comunicado de su uacuteltima reunioacuten celebrada los diacuteas 22 y 23 de septiembre que las condiciones econoacutemicas justificariacutean su mantenimiento en un nivel extremadamente bajo por un largo periodo

Thomaacutes Hoenig presidente de la Fed de Kansas City una de las 12 patas regionales del banco central defendioacute el 6 de octubre la idea de una raacutepida subida de la tasa directriz juzgando que la misma todaviacutea seriacutea muy complaciente a 1 oacute 2 En virtud de la rotacioacuten entre los dirigentes de las Fed regionales Hoenig seraacute en 2010 uno de los miembros con derecho a voto en el FOMC Una opinioacuten que choca frontalmente con la del presidente de la Fed Ben Bernanke que comentoacute el 9 de octubre que no teniacutea prisa por elevar los tipos

iquestQueacute pasaraacute entonces ldquoCreo que veremos una subida de tipos coordinada de los principales bancos centrales del mundordquo comenta Rafael Pampilloacuten profesor de anaacutelisis econoacutemico del IE Business School ldquoEstamos ante una situacioacuten muy delicada con los tipos de cambio de las monedas con un doacutelar depreciaacutendose mucho uacuteltimamente Si al BCE le diera por subir los tipos de intereacutes seriacutea un golpe muy duro para la divisa norteamericanardquo explica En caso de que no se produjera un alza coordinada del precio del dinero considera que seriacutea ldquoconveniente que la Fed fuera el primero en aumentar las tasas para ayudar al depreciado doacutelarrdquo

En cualquier caso Pampilloacuten ve todaviacutea lejana una subida de tipos Mantiene que las principales economiacuteas del planeta ademaacutes de un creciente deacuteficit puacuteblico ldquoestaacuten sufriendo un importante exceso de capacidad productivardquo y en esta situacioacuten es ldquodifiacutecil que se produzca un aumento relevante de la inflacioacutenrdquo Ademaacutes argumenta que antes de que se encarezca el dinero ldquolos Gobiernos tienen que retirar las medidas de estiacutemulos fiscales y los bancos centrales las medidas extraordinarias de inyeccioacuten de liquidez en los mercadosrdquo ldquoNo creo que el BCE suba los tipos hasta finales de 2010 o principios de 2011 porque la situacioacuten es muy delicadardquo afirma

ldquoLa economiacutea de Estados Unidos y Alemania seraacuten las primeras en salir de la crisisrdquo opina F Xavier Mena catedraacutetico de economiacutea de ESADE Business School Asiacute antildeade ldquolos bancos centrales se apresuraraacuten a subir los tipos de intereacutes antes incluso de que atisben los primeros siacutentomas de recuperacioacuten fiables ya que no quieren caer en los errores de comienzos de siglo cuando bajaron mucho el precio del dinero y los mantuvieron asiacute demasiado tiempo cuando la recuperacioacuten ya era fuerte lo que provocoacute una serie de burbujas econoacutemicasrdquo

Para Mena en Estados Unidos ldquono tardaremosrdquo en ver un incremento de las tasas ldquoPueden darse todaviacutea un tiempo pero yo creo que la espera la podemos medir en teacuterminos de meses incluso semanasrdquo para ldquocomenzar a normalizar los tipos y colocarlos en el 1rdquo Considera que en cuestioacuten de ldquoun antildeo vistardquo ldquopueden estar completamente normalizados en Estados Unidos y un poco maacutes tarde en la zona eurordquo Mena explica que cuando habla de ldquonormalizacioacutenrdquo se refiere a un precio del dinero en el entorno del 4 un ldquonivel apropiado para que no se dispare la inflacioacuten en un periodo de expansioacutenrdquo

El efecto de una subida de tipos de EEUU en Latinoameacuterica

Una subida de tipos en Estados Unidos cuando se produzca inevitablemente tendraacute sus consecuencias en Ameacuterica Latina David Robinson subdirector del departamento del hemisferio occidental del FMI sentildealoacute el pasado 2 de octubre en el contexto de la cumbre que celebroacute el organismo en Estambul que los paiacuteses de esta regioacuten deben de registrar un aumento de los costos crediticios mientras emergen de la recesioacuten global lo que les dificultariacutea estabilizar los niveles de deuda

Robinson explicoacute que la experiencia pasada indica que por cada aumento de 10 en la deuda de Estados Unidos como porcentaje del producto interno bruto los costes de los preacutestamos en la regioacuten suben 15 puntos baacutesicos Esto dificultariacutea la implementacioacuten de ajustes fiscales necesarios para estabilizar niveles de deuda todaviacutea ldquobastante altosrdquo aseguroacute ldquoParte de ello ocurriraacute naturalmente a medida que tiene lugar la recuperacioacutenrdquo dijo ldquoPero muchos paiacuteses deberaacuten emprender considerables ajustes tambieacuten y obviamente eso seraacute complicado si hay un menor crecimiento externo y tasas de intereacutes maacutes altas en el extranjerordquo antildeadioacute

Para Pampilloacuten una subida de los tipos de intereacutes en Estados Unidos apreciariacutea el doacutelar y traeriacutea una depreciacioacuten de las monedas de la regioacuten contra el billete verde lo que provocariacutea ldquoun aumento de las exportaciones y que las remesas en doacutelares que llegan a estos paiacuteses

valgan maacutesrdquo Pero tambieacuten tendriacutea consecuencias negativas seguacuten este profesor del IE Business School ldquola carga de la deuda externa nominada en doacutelares seriacutea mayorrdquo

Los movimientos de tipos de intereacutes en las diferentes economiacuteas latinoamericanas dependeraacuten de la situacioacuten de la inflacioacuten y no tanto del camino seguido por la poliacutetica monetaria de Estados Unidos seguacuten Pampilloacuten ldquoSon economiacuteas que han sufrido menos con las crisis porque no tienen tanta capacidad productiva ociosa ademaacutes sus tensiones inflacionistas son mayores Con estos argumentos los bancos centrales de la regioacuten pueden estar tentados a subir tiposrdquo mantiene

Mena destaca que las economiacuteas latinoamericanas ldquohan sido maacutes resistentes a las crisis que otros paiacuteses y que durante la actual recesioacuten han sufrido menos que en las anterioresrdquo Partiendo de esta base cree que una apreciacioacuten del doacutelar fruto de una subida de tipos de la Fed dantildeariacutea la actividad de la regioacuten pero cree que ldquola subida del billete verde tendriacutea que ser muy grande para que se viera realmente dantildeadardquo algo por lo que no apuesta y por ello afirma ldquono veo malas perspectivas para la zonardquo

En esta liacutenea Mena cree que los bancos centrales latinoamericanos seguiraacuten el camino de las grandes economiacuteas mundiales y subiraacuten tipos Pero en cualquier caso afirma que habriacutea que ir paiacutes por paiacutes y que no estamos ante una regioacuten ldquocon riesgo econoacutemicordquo

La difiacutecil papeleta del BCE

El BCE que mantiene los tipos en el 1 desde el 7 de mayo puede encontrarse con un dilema complicado de resolver en los proacuteximos meses Las economiacuteas de la regioacuten estaacuten saliendo de la recesioacuten a ritmos muy desiguales por lo que necesitaraacuten movimientos monetarios diferentes

Las dos mayores economiacuteas de la zona euro Alemania y Francia ya han salido de la recesioacuten en el segundo trimestre de antildeo cuando registraron crecimientos intertrimestrales positivos concretamente del 03 en ambos casos Y seguacuten las uacuteltimas previsiones de la Comisioacuten Europea publicadas el 14 de septiembre estos dos paiacuteses mantendraacuten la senda de la recuperacioacuten en los proacuteximos trimestres del antildeo y creceraacuten un 02 en 2010

En la situacioacuten contraria se encontrariacutean Espantildea e Irlanda que seguacuten Bruselas se contraeraacuten un 09 y un 15 respectivamente en 2010 y sufriraacuten deacuteficits presupuestarios del 98 y del 156 algunos de los maacutes grandes de la regioacuten De hechola Comisioacuten Europea destaca que Espantildea seraacute el uacutenico de entre los grandes estados de la UE que mantenga cifras negativas de crecimiento en el cuarto trimestre de este antildeo

El Presidente del BCE Jean-Claude Trichet no estaacute mandando sentildeales de ajustar la poliacutetica monetaria Retiraremos las medidas anticrisis cuando desencadenan riesgos para la estabilidad de precios ha informado en numerosas ocasiones A pesar de ello Bank of America-Merrill Lynch y Morgan Stanley aseguran que las subidas de tipos comenzaraacuten como muy tarde en junio de 2010 seguacuten informa Bloomberg

ldquoEl BCE no tendraacute en cuenta la situacioacuten de paiacuteses como Espantildea o Irlanda No la tuvo en cuenta desde 2001 cuando estos paiacuteses necesitaban subidas de tipos y Alemania Francia e Italia bajadas y tampoco lo haraacute ahora cuando ocurre todo lo contrariordquo asegura Pampilloacuten ldquoEstamos viendo un desacompasamiento del ciclo econoacutemico de algunos paiacuteses de la zona euro Espantildea necesita tipos bajos durante maacutes tiempo y Alemania y Francia subidas porque extraordinariamente estaacuten recuperaacutendose de la crisis antes que Estados Unidosrdquo expone

ldquoEl BCE se estaacute mostrando independiente y no se veraacute afectado por las presiones poliacuteticasrdquo asegura Mena Este profesor de la ESADE Business School hace esta puntualizacioacuten porque cree que el banco ldquosiacute subiraacute los tiposrdquo pero que lo haraacute porque el peso econoacutemico ponderado

de Alemania y Francia es muy grande ya que ldquosi ellos se recuperan supone que se recupera maacutes de la mitad de la economiacutea de la regioacuten y en este contexto no tendraacute maacutes remedio que elevar tasasrdquo

El profesor del IE Business School cree que una subida de tipos por parte del BCE seriacutea ldquomortalrdquo para Espantildea un ldquogolpe de graciardquo para su dantildeada economiacutea En este contexto algunas voces como la del Premio Nobel de Economiacutea Paul Krugman han insinuado que para paiacuteses como Espantildea o Irlanda seriacutea bueno salirse del Euro ldquoEl coste de abandonar la moneda uacutenica seriacutea mayor que el de mantenerserdquo asegura Pampilloacuten

La misma opinioacuten comparte Mena al afirmar que ldquola previsible subida de tipos del BCE perjudicaraacute mucho a paiacuteses como Espantildeardquo e igualmente ve como una mala solucioacuten el abandono del euro ldquoHay dos razones claras para mantenerse en la moneda uacutenica la primera que una devaluacioacuten de la peseta (moneda espantildeola antes de adoptar el euro) no asegura un aumento de las exportaciones y por lo tanto una recuperacioacuten por esta viacutea y la segunda es el fuerte endeudamiento que se encareceriacutea maacutes por la prima de riesgo que habriacutea que pagar a los inversores por la depreciacioacuten de la monedardquo argumenta

httpwwwwhartonuniversianetindexcfmfa=viewArticleampid=1793

21102009

Marketing

Zara reta a su modelo de negocio en el canal online

Desde su lanzamiento en 1975 Zara se ha acostumbrado a revolucionar la industria de la moda con su raacutepida cadena de suministro y su constante flujo de nuevas tendencias dentro de la industria Asiacute que el anuncioacute a mediados de septiembre y sin apenas dar detalles de que su principal ensentildea Zara empezaraacute a

comerciar en la red a partir de la segunda mitad de 2010 fue una sorpresa relativa Hasta la fecha el grupo espantildeol soacutelo ha desarrollado la venta electroacutenica en Zara Home cadena dedicada a la decoracioacuten del hogar que se puso en marcha el 29 de octubre de 2007

El anuncio vino acompantildeado de la presentacioacuten de unos resultados muy soacutelidos por parte de Inditex en el primer semestre de 2009 a pesar de los temores que rodean a toda la industria El beneficio bruto de explotacioacuten (Ebitda) alcanzoacute los 799 millones de euros batiendo las previsiones del mercado que lo situaban en 780 millones El beneficio neto fue de 375 millones de euros en el primer semestre de su ejercicio fiscal (desde el 1 de febrero hasta el 31 de julio) batiendo tambieacuten las estimaciones de 355 millones mientras que las ventas totales crecieron un 7 en liacutenea con las estimaciones de 4900 millones de euros de los que Zara representa 3000 millones de euros

Seguacuten ha anunciado la compantildeiacutea la tienda online de Zara se estrenaraacute con la campantildea otontildeo-invierno del proacuteximo antildeo en Espantildea Francia Alemania Reino Unido Italia y Portugal Progresivamente se introduciraacute en los 73 paiacuteses en los que la cadena estaacute presente Seguacuten declaroacute a los medios el vicepresidente de Inditex Pablo Isla es un paso estrateacutegico importante y es un canal interesante para el grupo aunque rehusoacute a entrar en maacutes detalles ya que es prematuro

Son justamente estos detalles los que han generado cierta curiosidad y expectacioacuten entre los expertos del sector que se preguntan si Inditex iquesttrasladaraacute su innovador modelo de negocio a Internet o replicaraacute lo que estaacuten haciendo sus competidores

Modelo de negocio innovador

Inditex cuenta con una destacada presencia internacional gracias a un modelo de negocio basado en ofrecer lo uacuteltimo en moda con calidad y buen precio La empresa logra lanzar 20000 nuevos disentildeos al antildeo y enviar dos colecciones nuevas por semana a sus maacutes de 4430 tiendas en todo el mundo ademaacutes de disentildear producir distribuir y vender sus colecciones en cuatro semanas un tiempo reacutecord si se tiene en cuenta que sus competidores tardan varios meses en completar ese mismo proceso

La innovacioacuten en su sector es tal que si se miran las decisiones tomadas por la empresa de forma aislada parecen poco eficientes y hasta cuestionables sentildeala Christoph Zott profesor

de Iniciativa Empresarial de IESE Business School en un trabajo de investigacioacuten publicado recientemente y titulado ldquoInnovacioacuten del modelo de negocio creacioacuten de valor en tiempos de cambiordquo Por ejemplo escribe ldquomuchas de las actividades geneacutericas se realizan en gran parte de forma interna como el tentildeido y el cortado de tela asiacute como el lavado el planchado etc Subcontratan la costura a pequentildeos talleres situados cerca de sus instalaciones de produccioacuten en Espantildeardquo

Pero Inditex supera con creces a sus competidores en la habilidad para reaccionar a los gustos de los consumidores porque aunque eacutestos cuenten con historiales y capacidades mayores en innovacioacuten de productos y logiacutestica su modelo de negocio ldquose apoya en recursos estaacutendar -por ejemplo en personas que detectan nuevas tendencias pero no las crean- y en tecnologiacuteas comerciales ndashpara transmitir informacioacuten en tiempo real desde los establecimientos de venta hasta los equipos de disentildeo-rdquo sentildeala el trabajo

Pero si hay un aacuterea en el que Zara ha sido maacutes lento que la competencia es en el canal online ldquoEs inevitable que todos (los jugadores del sector) entren al final en Internetrdquo sentildeala Roberto Manzano profesor de Marketing de IE Business School Efectivamente Diana Gavilaacuten Bouzas profesora de Marketing de la Universidad Complutense de Madrid comenta que el canal online es una tendencia ya asumida por numerosos fabricantes de moda aunque se pregunta si existe un mercado maduro para el comercio por Internet en el mundo de la moda en Espantildea Y antildeade ldquoEn marketing la existencia de un mercado con una demanda insatisfecha se considera una buena razoacuten para al menos plantearse la posibilidad de entrar en ese mercado Sin embargo esta condicioacuten no parece que se esteacute dandordquo

Y para apoyar esta afirmacioacuten sentildeala que en primer lugar ldquolos datos de la uacuteltima ola (junio 2009) del estudio sobre Usos de Internet en Espantildea que realiza el Ministerio de Industria Comercio y Tecnologiacutea indican que el sector de la venta online se concentra en Espantildea en viajes y vacaciones (289) seguido de entradas para espectaacuteculos (206) y libros revistas o muacutesica (159) con una categoriacutea muacuteltiple de otras compras (192) que incluye desde la compra de informaacutetica a la alimentacioacuten y la modahellip entre otros sectoresrdquo Otras fuentes como la compantildeiacutea de investigacioacuten Forrester Research estiman que las ventas mundiales de moda a traveacutes de la red representan del 3 al 4 de facturacioacuten actual del sector

Si ademaacutes pensamos que el mercado de la moda es mayoritariamente de mujeres antildeade ldquolos datos son desalentadores porque en lo que respecta a las mujeres de mediana edad (30-50 antildeos) la situacioacuten actual estaacute lejos de ser la idoacutenea para este canalrdquo Un estudio en el que estaacute trabajando la profesora de la Complutense junto con los docentes Mariacutea Avello y Francis Blasco sobre las compras de las mujeres de mediana edad indica que soacutelo el 27 de este segmento compra moda en la red ldquoY se trata de mujeres con un perfil muy homogeacuteneo trabajadoras con una aguda sensacioacuten de falta de tiempo niveles de actividad y compromisos elevados y que disfrutan comprando en cualquier tipo de establecimiento aunque prefieren los espacios de amplio surtido y oferta variadardquo

Por otro lado Gavilaacuten dice que ademaacutes hay que tener en cuenta un segundo factor de tipo sociocultural el contacto fiacutesico con la mercanciacutea En su opinioacuten la distribucioacuten actual de las ventas online corrobora que los productos que se venden bien en la red son los que no requieren contacto fiacutesico billetes de avioacuten entradas libros etc Por lo tanto explica ldquono parece que exista una demanda masiva de moda en la red Ahora bien el hecho de que hoy el mercado no sea masivo no quiere decir que no lo vaya a ser en el futuro Forrester Research estima que en breve el 10 de la facturacioacuten de este sector podriacutea proceder de Internet Todo apunta a que se trata de un mercado potencial Un mercado todaviacutea sin desarrollar que emergeraacute cuando las condiciones del entorno se alineen adecuadamenterdquo

Y en su opinioacuten a fecha de hoy ya se ven indicios de que este mercado se desarrollaraacute Seguacuten

sus datos ldquoen Espantildea crece el nuacutemero total de usuarios que ahora alcanza al 61 de la poblacioacuten la mujer aumenta su presencia en la red (49) el hogar es el lugar desde el que acceden el 75 de los usuarios y los joacutevenes formados en el mercado virtual es probable que encuentren poca o ninguna dificultad en comprar sin probar cualquier producto en un espacio donde la fiabilidad del canal es cada vez mayor Pero es que ademaacutes estos joacutevenes estaacuten sobrerrepresentados en Internet ndashen la poblacioacuten total las personas de 15-24 antildeos son el 12 y en Internet su presencia es del 19ndashrdquo

Sobre la capacidad de comprar sin probar de los joacutevenes Manzano tiene sus dudas De hecho eacuteste era uno de los comentarios favorables al canal online de Zara que recibiacutea como respuesta a un post en el que analizaba la anunciada estrategia de Inditex ldquoYo creo que no es para tantordquo dice Toda la parte sensorial de la experiencia de tienda se reduce considerablemente en Internetrdquo Y antildeade que hay dos tipologiacuteas de compra online la funcional de algo que conozco repetitivo y sin riesgo de equivocarme en la eleccioacuten ldquoEs decir me compro una camiseta porque me gusta el estampado y es baratardquo Las tiendas virtuales ldquominimizan el riesgo de que no te puedas probar una prenda mediante entregas raacutepidas y sistemas como la devolucioacuten en tienda por mensajeriacutea faacutecilrdquo explica La otra tipologiacutea es la compra de moda ldquode algo que me gusta y encaja con mi estilo personalrdquo

En la compra funcional de cosas de bajo valor donde la imagen en Internet es lo suficientemente transmisora de lo que es el producto es donde en opinioacuten de Manzano el canal online tiene maacutes eacutexito Pero eacutel sentildeala que la fuerza de Zara no es esa ldquosino el disentildeo hacia puacuteblicos distintos con un componente de moda diferencial disentildeadora vanguardista que es muy actual en el mundo O Zara se posiciona en la parte donde el medio funciona maacutes lo baacutesico y eso no le crea problemas o se va a la parte donde el medio funciona menos y refuerza su imagenrdquo

Hoy no pero mantildeana siacute Para Gavilaacuten la apertura de Zara online debe interpretarse como una decisioacuten estrateacutegica A corto plazo dice ldquolas perspectivas de beneficio son reducidas pero el riesgo es bajo maacutes allaacute del desarrollo y mantenimiento de la tienda virtual Como contrapartida la marca puede beneficiarse de las ventas procedentes de su mayor accesibilidad y sobre todo de notoriedadrdquo En su opinioacuten esta estrategia fortaleceraacute su imagen en aspectos como capacidad tecnoloacutegica facilidades para los clientes dinamismo modernidad y presencia en la mente del consumidor ldquoY a medio plazo Zara se prepara para competir cuando este canal sea una auteacutentica fuente de ingresos y beneficiosrdquo antildeade

Con la caiacuteda del consumo como consecuencia de la crisis Gavilaacuten se pregunta si tal vez Inditex trata de captar al consumidor inteligente Este consumidor ha emigrado a la red donde las condiciones para la comparacioacuten de precios y productos son idoacuteneas Pero en su opinioacuten ldquoexisten pocas o ninguna razoacuten que permitan relacionar al consumidor inteligente con esta decisioacuten Eacuteste estaacute simplificando sus compras adquiere lo esencial en las mejores condiciones de precio y cuando se trata de una mujer empieza por eliminar o posponer las compras de los productos que considera prescindibles moda y complementos son de los primeros de la listardquo

De hecho la profesora de la Complutense explica que con su estrategia de producto-precio Zara ha demostrado una brillante capacidad para eludir al comprador estrateacutegico -cliente que espera el mejor momento para comprar- ya que sus modelos no se reabastecen ilimitadamente en las tiendas hasta las rebajas Por consiguiente ldquolas clientas de Zara saben que si una prenda les gusta hay que comprarla porque puede que se agote y no vuelva iquestTrasladaraacute esta estrategia a su tienda online iquestLimitaraacute existencias o nos sorprenderaacute con precio dinaacutemicos Seriacutea interesante saber algunas cosas maacutes sobre las caracteriacutesticas que tendraacute este nuevo canalrdquo

Posicionamiento De momento la uacutenica experiencia que tiene Inditex en tienda online es la de su ensentildea Zara Home que seguacuten Manzano le habraacute servido para profundizar tanto en los elementos logiacutesticos como en la propia comunicacioacuten de artiacuteculos decorativos con un alto componente de moda a traveacutes de la web Aunque en su opinioacuten la imagen que da esta ensentildea de productos de moda es muy pobre en cuanto a textiles porque el medio dificulta que sea maacutes rico ademaacutes de que no tienen una ambicioacuten muy fuerte en ese sentido Y advierte ldquoSi con Zara se hace lo mismo que con Zara Home Internet va a ser un freno a su posicionamiento de renovacioacuten continua de la modardquo

Manzano explica que la problemaacutetica a la que se tiene que enfrentar Zara tiene un doble frente ldquoPor un lado coacutemo va la empresa a gestionar toda la parte logiacutestica desde el punto de vista de restos de stock de distribucioacuten en tiradas muy cortas y a nivel internacional y por otro coacutemo en una tienda cuyo posicionamiento es que cambio la moda todos los diacuteas ndashlas prendas estaacuten como mucho un mes en tienda- se traslada ese concepto al medio Internet donde la visioacuten estaacute mucho maacutes segmentada nunca es una visioacuten global Es decir coacutemo va a lograr reforzar la imagen de renovacioacuten continua de moda en un medio que a nivel visual te permite navegar tener muchos maacutes modelos pero globalmente estaacute mucho maacutes segmentado a la vistardquo

El profesor sentildeala que el tiempo despejaraacute algunas dudas y dice que la parte de logiacutestica no la vamos a ver pero la parte de imagen y de renovacioacuten de moda siacute ldquoSi acaban teniendo 80 modelos expuestos en su sitio web seraacute una imagen muy pobre pero si pueden ofrecer esa imagen de surtido de renovacioacuten continua reforzaraacuten lo que tienenrdquo

Manzano explica que en Internet se hace una seleccioacuten muy fuerte de surtidos lo que permite su gestioacuten ldquoEs la manera de expresar todo la gama de productos que tienes en un surtido muy limitado y solventar los temas de logiacutestica y produccioacuten Esto es justamente lo contrario que estaacute haciendo Zara en el mercado y por lo que estaacute echando a sus competidores creciendo a base de no tener colecciones y lanzamientos en oleadas continuas Ahora bien habraacute que ver coacutemo lo trasladaraacute a su sitio webrdquo

Y es que Zara tiene un reto muy fuerte ldquoextrapolar al medio Internet todo lo que es su estrategia desde el punto de vista de diferenciacioacuten Es decir dado el posicionamiento de Zara hacer que Internet se convierta en una herramienta de refuerzo de imagen del posicionamiento de venta en lugar de lo contrario una herramienta que la iguale con la competenciardquo antildeade

ldquoEstaremos atentos para observar las respuestasrdquo concluye Gavilaacuten

Publicado el 21102009

21102009

El impacto de las transacciones de alta frecuencia iquestManipulacioacuten distorsioacuten o un mercado maacutes eficiente

Parece ficcioacuten cientiacutefica algo salido de alguna peliacutecula en que las maacutequinas toman el control del mundo Sin embargo las ldquotransacciones de alta frecuenciardquo totalmente automatizadas forman parte del mercado bursaacutetil actual mdashuna parte de hecho bastante significativa

De acuerdo con algunas estimaciones las transacciones de alta frecuencia por parte de bancosde inversiones fondos hedge y otras empresas representan un porcentaje de un 60 a un 70 de todas las transacciones de acciones americanas lo que explica el enorme aumento en el volumen de negocios en el transcurso de los uacuteltimos antildeos Se estiman unos beneficios en 2008 de 8000 millones a 21000 millones de doacutelares

Algunos observadores del mercado miembros del Congreso y oacuterganos reguladores se muestran preocupados iquestEsos beneficios estariacutean saliendo del bolsillo de los inversores comunes iquestPerjudicaraacute la uacuteltima forma de enriquecimiento raacutepido de Wall Street a observadores inocentes ldquoCreo que seriacutea muy bueno que las personas comprendieran el objetivo de esas estrategiasrdquo dice Robert F Stambaugh profesor de Finanzas de Wharton ldquoiquestCuaacutel es el efecto sobre los mercados Hay una cierta sensacioacuten de 2001 Odisea en el espacio en ello ya que crea un cierto clima de desconfianza

Sus defensores afirman que las transacciones de alta frecuencia mejoran la liquidez del mercado contribuyendo de esa forma a garantizar que haya siempre un comprador o vendedor disponible cuando se quiere negociar De momento realizar operaciones de alta frecuencia no parece amenazador en opinioacuten de diversos profesores de Wharton En realidad hasta puede ser beneficioso para los inversores de fondos mutuos y otros jugadores del mercado reduciendo los costes de las operaciones Al mismo tiempo sin embargo muchos afirman que no hay informaciones suficientes sobre coacutemo funcionan las operaciones realizadas a la velocidad de la luz y si pueden ser usadas para manipular los mercados o incluso si las decisiones aparentemente positivas de las diferentes partes involucradas pueden interaccionar y generar una nueva crisis financiera

ldquoLas transacciones de alta frecuencia son hechas por inversores equipados con buenos ordenadores y que se aprovechan de pequentildeas discrepancias en los preciosrdquo observa Marshall E Blume profesor de Finanzas de Wharton ldquoEn general los economistas creen que ese tipo de praacutectica empuja los precios hacia niveles en los que deben quedarse [] Si eso trae liquidez al mercado y hace que los precios sean maacutes precisos entonces es bueno Hay sin embargo una preocupacioacuten que es difiacutecil de documentar y que consiste en el hecho de que de alguacuten modo esos traders manipulan el mercado lo que seriacutea malordquo

Transferir la toma de decisiones a las maacutequinas no siempre ha sido bueno para los seres humanos observa Itay Goldstein profesor de Finanzas de Wharton ldquoLas personas creen que el crac del 87 fue consecuencia de transacciones hechas por ordenadoresrdquo En esa ocasioacuten un ciacuterculo vicioso se salioacute de control debido a que los programas informaacuteticos empleados en las transacciones generaron ventas en masa en respuesta a la caiacuteda de los precios llevando otros ordenadores a hacer lo mismo

Viajando a la velocidad de la luz Las transacciones de alta frecuencia son transacciones informatizadas que buscan el beneficio tomando como base condiciones excesivamente efiacutemeras para que sean exploradas por el hombre como por ejemplo un minuacutesculo aumento en la brecha entre los precios de compra y venta de un tiacutetulo cualquiera o una pequentildea diferencia de precio de una accioacuten negociada en varios mercados del mundo La transaccioacuten es tan raacutepida que algunas empresas llegan a instalar su grupo de servidores proacuteximos a los ordenadores de los mercados para disminuir la distancia que los pedidos necesitan recorrer en los cables a la velocidad de la luz

Las transacciones de alta frecuencia cuya existencia se debe a la proliferacioacuten de los ordenadores de alta velocidad fue tambieacuten consecuencia de diversos cambios regulatorios En 1998 la Regulacioacuten de Sistemas Alternativos de Comercio de la Securities amp Exchange Commission (SEC comisioacuten federal de valores) abrioacute las puertas a las plataformas de comercio electroacutenico con el objetivo de competir con las principales bolsas Pasados algunos antildeos las bolsas comenzaron a cotizar precios en relacioacuten al centavo maacutes proacuteximo y no con base a 116 del doacutelar haciendo que los maacutergenes disminuyeran obligando a los traders que ganaban con esas diferencias de precios a salir en busca de alternativas Finalmente la Normativa de la SEC para el Sistema de Mercado Nacional de 2005 obligoacute a la colocacioacuten de los pedidos en todo el territorio nacional y no soacutelo en algunas bolsas Eso permitioacute que los traders maacutes aacutegiles se lucraran en el momento en que una accioacuten era negociada a un precio ligeramente diferente en una bolsa en relacioacuten a otra

Incluso bajo el efecto de la crisis subprime los oacuterganos reguladores y las instancias legisladoras continuacutean bastante atentas a las posibles amenazas a productos y estrategias poco conocidos de Wall Street La alarma sonoacute en verano con la llegada de los ldquopedidos relaacutempagosrdquo un subconjunto de transacciones de alta frecuencia que explora las brechas del sistema regulatorio e informa a los traders privilegiados sobre la existencia de pedidos en una fraccioacuten de segundo antes de su transmisioacuten a los demaacutes operadores El comercio relaacutempago ha sido ampliamente condenado por conferir a unos pocos privilegiados ventajas desleales

ldquoHay quien saca provecho de la situacioacuten lo que puede generar abusos pero no todos lo hacenrdquo observa Franklin Allen profesor de Finanzas de Wharton ldquoEs una especie de front runningrdquo Esa praacutectica generalmente considerada ilegal consiste en la obtencioacuten de beneficios iliacutecitos por medio del uso de informaciones obtenidas con antelacioacuten y que permiten al negociador tomar la delantera en una transaccioacuten en relacioacuten a los demaacutes operadores Ejemplo tiacutepico de eso ocurre cuando un trader recibe un pedido de un cliente para comprar acciones por hasta 10 doacutelares cada una El broker compra las acciones al precio de mercado de 975 doacutelares y las vende a su cliente por 10 defraudaacutendolo en 25 ceacutentimos por accioacuten En los pedidos relaacutempago lo mismo puede suceder de forma maacutes raacutepida y con mayor frecuencia

Las oacuterdenes relaacutempago parecen estar desapareciendo A mediados de septiembre la SEC propuso su veda y Nasdaq decidioacute prohibir la praacutectica Varias empresas que habiacutean propuesto este tipo de operaciones a sus clientes abandonaron el negocio La prohibicioacuten de la SEC exige un segundo voto por parte de los consejeros para que sea regulada

Como mucha gente tiene dudas sobre la diferencia la poleacutemica en torno al comercio relaacutempago ha aumentado mucho las dudas sobre las transacciones de alta frecuencia que recurre a estrategias por lo que todo indica perfectamente legales En algunos casos los traders de ese tipo de comercio prueban los precios emitiendo pedidos de compra o venta que son retirados en mileacutesimas de segundo confiriendo a aquellos profesionales el conocimiento necesario sobre la disposicioacuten del inversor a negociar sus activos a precios especiacuteficos Los traders de alta frecuencia tambieacuten pueden obtener pequentildeos beneficios millones de veces por medio de ldquodescuentosrdquo dados por los mercados a los participantes dispuestos a comprar y a vender siempre que haya escasez de operadores en el mercado

Ganadores y perdedores Si los traders de alta frecuencia ganan billones iquestalguien mdashel inversor comuacuten por ejemplomdashestariacutea perdiendo dinero

Gus Sauter director de inversiones de la empresa de fondo mutuo Vanguard Mutual cree que no y destaca que desde hace siglos el mercado bursaacutetil trabaja con intermediarios Para garantizar la liquidez mdashdisponibilidad constante de acciones compradores y vendedoresmdashesos ldquoartiacutefices del mercadordquo completan las ventas comprando y vendiendo por cuenta propia siempre que no hay terceros compradores y vendedores Ellos salen ganando gracias a la diferencia entre los precios de compra que los compradores estaacuten dispuestos a pagar por una accioacuten y los precios de venta que los vendedores estaacuten dispuestos a aceptar Los negociadores de alta frecuencia llevaron esa dinaacutemica hasta el siglo XXI dice Sauter explicando que los beneficios obtenidos son ldquoprobablemente menores que los retirados del sistemardquo previamente por los negociadores tradicionales ldquoSi estuvieran haciendo lo que hacen sin ordenadores nosotros los llamariacuteamos artiacutefices del mercadordquo dice

De acuerdo con Blume los inversores individuales comunes que adoptan estrategias de largo plazo no deben sospechar que los beneficios de los traders de alta frecuencia esteacuten saliendo de su bolsillo ya que esos billones estaacuten formados por pequentildeas sumas repartidas entre millones y millones de transacciones

En realidad dice Sauter los pequentildeos inversores de Vanguard se beneficiaron de una reduccioacuten significativa de los costes de las transacciones a causa de las transacciones de alta frecuencia Entre esos costes que inciden sobre los ldquoiacutendices de gastosrdquo con que los inversores de fondos estaacuten familiarizados estaacute el margen de precio de compra y de venta Un margen amplio significa que el fondo debe pagar mucho maacutes para adquirir una accioacuten que el valor por el cual podriacutea venderla en el mismo instante Las transacciones de alta frecuencia redujeron ese coste estrechando los maacutergenes dice eacutel En general los maacutergenes amplios son sinoacutenimo de ineficacia ya que compradores y vendedores tienen dificultad en llegar a un precio que refleje con exactitud lo que se sabe sobre un valor Los maacutergenes tiacutemidos indican que el mercado estaacute funcionando mejor

Otro coste de transaccioacuten se deriva del hecho de que el enorme volumen de transacciones de una empresa de fondos puede empujar los precios hacia arriba o hacia abajo al inclinar la balanza de la oferta y de la demanda Las transacciones de alta frecuencia han ayudado a reducir el coste impactante ldquodel mercadordquo facilitando la quiebra de grandes transacciones en transacciones menores realizadas sin embargo de manera muy raacutepida dice Sauter

Los costes de negociacioacuten resultantes de los maacutergenes y del impacto de mercado se redujeron a la mitad en la deacutecada pasada dice eacutel pasando del 05 del montante de transacciones con acciones de grandes empresas a un 025 En el caso de las pequentildeas acciones los costes de negociacioacuten cayeron del 1 al 05 ldquoLas transacciones de alta frecuencia sacan a relucir la liquidez oculta Es posible que haya algo alliacute difiacutecil de encontrar Quien actuacutea en el segmento

de alta frecuencia acaba descubriendo eso de una forma o de otra Luego ofrecen lo que descubrieron al mercadordquo

Sauter y representantes de otras tres empresas de fondos se reunieron recientemente con funcionarios de la SEC para discutir el comercio de alta frecuencia Tres o cuatro funcionarios defendieron que se trata de un procedimiento beneficioso para la industria Pero hay un desacuerdo sustancial entre las compantildeiacuteas de fondos ya que algunas temen el front running y la manipulacioacuten de mercado A causa de eso el Investment Company Institute tomoacute una posicioacuten mediadora solicitando a la SEC que estudie exhaustivamente la cuestioacuten antes de expedir nuevas normativas

Inversores de fondos mutuos frente a individuales Aunque las transacciones de alta frecuencia beneficien a algunos participantes del mercado hay especialistas que cuestionan la posible existencia de peligros ocultos y de instancias justas ldquoExiste ahiacute una cuestioacuten de justiciardquo dice Blume ldquoPara cada transaccioacuten hay un vencedor y un perdedor y la presuposicioacuten es que los negociadores de alta frecuencia esteacuten maacutes especializados en detrimento de negociadores menos especializados iquestEso es bueno o malo No seacuterdquo Si es posible obtener beneficios palpables gracias a variaciones miacutenimas de precios gente sin escruacutepulos podriacutea aprovecharse de manipulaciones miacutenimas difiacuteciles de detectar como la causada por rumores de ventas en la bolsa dice eacutel antildeadiendo sin embargo que hay evidencias de que eso no esteacute ocurriendo ldquoSupuestamente la SEC tiene los medios para vigilar ese tipo de acciones Pero hechos recientes prueban que la institucioacuten no es tan experta como cabriacutea esperarrdquo

La SEC dice Blume debe tener mucho cuidado cuando se trata de proteger al pequentildeo inversor Quien negocia activamente puede salir perjudicado por las transacciones de alta frecuencia porque no puede competir con los ordenadores maacutes veloces de las grandes empresas Al mismo tiempo las transacciones de alta frecuencia pueden beneficiar a pequentildeos inversores de fondos mutuos ldquoEn mi opinioacuten el inversor de fondo mutuo deberiacutea estar protegido frente a individuos que estaacuten negociando por cuenta propiardquo

Las ventajas para la liquidez son muchas veces citadas cuando Wall Street aparece con un nuevo producto o estrategia La necesidad de mayor liquidez es el principio tradicional al que recurren economistas y especialistas en mercados de manera general Teoacutericamente los mercados funcionan mejor cuando los precios son reflejo del conocimiento y del anaacutelisis y no de la dificultad en encontrar compradores y vendedores Por lo tanto cualquier cosa que facilite la identificacioacuten de compradores y vendedores hace que el mercado sea maacutes eficiente ldquoEn el mercado liacutequido ideal las transacciones llevan los precios hasta donde deben estar en lo referente a los fundamentos de la economiacuteardquo dice Stambaugh destacando que un volumen mayor de transacciones de un tiacutetulo especiacutefico haraacute muy probablemente que su precio refleje con precisioacuten factores como ganancias actuales y esperadas

Allen observa sin embargo que el comercio de alta frecuencia tal vez no esteacute contribuyendo tanto a la liquidez tal y como sugieren los elevados nuacutemeros del comercio Si muchas transacciones estaacuten asociadas a pedidos de compra y venta del mismo negociador no estaraacuten produciendo de hecho ofertas en las cuaacuteles otras partes puedan participar resalta Allen Ademaacutes de eso no es seguro partir del principio de que todo nuevo producto o toda nueva estrategia creada por Wall Street sean siempre algo positivo ldquoCualquier aumento en el volumen de comercio estaacute siempre asociado en las mentes de algunas personas a la mayor liquidezrdquo dice Blume ldquoPero si el comercio desestabiliza de hecho el mercado [] bien entonces naturalmente no es buenordquo

Las transacciones de alta frecuencia no se han estudiado lo suficiente para que se sepa si

podriacutean desestabilizar los mercados antildeade y dice que los oacuterganos reguladores podriacutean prohibir temporalmente ese tipo de comercio con base a una muestra de 25 a 30 acciones Pasados algunos meses el precio y los patrones de comercio seriacutean comparados con los de las acciones exentas de prohibicioacuten

A lo largo de los antildeos dice Allen la investigacioacuten acadeacutemica ha mostrado que ciertasdecisiones tomadas con el objetivo de aumentar la liquidez han abierto las puertas a especulaciones dantildeinas ldquoEse tipo de comercio raacutepido puede dar margen a un cierto furorrdquo observa Goldstein Si muchos especuladores recurren a las estrategias automatizadas que desencadenan los mismos factores como caiacutedas de precios de acciones especiacuteficas los programas tal vez hagan lo mismo al mismo tiempo ldquoEso soacutelo desestabiliza el mercado mdashsi las personas comienzan a imitarse entre siacute coordinando las expectativas Veo a otros vendiendo entonces comienzo a vender tambieacutenrdquo En el momento dice eacutel no se sabe a ciencia cierta si las transacciones de alta frecuencia tienen potencial para generar ese tipo de crisis ldquoCreo que a fin de cuentas no tenemos la respuesta por completordquo

Las transacciones de alta frecuencia concluye Allen son una praacutectica que requiere un anaacutelisis maacutes detallado como la que viene siendo llevada a cabo por la SEC ldquoEs preciso que hagan un estudio que verifique exactamente de doacutende vienen esos beneficios iquestSeraacuten fruto de la manipulacioacuten iquestO seraacuten resultado de mejoras en la forma en la que los mercados funcionan

US to cut pay for bailed-out bosses AVERAGE SLASH AROUND 50 175 executives at 7 companies affected

By Tomoeh Murakami Tse and Brady Dennis Thursday October 22 2009

NEW YORK -- The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average according to people familiar with the long-awaited decision

The cuts will affect 25 of the most highly paid executives at each of five major financial companies and two automakers according to the sources who spoke on the condition of anonymity because the plan has not been made public Cash salaries will be cut by about 90 percent compared with last year they said

The administration will also curtail many corporate perks including the use of corporate jets for personal travel chauffeured drivers and country club fee reimbursement people familiar with the matter have said Individual perks worth more than $25000 have received particular scrutiny

In making the ruling the administrations pay czar Kenneth R Feinberg will be inserting the government as never before into pay decisions traditionally made in corporate boardrooms His decree which the Treasury Department expects to be announced Thursday will culminate a months-long review prompted by public outrage over outsize paydays at failing companies saved with taxpayer money

The seven companies under Feinbergs purview are Citigroup Bank of America General Motors Chrysler GMAC Chrysler Financial and American International Group These firms have received a total of about $250 billion in bailout funds from the Troubled Assets Relief Program adopted last year by Congress and benefited from hundreds of billions of dollars more in government guarantees and other support

Feinberg who was named special master on compensation by the administration in June has sole discretion to set compensation for the five top senior executives plus the 20 highest-paid people after them at each of the seven companies For months he has been meeting frequently with officials at each of the firms to negotiate executive-pay arrangements In August each company submitted detailed compensation plans for their top earners Under the Treasury Departments rules Feinberg had 60 days to make a determination after receiving the pay plans His decisions are binding

Under Feinbergs plan cash salary for affected executives will go down by an average of 90 percent the sources said That means an executive who received $1 million in cash salary last year would get $100000 this year

But executives can still receive additional salary in stock according to a source with knowledge of the matter The portion of salary given in stock would vest immediately although executives will have to wait two years before redeeming the shares Even then they will be able to cash in on only a third of that stock The executives will be able to

cash in another third after three years and the rest after four years Because it is considered salary executives get to keep the stock even if they leave their employers The final component of an employees compensation under Feinbergs plan would come in the form of long-term stock The awards would be based on performance and could be redeemed after three years or sooner if the company repays its government aid the source said

Not every employee under Feinbergs purview will receive all three components of the pay package For example executives at the Financial Products unit of American International Group -- widely blamed for the insurers downfall -- will receive only a base cash salary the source said None of the AIG units employees will receive more than $200000

Executives at Chrysler Financial -- the automakers lending arm which is winding down operations -- will also receive only the cash salary component the source said

A Bank of America spokesman would not comment saying the company had not yet been notified of the cuts by Feinbergs office Citigroup AIG GM and Chrysler Financial also declined to comment

The carmaker Chrysler said in a statement Wednesday that it has worked closely with Feinberg in developing the 2009 compensation plans for its executives The company added that our initial submission was developed in a manner both consistent with our traditional compensation practices and responsive to the current financial position of the company Chrysler said it is not at liberty to discuss details before Feinberg makes an announcement

GMAC also said it had yet to be notified about his decision and declined to comment We have been working on a proposal that aims at embodying the principles set forth for compensation along with balancing the need to retain critical talent necessary to execute our turnaround spokeswoman Gina Proia said

The extent of the pay cut for most of the 175 executives will be less severe than the average for the overall group Thats because the average figure will be skewed by at least a few special cases

For example Citigroup initially proposed a pay package for star trader Andrew Hall that included a $100 million bonus according to two people familiar with the matter But the bank submitted in a revised plan after reaching a deal to sell Halls Phibro unit to Occidental Petroleum and defer Halls compensation until 2010 when it would no longer fall under Feinbergs purview The revised plan now lists Halls 2009 bonus as zero people familiar with the matter said

Feinberg has already exerted influence over executive compensation in several ways this year He persuaded Bank of America chief executive Kenneth D Lewis not to take any compensation for his work this year after the bank received $45 billion in government aid Because of Lewiss contract with the bank he is still slated to receive nearly $70 million in retirement money something Feinberg cant legally prevent

In addition Feinberg has maintained that he wants future retention payments reduced at AIG Financial Products He has advised AIG officials to scale back $198 million in retention bonuses due next March to employees at Financial Products in an effort to avoid another public uproar over pay packages at the bailed-out company

Earlier this month Feinberg gave his blessing to a pay package worth up to $105 million for AIGs new chief executive Robert H Benmosche Under the plan Benmosche would receive an annual salary of $7 million -- $3 million in cash and $4 million in fully vested common

stock -- and would be eligible to receive long-term incentive awards of up to $35 million each year

In recent days top Obama administration officials have chided Wall Street firms planning to distribute big bonuses as their bottom lines rebound noting that many of the firms continue to benefit from taxpayer assistance even as millions of Americans remain unemployed Senior presidential adviser David Axelrod for example has called such planned payments offensive

In a recent speech President Obama himself accused large financial firms and their army of lobbyists of mobilizing against change adding Theyre doing what they always do -- descending on Congress using every bit of influence they have to maintain the status quo that has maximized their profits at the expense of American consumers despite the fact that recently a whole bunch of those same American consumers bailed them out as a consequence of the bad decisions that they made

Dennis reported from Washington

Pelosi explores for more economic fuel Seeking ways to spur hiring proves tough political balancing act By Lori Montgomery Washington Post Staff Writer Thursday October 22 2009

It wont be called stimulus And it wont cost anything close to $787 billion But despite record budget deficits House leaders plan to pour more cash into piecemeal measures aimed at creating jobs and maintaining a safety net for the unemployed in hopes of preventing a still-fragile economy from lapsing back into recession House Speaker Nancy Pelosi said Wednesday

It is not the plan to put it all in a bill and move forward Because we do not have plans for an additional stimulus package Pelosi (D-Calif) told reporters We do have plans to stimulate the economy in the work that we are doing

Pelosis remarks which came after a four-hour meeting where House leaders sought advice from a team of economists underscore the queasy politics of righting the economy With budget deficits rising along with the jobless rate Democrats face the uncomfortable choice of doing nothing heading into next years midterm elections or digging an already deep budget hole even deeper

Republicans seeing a political opening say the talks prove that President Obamas first attempt at stimulus a $787 billion package of tax cuts and public spending enacted in February was a failure But the five ideologically diverse economists who Pelosi summoned to Washington on Wednesday said thats not true Combined with the Bush administrations $700 billion bank bailout and actions by the Federal Reserve Obamas stimulus package successfully halted the economys slide toward the abyss the economists said

But with the unemployment rate at 98 percent and rising Mark Zandi chief economist for Moodys Economycom said the possibilities of the economy slipping back into recession

next year remains uncomfortably high That makes it very important for policymakers to remain aggressive and continue to do more said Zandi who advised the presidential campaign of Republican Sen John McCain (Ariz)

Weve avoided a great depression But we are still at risk of a great stagnation said Robert Kuttner a co-founder of the liberal American Prospect who participated in the meeting with Pelosi Just about everyone in that room feels that there needs to be more stimulus and not after the State of the Union [address] but very soon

Pelosi said the ideas under discussion include extending a number of expiring provisions from the earlier stimulus The House has already voted to extend unemployment benefits but the measure is hung up in the Senate Democrats are also looking at extending health benefits for the unemployed higher loan limits for federally backed mortgages and a tax credit for first-time home buyers that could be offered to anytime homeowners Pelosi said

Pelosi said House Appropriations Committee Chairman David R Obey (D-Wis) presented her with an array of other spending ideas on Tuesday and that House Transportation and Infrastructure Committee Chairman James L Oberstar (D-Minn) is pushing for more spending on infrastructure Democrats are also considering new tax breaks for businesses that save or create jobs

The economists offered several other ideas including additional aid for cash-strapped states that could be forced to cut jobs or raise taxes in the face of state budget deficits expected to total $350 billion over the next three years They also called on lawmakers to divert unused and repaid money from the bank bailout to recapitalize community banks reinvigorate lending to small businesses and provide additional help to homeowners facing foreclosure

However the economists cautioned that lawmakers also must quickly begin to chart a course to bring annual budget deficits back into a sustainable range over the next decade

A speech stuck on repeat By Dana Milbank Thursday October 22 2009

If he were a runner he would do ultramarathons If he were a swimmer he would cross the English Channel If he were a baseball player he would be Cal Ripken

Mitch McConnell is none of those things But on Wednesday the Republican leader of the Senate accomplished a feat of endurance no less impressive He delivered his 50th floor speech since the beginning of June denouncing Democrats health-care reform plans

These speeches about 44000 words in all test the outer limits of human stamina Ninety-four times he warned of the evils of a government-run system according to a Washington Post analysis Forty-seven times he warned of a government takeover of the same Fourteen times he railed against the Democrats nefarious experiment Thirty-seven times he spoke the phrases higher taxes or raise taxes and at least 19 times he used the words slash Medicare or Medicare cuts

Perhaps more accurate than saying that McConnell gave 50 health-care speeches would be saying that McConnell gave the same health-care speech 50 times with minor changes And this in itself is a major achievement Only a disciplined and well-conditioned public orator could repeat himself so often without injury

Albert Einstein had an unkind label for those who do the same thing over and over again expecting a different result Yet that has been the strategy of McConnell and congressional Republicans generally as they have labored over the past several months to defeat any health-care plan proposed by the White House and congressional Democrats Higher taxes Medicare cuts Government takeover Rationing Closed-door negotiations Dangerous experiment Higher premiums Canada Lather and repeat The phrases have become less a form of rhetoric than a collection of verbal tics

For most Democrats reform seems to come in a single form a vast expansion of government detailed in complicated thousand-page bills costing trillions McConnell said Wednesday morning near the beginning of his 50th speech

It was the 19th time he had mentioned some form of government expansion often preceded by vast or massive and the eighth mention of the bills 1000 pages

The only thing thats clear about the Democratic plans are the basics he went on It costs about $1 trillion he said for the 61st time They increase premiums he said for the 16th time

For McConnell these statistics are a matter of pride His aides alerted news organizations to the occasion of his 50th health-care speech which he delivered just after the opening prayer and a speech by Majority Leader Harry Reid (D-Nev) As always the Kentuckians style was spare His lips barely moved when he spoke his upper teeth rarely showed themselves and his gestures were limited to the occasional wag of the index finger He spoke in the tone of a traditionalist father lecturing his wayward teenager

McConnell went through several of his usual tropes right away -- higher premiums and taxes fewer Medicare benefits government expansion -- and then seconds later repeated those

items What was supposed to be an exercise in smart bipartisan common-sense reforms that cut costs and increase access somehow became an exercise in government expansion that promises to raise costs raise premiums and slash Medicare for seniors he said

This was the 30th mention of the Republicans common-sense alternative And there was not long to wait before the 31st reference Instead of a massive government-driven experiment Republicans had offered common-sense step-by-step solutions to the problems of cost and access the minority leader continued It was the 15th mention of experiment and the sixth use of government-driven (not to be confused with government-run or government takeover)

For the 27th time since his streak began on June 1 McConnell spoke of Republicans craving for medical malpractice limits things like medical liability reform which would save tens of billions of dollars and increase access to care Recalling for the sixth time the summers town hall meetings he reminded Democrats for the fourth time that they werent heeding ordinary Americans

Americans rejected the idea of a vast new experiment the Republican leader went on to reorder their health care and nearly one-fifth of the economy in a single stunning move This was the first mention of health care as nearly one-fifth of the economy however On six previous occasions he described the industry as one-sixth of the economy

The minority leader was in the homestretch of his long run He spoke of the national debt (24th mention often preceded by staggering) the message from the American people (15th mention) and Americans distaste for denial (28th in some form) delay (46th) and rationing (26th) of care Americans he said for the third time in 10 minutes and the 32nd time in 50 speeches want common-sense reforms

McConnell yielded the floor It was time to ice the jaw muscles and rest his weary tongue for speech No 51

22102009

$150 again

Itrsquos happening again Risk appetite is returning to the market and pretty much every speculator out there has called the ECBrsquos bluff If they were really serious in their protestations about the dollar they can always cut interest rates which of course they wonrsquot do As European interest rates will be higher than US rates for the foreseeable future DollarEuro turned into a one way bet The FT talks to various market commentators who believe that the dollar has further to fall One of them made the comment that sustained intervention by the ECB is unlikely since such intervention never succeeded without the explicit support of the US authorities And while they studiously stick to the line the dollar must be strong they are quite content with the way things are going now since this takes care of deflationary pressures

US is headed for a jobless recovery David Altig has made the observation that the percentage of employee separations labeled permanent is at a recorded high and concludes from this fact that the odds of a jobless recovery are high He notes that never the in the six preceding recessions did permanent separations around for 45 of new unemployment Now it is 56

(As employment is part of the Fedrsquos mandate a permanent rise in unemployment is very likely to dampen any fast exit strategies if Altig is right And this means coming back to our story above that the dollar will remain under pressure)

Chinarsquos bubble recovery The FT reports this morning that a top Chinese banker the head of China Merchantrsquos Bank has warned the countryrsquos authorities that dangerous asset price bubbles are building up and that it is necessary to tighten monetary policy now The paper has calculated that the total Chinese stimulus amounted to some 15-17 of GDP while M2 money supply has gone up by almost 30 over the last year

In a separate story the FT reports that Chinarsquos economy had grown by 89 during the third quarter compared with the third quarter in 2008 The countryrsquos state council already signalled that it will be close attention to control inflationary expectation as the boom solidifies

Ecofin agrees on systemic risk board The Commissionrsquos proposals for a systemic risk council were approved by Ecofin though the British issued a reservation amid concerns about the scope of the new body which is to be based at the ECB in Frankfurt El Pais quotes Joaquin Almunia as saying that the council had

it already been in place before the financial crisis would have been to prevent at least some of the more severe damage (We actually doubt that)

A concrete proposal to reduce global imbalances Writing in the FT Eswar Prasad says the G20 pledges on global imbalance are worth little unless accompanied by an action plan He proposes that the G20 set a target of 3 of GDP for maximum current account deficits and surpluses Member states would issue commitments bonds in SDRs which would be forfeited if the target is not reached within a five-year period The sums involved are not large but the symbolic effect of a penalty would be huge

An Enron like accounting trick Sebastian Dullien takes a look at the reports of an ingenious scheme how the new German government wants to be able to spend money and yet remain within the future constitutional obligation to balance the budget The answer is an Enron-like accounting trick through the establishment of an off-balance sheet vehicle that borrows euro40bn from the capital markets to plug future deficits of the social security funds The effect is that the current year deficit would sky-rocket but future deficits would be correspondingly lower This would free up resources for tax cuts now Dullien makes the point that while this trick might work under German law it will almost certainly not be rule-compliant with the EU definition of a Maastricht deficit as Eurostat will almost certainly rule this to be a purely financial transaction

October 21 2009

The growing case for a jobless recovery

The Wall Street Journal repeats the unhappy news Companies across the economy are holding off on hiring even as the profit outlook improves amid economic uncertainty and their own success at raising productivity in rough waters

Hiring always lags behind in economic recoveries but the outlook this time is worse many economists say Most forecasters now expect a prolonged period of high unemployment even though the government is expected to report next week that the economy grew in the third quarter after four quarters of contraction

Id like to be able to contradict what most forecasters expect but we at the Atlanta Fed have been building the case for a similar outcome on macroblog Here are few salient points from previous posts

Job opportunities are scarce (Oct 14 2009) At the end of August there were estimated to be fewer than 24 million job openings equal to only 18 percent of the total filled and unfilled positionsmdasha new record low

This development could of course turn around as business activity picks up but there is more than a little evidence that some structural impediments are afoot

Job losses have been disproportionately concentrated in small businesses (Oct 6 2009)

As Melinda Pitts pointed out a few weeks back businesses with fewer than 50 employees account for about one third of net employment gains in expansions They have accounted for about 45 percent of job losses since the beginning of this recession Given that these are the types of businesses most likely to be dependent on bank lendingmdashand given that bank lending does not appear poised for a rapid return to being robustmdashthe prognosis for an employment recovery in these businesses is a question mark

The share of workers reporting that they have been involuntarily cut back to part-time is at a recorded high (Aug 14 2009)

hellip the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions Although the increase in these workers has moderated some since the spring of this year the number of people in the category of working part-time for economic reasons remains at 88 million well above the level of past contractions in both absolute and relative terms

One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity) All these firms have to do is give more hours to existing workers who have indicated they would be plenty eager to have them Good for themmdashand good for GDP growthmdashbut not much help on the employment front Here is one additional concern that we have not previously emphasized The percentage of employee separations labeled permanent is at a recorded high

Underneath the usual total unemployment numbers are the reasons an individual is unemployed You are on temporary layoff you quit your job you have reentered the labor market and have yet to find a job or you are entering the job market for the first time and have yet to find a job Or finally you have been permanently separated from your previous employer who has no expectation of hiring you back

The last category is the dominant reason for unemployment at this time That might not seem surprising but it actually is Never in the six recessions preceding the latest one did permanent separations account for more than 45 percent of the unemployed The current percentage stands at 56 percent as of September and appears to be still climbing

Of course none of this is proof positive that we are in for a jobless recovery but to me the odds appear to be increasing By David Altig senior vice president and research director at the Atlanta Fed httpmacroblogtypepadcommacroblog200910the-growing-case-for-a-jobless-recoveryhtml

Top China banker warns on asset bubbles

By Geoff Dyer in Beijing

China needs an ldquourgentrdquo tightening of monetary policy to prevent the huge stimulus measures introduced this year from inflating stock and property bubbles one of the countryrsquos leading bankers has warned Qin Xiao ndash chairman of China Merchants Bank the countryrsquos sixth-biggest ndash says in Thursdayrsquos Financial Times that the government should not be afraid of a ldquomoderate slowdownrdquo in the economy

In depth China - Jul-28 Opinion China must keep its eyes on the exit - Oct-21 Optimism returns for Chinarsquos jobseekers - Oct-21 Asean struggles to sway world opinion - Oct-21 China bank lending still on rise - Oct-14 Scramble to manage wealth in Asia - Oct-21

ldquoMonetary policy must not neglect asset-price movementsrdquo he writes ldquoTherefore it is urgent that China shifts from a loose monetary policy stance to a neutral onerdquo Mr Qinrsquos unusually frank warning comes ahead of the publication on Thursday of third-quarter gross domestic product figures that are expected to underline the rapid recovery in Chinarsquos economy with analysts forecasting growth of nearly 9 per cent compared to last year

According to calculations by the Financial Times and independent economists Chinarsquos stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account ndash by far the largest among major economies

The Chinese government has used its control over the banks to engineer a massive increase in lending this year with new loans in the first nine months of the year 149 per cent higher than last year at Rmb8650bn ($1260bn) Much of this investment has gone into infrastructure projects The M2 measure of money supply is up 293 per cent year on year

The giant investment programme has polarised critics with some predicting inflation and warning that excessive bank loans were causing sharp rises in share and property prices while others have argued the lending binge would exacerbate over-capacity and encourage deflation

The State Council Chinarsquos cabinet gave its first clear hint Wednesday evening that it was considering a tighter monetary policy when it said that policy should focus both on managing inflationary expectations as well as securing stable growth ndash the first time it has mentioned inflation since the global economic crisis hit China last year

ldquoThis is the first thing you would expect the authorities to say before they begin to moderate policyrdquo said Stephen Green economist at Standard Chartered in Shanghai But any increases in interest rates or controls on lending were unlikely before Chinese New Year in February he said

Tomo Kinoshita an economist at Nomura International said in a report on Wednesday that China risked creating an asset bubble similar to Japanrsquos in the 1980s if it continued with aggressive lending at the same time as deregulating its financial markets httpwwwftcomcmss0e33078cc-be6c-11de-b4ab-00144feab49ahtml

21102009

Finance ministers concerned about the eurorsquos strength

Austriarsquos Der Standard reports that European finance ministers and central bankers fear that the strong recovery of the euro could derail the economic recovery The article quotes Nicolas Sarkozyrsquos adviser Henri Guaino who said an exchange rate of $150 was a disaster the consequence of US policy trying to reduce its debt mountain through inflation The Europeans are also concerned about the undervaluation of the yuan Goldman Sachs calculated a back-of-the-envelope calculation that each 10 decline in the eurorsquos exchange rate against a basket of the main currencies would reduce growth rates by 1 per centage

ECB liquidity injections fall The FT has the story that demand for ECB weekly liquidity has fallen to a six-year low which some analysis saw as a sign that the liquidity situation has eased However it could mean that the banks are so much awash with cash from the most recent auction Analysts treated this news as a sign that the situation was normalising allowing the ECB to return to a normal funding process sometime next year

Sweden proposes stability tax The Swedish finance minister Anders Borgh has written to his EU colleagues in favour a stability tax levied on banks who proceeds could be used for future bail-outs Sweden has already imposed a tax of 00036 of bank liabilities FT Deutschland points out that this is not a Tobin tax on bank transactions Sweden has introduced this tax this year and expects the revenue from this tax to grow to 25 of GDP in fifteen years

Fiscal situation in Greece worse than thought Nobody seems to believe anything anymore that comes out of Greece The countryrsquos new finance minister yesterday surprised his colleagues with the announcement that the countryrsquos 2009 deficit would be 125 with public debt now up to over 110 The new finance minister also pledge to give independence to the countryrsquos statistics office as many of the economic data appeared to have been manipulated in the past EU economics

commissioner Almunia asked for a thorough and open investigation into these discrepancies the FT reported

Break up or nationalise The London The Times reports that Mervyn King called for banks that are too large to save either to split or to become state-owened ldquoWhat does seem impractical however are the current arrangements Anyone who proposed giving government guarantees to retail depositors and other creditors and then suggested that such funding could be used to finance highly risky and speculative activities would be thought rather unworldly But that is where we now arerdquo

EU gets tougher on derivatives markets This is a good news story if it true The European Commission has changed its approach to the derivatives market proposing strict regulation of a sector which has been blamed for worsening the financial and economic crises according to a draft document seen by EurActiv This draft contains several legislative measures to restrict future regulation of the sector To increase safety the Commission is proposing the establishment of European central clearing houses Under such a system derivatives are processed via an intermediary instead of being exchanged bilaterally The Commission will also propose legislation to harmonise the work of clearing houses across Europe in order to allow them to operate at a European level Their supervision and authorisation will be dealt with by the proposed European Securities and Markets Authority (ESMA)The over-the-counter market will not become illegal but it will be regulated in a stricter way and will be subject to extra costs

Germanyrsquos conservatives warn coalition of dirty tricks Germanyrsquos conservative establishment is up in arms over plans by the new coalition to finance the tax cuts through off-balance sheet vehicles thus effectively circumventing the new debt rules Frankfurter Allgemeine said in a commentary that this was a dirty trick to fool the electorate

Last exit for Germany Writing in the FT Deutschland Wolfgang Muumlnchau argues the very opposite that the new coalition should this week agree a more extensive tax cut plan than envisaged even if financed by higher deficits as this will be the last opportunity in our generation for tax cuts If this is not agreed now it will never be agreed given the electoral timetable and the start of the constitutional debt ceiling in 2016 Finance ministers concerned about the eurorsquos strength21102009 httpwwweurointelligencecomarticle581+M5272784ef140html

From The Times

October 21 2009

Mervyn King calls for banks to split as public finances take record hit

Mervyn King Ian King and Graacuteinne Gilmore

Mervyn King the Governor of the Bank of England called last night for banks to be split to prevent them becoming ldquotoo important to failrdquo saying that tougher regulation would not prevent another financial crisis

His comments came as it was confirmed that the public finances suffered their worst six months on record between April and September and as a respected economic forecaster warned that it would take longer to close the UKrsquos budget deficit than the Treasury has been predicting

Addressing Scottish business leaders in Edinburgh Mr King attacked those who are delaying reform of the banking sector and warned that the UK would be paying for the impact of the financial crisis on its public finances ldquofor a generationrdquo

Mr King said that ldquoit was hard to see whyrdquo some claimed that it was ldquoimpracticalrdquo to restrict government guarantees to ldquoutility bankingrdquo such as running payments systems or lending to households and businesses while ruling out such support for riskier activities such as speculative trading

He added ldquoWhat does seem impractical however are the current arrangements Anyone who proposed giving government guarantees to retail depositors and other creditors and then suggested that such funding could be used to finance highly risky and speculative activities would be thought rather unworldly But that is where we now are

ldquoIt is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first placerdquo

Mr King said that if banks proved reluctant to split their ldquoutilityrdquo activities from their riskier activities the sector could end up with ldquoever increasingly detailed regulatory oversightrdquo He said that such regulation could prove costly for the industry and repeated his call first made in June for banks to be made to plan for their own orderly wind-down in the form of a living will

However the Treasury and the Financial Services Authority have rejected the idea of splitting up the banks and the Conservatives assert that Britain acting alone would be ineffective

Mr King said that the sheer scale of support to the banking sector from taxpayers was ldquobreathtakingrdquo He said that although a number of UK banks remained ldquoextraordinarily dependentrdquo on the public sector for support this was ldquonot sustainablerdquo in the medium term

He added ldquoTo paraphrase a great wartime leader never in the field of financial endeavour has so much money been owed by so few to so many And one might add so far with little real reformrdquo

The Governor who said it was likely that the economy had returned to ldquomodestrdquo growth during the second half of the year indicated that interest rates were set to remain low for some time to come

Although inflation could spike higher in coming months because of higher petrol prices he said the weak pound and an imminent rise in VAT were ldquopulling backrdquo on inflation

Mr King spoke hours after it was confirmed that in the six months to September government borrowing had hit a record high of pound773 billion as the recession took a heavy toll on tax receipts

Ian King and Graacuteinne Gilmore Mervyn King calls for banks to split as public finances take record hit October 21 2009

httpbusinesstimesonlinecouktolbusinessindustry_sectorsbanking_and_financearticle6883095ece

Demand for ECB liquidity at six-year low

By Ralph Atkins in Frankfurt Published October 20 2009 1832 |

The European Central Bank on Tuesday pumped the smallest amount of liquidity into the banking system in a regular weekly operation for more than six years a sign that its emergency actions to combat the crisis are closer to having outlived their usefulness

The slump in demand highlighted how the eurozone financial system has become saturated with liquidity which could encourage the ECB to start unwinding the steps taken after last yearrsquos collapse of Lehman Brothers

However analysts said the fragility of the economic recovery and banking system meant the ECB would be in no rush to withdraw support for financial markets

For the past year the ECB has met in full eurozone banksrsquo demand for liquidity abandoning its usual system for rationing funds In June it provided euro442bn in one-year loans the largest amount it had provided in a single market operation As a result demand for liquidity for shorter periods has fallen sharply

Tuesdayrsquos weekly auction saw just euro498bn allotted to banks down from last weekrsquos euro616bn Apart from one operation in December 2007 just after the ECB had flooded the banks with extra funds to tide them over the year-end that was the lowest amount allotted since July 2003 Then however the ECB provided funds on a two-week basis so there were always two operations outstanding

ECB chief warns on lsquofinancial gamblingrsquo - Oct-15 ECB challenged by rising euro - Oct-13 ECB presses for fiscal exit plan - Oct-08 ECB chief signals concerns on euro - Oct-02 ECB nets euro900m from crisis lending - Sep-14 ECB plans policy revamp to tackle bubbles - Sep-07

Jacques Cailloux European economist at Royal Bank of Scotland said the results showed ldquothe ECBrsquos emergency liquidity set up is becoming redundant and there will be room next year to go back to a liquidity system resembling more that before the crisisrdquo

The ECB has said simply it will match banksrsquo demand for liquidity ldquofor as long as needed and in any case beyond the end of 2009rdquo This month Jean-Claude Trichet president said the ECBrsquos calendar of market operations which runs until the end of January would be updated only ldquoat the moment that is appropriaterdquo Analysts said that could be after the governing council meetings scheduled for early November or December

ldquoThey need to come up with quite a detailed strategy and calendar for liquidity provision going into next year November would be a first opportunityrdquo said Mr Cailloux

Elga Bartsch European economist at Morgan Stanley said the large sums still being deposited overnight at the ECB pointed to continuing nervousness among banks about lending to each other Ralph Atkins Demand for ECB liquidity at six-year low October 20 2009 httpwwwftcomcmss03a54d128-bd98-11de-9f6a-00144feab49ahtml

20 October 2009

Brussels to clamp down on derivatives market Published Tuesday 20 October 2009

The European Commission is planning a paradigm shift in its approach to the derivatives market moving towards strict regulation of a sector which has been blamed for worsening the financial and economic crises according to a draft document seen by EurActiv

Central clearing houses To increase safety in the sector the Commission is proposing the establishment of European central clearing houses Under such a system derivatives are processed via an intermediary instead of being exchanged bilateraly

This favours transparency and provides more protection against defaults The Commission will propose legislation to harmonise the work of clearing houses across Europe in order to allow them to operate at a European level Their supervision and authorisation will be dealt with by the proposed European Securities and Markets Authority (ESMA)

The over-the-counter market will not become illegal but it will be regulated in a stricter way and will be subject to extra costs Indeed Brussels openly aims to widen the difference of the capital charges between centrally-cleared and bilaterally-cleared contracts contained in the Capital Requirements Directive (CRD)

A review of existing legislation is planned in 2010 to take into account this emerging interest according to the draft communication on derivatives Financial firms [dealing with derivatives] need to hold a larger amount of collateral to cover their credit exposure adds the draft

Over-the-counter exchanges will also be subject to substantial reporting obligations with trade repositories set up to fulfil this target This is expected to increase the cost of bilateral operations making centralised exchanges more attractive

For standardised derivatives the Commission is instead proposing mandatory central clearing However debate is still ongoing at international level to define which contracts can be regarded as standardised for central clearing according to the draft document

Next steps bull Oct 2009 Commission to publish communication outlining its vision for regulation of

derivatives sector

bull 2010 Commission to table raft of legislative measures to regulate derivatives

Background EU Internal Market Commissioner Charlie McCreevy opened an investigation into the derivatives sector in October 2008 a month after the collapse of Lehman Brothers a bank heavily involved in the $600 trillion global derivatives market

The advantage of derivatives is that they allow companies and governments to increase their means of managing risk The disadvantage is that they are the top instrument for speculative operations If used irresponsibly they can increase risk at exponential levels spreading the negative consequences of defaults across the markets

Establishing central clearing houses is considered a moderate way of reducing systemic risk related to derivatives Instead of being exchanged privately (over the counter) they could be processed through an intermediary a move which is expected to improve transparency and reduce risk

The European Commission clearly supported this approach in a communication published in July 2009 (EurActiv 060709)

More on this topic

News EU courts US dealers with flexible derivatives rules

The Commission believes that a paradigm shift must take place away from the traditional view that derivatives are financial instruments for professional use for which light-handed regulation was thought sufficient reads a draft communication on derivatives to be published this week

According to the document future regulation in the sector must lead towards an approach where legislation allows markets to price risks properly A number of legislative measures will be proposed in the course of 2010 it adds

Forthcoming EU regulation will first address the issue of derivatives trading Brussels will propose measures aimed at discouraging bilateral exchanges of derivatives over-the-counter (OTC) a practice which is believed to contribute to price opacity and increase risks for financial markets as a whole

Links European Union

bull European Commission FAQs on derivatives markets (3 July 2009) bull European Commission First Communication on derivatives (3 July 2009) bull European Commission Draft Communication on derivatives

httpwwweuractivcomenfinancial-servicesbrussels-clamp-derivatives-marketarticle-186548Ref=RSS

RGE Monitors Newsletter inforoubinicom 21102009

Eastern Europe Out of the Danger Zone

Mary Stokes and Jelena Vukotic | Oct 21 2009

Fears of a full-fledged regional financial crisis across Eastern Europe have eased calmed by a strong IMF presence hefty external assistance to those in need and a general improvement in global risk appetite Nevertheless the region is not out of the woods The specter of a Latvian devaluation still looms banking stress continues and rising political risk in several countries with IMF programs is a concern

The Good Bright Spots Have Emerged Risks may linger but bright spots have emerged The second quarter upturns (qq) in Franceand Germanymdashkey export markets and important sources of foreign capital for Central and Eastern Europemdashare a positive sign but the jury is still out on the strength of the recovery Meanwhile the improvement in global risk appetite cannot be underestimated As the saying goes ldquoA rising tide lifts all boatsrdquo For now investor appetite for Eastern European sovereign debt has picked up compared to earlier this year which has alleviated external financing risks

The Improved Contagion Effects from a Latvian Devaluation Likely To Be Limited While devaluation is not imminent in Latvia the risk that it will happen next year remains high The potential for contagion into other CEE economies however is more limited now than it was this summer Temporary ripples throughout the regionrsquos currency and stock markets are likely in the event of devaluation but the effects for the most part should not be lasting Investors have had time to digest the risk and policymakers have had time to prepare A recent IMF paper by Prakash Kannan and Fritzi Koumlhler-Geib shows that the degree of anticipation of a crisis is an important determinant of whether contagion occurs

The risk of spillover effects is also limited by the fact that CEE economies have increasingly differentiated themselves from each other Poland for example stands out as the only EU economy to have averted recession Central European economies like the Czech Republic and Poland are widely seen as fundamentally healthy and should largely be insulated from long-term ill effects

Nevertheless RGE continues to believe that a Latvian devaluation could shake confidence in other currency pegs in the region That means Estonia Lithuania and Bulgaria which all have fixed exchange rates to the euro could experience the most severe aftershocks if Latvia abandons its peg

The Bad Banking Stresses Remain

Eastern European banking systems have come under stress as the number of non-performing loans (NPLs) on their balance sheets has spiked amid sharp economic contractions The peak is not expected until early 2010 as NPLs typically lag the business cycle by several months Deutsche Bank forecasts NPLs will jump to 5-10 of total loans in the CEE-3 (Czech Republic Hungary Poland) 15-25 in the Baltics 15-20 in South East Europe and 30-45

in Ukraine

Foreign-owned (primarily Western European) parent banks operate in the region via subsidiaries and account for 60 to 90 of total bank assets in most CEE countries and the fear has been that rising NPLs could test these parent banksrsquo commitment to the region

RGE expects parent banks to stay the course but the possibility of a complete pullout (while highly unlikely) cannot be completely discarded A week ago Swedbankmdasha top Swedish bank and Latviarsquos largest lendermdashraised the threat of withdrawing from Latvia if lawmakers there pushed through a controversial mortgage bill If this runs through we need to reconsider our operations in Latvia said Thomas Backteman vice president of corporate communications for Swedbank according to Reuters

In recent months foreign parent banks in some of the worst-hit economiesmdashHungary Romania Serbiamdashhave collectively pledged to support their subsidiaries as needed making a pullout highly unlikely The bigger concern is further tightening of lending which will cut into the regionrsquos growth prospects and delay recovery

The Ugly Political Uncertainty Threatens IMF Programs There is no doubt that IMF programs in some of the regionrsquos most vulnerable economiesmdashBosnia Hungary Latvia Romania Serbia Ukrainemdashhave played an important role in calming fears of a regional financial crisis

Even with IMF programs in place however these economies are not immune to crisis Of particular concern are the difficulties these governments might face in meeting loan conditions as they try to balance electoral ambitions against economic realities Will they adhere to their IMF programs If they donrsquot will the IMF keep lending anyway There are no easy answers to these questions If financing is halted these countries could again be facing full-blown capital account crises

Compared to practices during the Asian Crisis the IMF has shown a newfound flexibility and leniency in dealing with program countries The Fund dropped its request for land reform in Ukraine and approved wider budget deficit targets than originally agreed in Romania Hungary Latvia Serbia and Ukraine However the lenderrsquos flexibility is not boundless

So far the spotlight has focused on Latviarsquos government which is struggling to cut spending and keep its currency peg Latviarsquos lack of adherence to loan program targets resulted in a delay in the IMFrsquos disbursement of a euro02 billion loan tranche originally due in March but not paid out until August Ukraine is another problem country where authorities have failed tomeet program targetsmdashwith January presidential elections looming the government has stonewalled on targets of energy reform and raising household gas prices In November the IMF will decide whether to disburse a $38 billion tranche to Ukraine

Romania has emerged as the latest hotspot and could put the IMF in a difficult position The abrupt collapse of the government in October has left a political vacuum and raised fears over the countryrsquos ability to adhere to its euro20 billion loan agreement The conclusion of the second review of the IMF program is scheduled for December and involves a euro15 billion disbursement Some analysts expect that payment to be delayed The concern is that Romaniarsquos uncertain political situation could affect the viability of the entire program

httpwwwrgemonitorcomeconomonitor-monitor257857eastern_europe_out_of_the_danger_zone

Business

October 21 2009

Volckerrsquos Voice Fails to Sell a Bank Strategy By LOUIS UCHITELLE

Mannnie GarciaBloomberg News Paul A Volcker second from left in a meeting in May at the White House with President Obama and his economic advisory board

Mannie

Listen to a top economist in the Obama administration describe Paul A Volcker the former Federal Reserve chairman who endorsed Mr Obama early in his election campaign and who stood by his side during the financial crisis

ldquoThe guyrsquos a giant hersquos a genius he is a great human beingrdquo said Austan D Goolsbee counselor to Mr Obama since their Chicago days ldquoWhenever he has advice the administration is very interestedrdquo

Well not lately The aging Mr Volcker (he is 82) has some advice deeply felt He has been offering it in speeches and Congressional testimony and repeating it to those around the president most of them young enough to be his children

He wants the nationrsquos banks to be prohibited from owning and trading risky securities the very practice that got the biggest ones into deep trouble in 2008 And the administration is saying no it will not separate commercial banking from investment operations

ldquoI am not pounding the desk all the time but I am making my pointrdquo Mr Volcker said in one of his infrequent on-the-record interviews ldquoI have talked to some senators who asked me to

talk to them and if people want to talk to me I talk to them But I am not going around knocking on doorsrdquo

Still he does head the presidentrsquos Economic Recovery Advisory Board which makes him the administrationrsquos most prominent outside economic adviser As Fed chairman from 1979 to 1987 he helped the country weather more than one crisis And in the campaign last year he appeared occasionally with Mr Obama including a town hall meeting in Florida last fall His towering presence (he is 6-foot-8) offered reassurance that the candidatersquos economic policies in the midst of a crisis were trustworthy

More subtly Mr Obama has in Mr Volcker an adviser perceived as standing apart from Wall Street and critical of its ways some administration officials say while Timothy F Geithner the Treasury secretary and Lawrence H Summers chief of the National Economic Council are seen rightly or wrongly as more sympathetic to the concerns of investment bankers

For all these reasons Mr Volckerrsquos approach to financial regulation cannot be just brushed off mdash and Mr Goolsbee speaking for the administration is careful not to do so ldquoWe have discussed these issues with Paul Volcker extensivelyrdquo he said

Mr Volckerrsquos proposal would roll back the nationrsquos commercial banks to an earlier era when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities

The Obama team in contrast would let the giants survive but would regulate them extensively so they could not get themselves and the nation into trouble again While the administrationrsquos proposal languishes giants like Goldman Sachs have re-engaged in old trading practices once again earning big profits and planning big bonuses Mr Volcker argues that regulation by itself will not work Sooner or later the giants in pursuit of profits will get into trouble The administration should accept this and shield commercial banking from Wall Streetrsquos wild ways

ldquoThe banks are there to serve the publicrdquo Mr Volcker said ldquoand that is what they should concentrate on These other activities create conflicts of interest They create risks and if you try to control the risks with supervision that just creates friction and difficultiesrdquo and ultimately fails

The only viable solution in the Volcker view is to break up the giants JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns Bank of America and Merrill Lynch would go back to being separate companies Goldman Sachs could no longer be a bank holding company Itrsquos a tall order and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act which mandated separation

Glass-Steagall was watered down over the years and finally revoked in 1999 In the Volcker resurrection commercial banks would take deposits manage the nationrsquos payments system make standard loans and even trade securities for their customers mdash just not for themselves The government in return would rescue banks that fail On the other side of the wall investment houses would be free to buy and sell securities for their own accounts borrowing to leverage these trades and thus multiplying the profits and the risks Being separated from banks the investment houses would no longer have access to federally insured deposits to finance this trading If one failed the government would supervise an orderly liquidation None would be too big to fail mdash a designation that could arise for a handful of institutions under the administrationrsquos proposal

ldquoPeople say Irsquom old-fashioned and banks can no longer be separated from nonbank activityrdquo Mr Volcker said acknowledging criticism that he is nostalgic for an earlier era ldquoThat argumentrdquo he added ruefully ldquobrought us to where we are todayrdquo

He may not be alone in his proposal but he is nearly so Most economists and policy makers argue that a global economy requires that America have big financial institutions to compete against others in Europe and Asia An administration spokesman says the Obama proposal for reform would result in financial institutions that could fail without damaging the system

Still a handful side with Mr Volcker among them Joseph E Stiglitz a Nobel laureate in economics at Columbia and a former official in the Clinton administration ldquoWe would have a cleaner safer banking systemrdquo Mr Stiglitz said adding that while he endorses Mr Volckerrsquos proposal the former Fed chairman is nevertheless embarked on a quixotic journey

Alan Greenspan the only other former Fed chairman still living favored the repeal of Glass-Steagall a decade ago and unlike Mr Volcker would not bring it back now He declined to be interviewed for this article but in response to e-mailed questions he cited two recent public statements in which he suggested that the nationrsquos largest financial institutions become smaller so that none would be too big to fail requiring a federal rescue

Taking issue implicitly with the Volcker proposal to split commercial and investment banking he has said ldquoNo form of economic organization can fully contain bouts of destructive speculative euphoriardquo

For his part Mr Volcker is careful to explain that he supports 80 percent of the administrationrsquos detailed plan for financial regulation including much higher capital requirements and ldquoguidelinesrdquo on pay Wall Street compensation he said in a recent television interview ldquohas gotten grotesquely largerdquo

Before the credit crisis the big institutions earned most of their profits from proprietary trading and those profits led to giant bonuses Mr Volcker argues that splitting commercial and investment banking would put a damper on both pay and risky trading practices

His disagreement with the Obama people on whether to restore some version of Glass-Steagall appears to have contributed to published reports that his influence in the administration is fading and that he is rarely if ever in the small Washington office assigned to him He operates from his own offices in New York communicating with administration officials and other members of the advisory board mainly by telephone (He does not use e-mail although his support staff does) He travels infrequently to Washington he says and when he does the visits are too short to bother with the office The advisory board has been asked to study amid other issues the tax law on corporate profits earned overseas hardly a headline concern So Mr Volcker scoffs at the reports that he is losing clout ldquoI did not have influence to start withrdquo he said LOUIS UCHITELLE Volckerrsquos Voice Fails to Sell a Bank Strategy October 21 2009

httpwwwnytimescom20091021business21volckerhtmlthampemc=th

Global Business

October 21 2009

Rising Debt a Threat to Japanese Economy By HIROKO TABUCHI TOKYO mdash How much debt can an industrialized country carry before the nationrsquos economy and its currency bow then break

The question looms large in the United States as a surging budget deficit pushes government debt to nearly 98 percent of the gross domestic product But it looms even larger in Japan

Here years of stimulus spending on expensive dams and roads have inflated the countryrsquos gross public debt to twice the size of its $5 trillion economy mdash by far the highest debt-to-GDP ratio in recent memory

Just paying the interest on its debt consumed a fifth of Japanrsquos budget for 2008 compared with debt payments that compose about a tenth of the United States budget

Yet the finance minister Hirohisa Fujii suggested Tuesday that the government would sell 50 trillion yen about $550 billion in new bonds mdash or more

ldquoTherersquos no mistaking the budget deficit stems from the past yearrsquos global recession Now is the time to be bold and issue more deficit bondsrdquo Mr Fujii told reporters at the National Press Club in Tokyo ldquoThose who may call this pork-barrel spending mdash thatrsquos a total lierdquo

The Obama administration insists that it understands the risks posed by deficits and ever-increasing debt Its critics are doubtful But as Washington runs up a trillion-dollar deficit this year with trillions in debt for years to come it need look no farther than Tokyo to see how overspending can ravage an economy

Tokyorsquos new government which won a landslide victory on an ambitious (and expensive) social agenda is set to issue a record amount of debt borrowing more in government bonds than it will receive in tax receipts for the first time since the years after World War II

ldquoPublic sector finances are spinning out of control mdash fastrdquo said Carl Weinberg chief economist at High Frequency Economics in a recent note to clients ldquoWe believe a fiscal crisis is imminentrdquo

One of the lessons of Japanrsquos experience is that a government saddled with debt can quickly run out of room to maneuver

ldquoJapan will keep on selling more bonds this year and next but that wonrsquot work in three to five yearsrdquo said Akito Fukunaga a Tokyo-based fixed-income strategist at Credit Suisse ldquoIf you ask me what Japan can resort to after that my answer would be lsquonot very muchrsquo rdquo

How Japan got into such a deep hole and kept digging is a tale of reckless spending

The country poured hundreds of billions of dollars into civil engineering projects in the postwar era marbling Japan with highways dams and ports

The spending initially fueled Japanrsquos rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century But after a spectacular asset and stock market boom collapsed in 1990 the country fell into a long economic malaise

The Democratic Party which swept to victory in August promises to rein in public works spending But the partyrsquos generous welfare agenda mdash like cash support to families with children and free high schools mdash could ultimately enlarge budget deficits

ldquoItrsquos dangerous for the Democrats to push on with all of their policies when tax revenues are so lowrdquo said Chotaro Morita head of fixed-income strategy at Barclays Capital Japan ldquoFrom a global perspective Japanrsquos debt ratio is way off the chartsrdquo he said

Still officials insist that Japan is better off than the United States by some measures

One hugely important difference is that Japan is rich in personal savings and assets and owes less than 10 percent of its debt to foreigners By comparison about 46 percent of Americarsquos debt is held overseas by countries such as China and Japan

Moreover half of Japanrsquos government bonds are held by the public sector while government regulations encourage long-term investors like banks pension funds and insurance companies to buy up the rest

All of this makes a sudden sell-off of government bonds unlikely officials argue

ldquoThe government is just borrowing from one pocket and putting it in the otherrdquo said Toyoo Gyohten a former top finance ministry official and a special currency adviser to Mr Fujii ldquoAlthough the numbers appear very fearsome we have some leewayrdquo

Many analysts agree that during a recession Japan like the United States should worry less about trying to cut debt But they say Tokyo should at least concentrate on making sure that spending does not get out of hand

ldquoThe government needs to stabilize the debt first and foremost Only then can it start setting other targetsrdquo said Randall Jones chief economist for Japan and Korea at the Organization for Economic Cooperation and Development

A credible plan to pare down spending is important ldquoto maintain public confidence in Japanrsquos fiscal sustainabilityrdquo said the OECDrsquos economic survey of Japan for 2009

In the long run even Japanrsquos sizable assets could fall and eventually turn negative Japanrsquos rapidly aging population means retirees are starting to dip into their nest eggs mdash just as government spending increases to cover their rising medical bills and pension payments

The fall in public and private savings could eventually reverse Japanrsquos current account surplus possibly driving up interest rates as the public and private sectors compete for funds Higher interest rates would increase the cost of servicing the debt and raise Japanrsquos risk of default

In a worst case Japanrsquos currency could suffer as more investors switch away from Japan to other assets And if Japan were to print more money and set off inflation to reduce its debt burden the supply of yen would shoot up lowering the currencyrsquos value further

In recent months the yenrsquos surge on major markets as the dollar weakened has sent a false sense of security The currency recently touched a seven-month high of about 89 yen to the dollar before easing slightly as near-zero interest rates in the United States prompted investors to take their money elsewhere Many strategists expect the yen to strengthen further at least in the short term

ldquoIn 10 or 20 years Japanrsquos current-account surplus will fall into deficit and that will lead to a weaker yenrdquo said Mr Morita at Barclays Capital ldquoBut if investors become pessimistic about Japan before that the yen will weaken earlier than thatrdquo

For all the recent talk of a shift away from the dollar as the reserve currency of choice it is the yen that is becoming increasingly irrelevant analysts say The yen made up 308 percent of foreign currency reserves in mid-2009 down from 329 percent the same time last year and down from 64 percent in 1999 In mid-2009 the dollar still accounted for almost 63 percent of global foreign reserves

ldquoThe yen is set to enter a long declinerdquo in both stature and value as investors lose confidence in Japan said Hideo Kumano chief economist at the Dai-Ichi Life Research Institute in Tokyo

Considering the state of Japanrsquos finances and economy Mr Kumano said the yenrsquos recent strength against the dollar ldquoisnrsquot an affirmation of Japan mdash itrsquos the yenrsquos last hurrahrdquo

Rising Debt a Threat to Japanese Economy by HIROKO TABUCHI October 21 2009 httpwwwnytimescom20091021businessglobal21yenhtmlthampemc=th

October 21 2009

Ko Sasaki for The New York Times Photo Illustration by The New York Times

A construction site near the Yamba dam project in Naganohara Japan Stimulus spending on dams and roads have helped inflate Japans gross public debt to twice the $5 trillion economy

Oct 20 2009

Will the Brazilian Real Continue to Appreciate Despite the Tax on Capital Inflows Outlook o Citi analysts expect the impact from the IFO tax (2 for fixed income and equities only)

to be transitory and therefore rule out changes to their current forecasts keeping the year-end USDBRL at 165 Citi does not expect more extreme measures such as FX control or additional restrictions on inflows If needed they expect the central bank to step up its US dollar purchases (Citi 102009)

o On the 2 flat tax IOF (financial transaction tax) on foreign investments in local equities and bonds only (FDI is exempt) BNP analysts highlighted that such decision will have a more important impact on equity and the bond markets (the assets target by the IOF tax) than FX leading them to lag the bull market seen elsewhere in the EMK world It will lag but those measures will not abort the trend in light of liquidity in the global markets that remains supportive The same rationality can be applied to the FX market BNP analysts still see USDBRL breaking lower the 170 level during Q409 (BNP 102009)

o According to the latest BCBs consensus survey (October 19) analysts revised down the real to BRL 17 per US$ from 176 for 2009 and to BRL 175 from BRL 18 for 2010 (BNP 102009)

o Brazilrsquos real the best-performing major currency this year may rally another 6 percent against the dollar before investment flows to the country start to ebb former central bank director Carlos Eduardo de Freitas said The real may rise to BRL 16 per US$ before falling according to Freitas (Bloomberg 101909)

o Standard Chartered Plc ldquoBrazilrsquos real the best-performing currency this year will climb 18 by the end of 2010 as exports to China surge and stock inflows grow The real will rise to BRL 18USD by the end of this year from 18236 and reach an 11-year high of 155 by December 2010rdquo (via Bloomberg)

o Merrill Lynch Estimates the BRL will appreciate another 7 to as strong as 170USD within the next month ldquoas traders bet demand for the nationrsquos stocks bonds and commodities will grow as the economy recoversrdquo

o JP Morgan Brazils real may strengthen to 18USD by year-end as faster economic growth lures foreign investment and higher demand for commodities boosts the countrys exports JP Morgans analysts Julio Callegari said the real should benefit from a stronger trade surplus in the second half as well as higher equity and foreign direct investment flows as the Brazilian economy expands faster than most of its emerging-market peers (Bloomberg)

o Citigroup has revised down their USDBRL to 19 from 20 at 2009 year-end Considering the good performance of Brazilian external account and the slightly better global environment reflected in commodity prices and risk aversion the institution has revised

downward their USDBRL forecasts to 19 for 2009 year-end from 20 before For next year it is expected that an additional appreciating trend driving USDBRL to 18 at 2010 year end As suggested previously the main risk seen to this benign outlook lies in an unexpected reversal in the global environment

Recent Trend

o Brazilian stocks dropped the most in four months and the currency tumbled after the government imposed a tax on foreign purchases of equities and bonds to stem the realrsquos appreciation ldquoThe introduction of the new tax is clearly negative for the markets and should create short-term noiserdquo wrote Ricardo Lanfranchi head of equity sales at Barclays Plc ldquoOnce the bad news wears out markets should gradually resume their bullish structural trendsrdquo (Bloomberg 102009)

o The government reimposed the IOF tax at 2 (a higher rate than in 2008) for fixed income and equities in an attempt to limit strong appreciative pressures on the currency The tax will be effective October 20 The IFO tax will be charged upon entry once and for all Foreign direct investments (FDI) will be exempted Citi analysts expect the impact from these measures to be transitory and therefore rule out changes to their current forecasts keeping the year-end USDBRL at 165 (cit 102009)

o Worries about possible tax changes aimed at foreign investors pressured the Real Press reports over the weekend indicated that Brazils government may be mulling the return of a financial transactions tax on certain forms of foreign investment especially short-term fixed-income investments Stock-market investments could also be the target for imposition of the tax (Wall Street Journal 101909)

o Rodrigo Azevedo Brazilrsquos former central bank official said there is little probability of the country adopting any measures to curb the realrsquos 36 gain against the dollar this year The central bankrsquos daily dollar purchases fail to stop the appreciation so there is ldquovery little Brazil can do(hellip) I have no concrete evidence the government will do something in the short termrdquo he said (Bloomberg 101609)

o Improved risk appetite and high expected USD inflow should continue to push BRL up Besides the US$68bn IPO from Santander Brasil BNP analysts said that there is still another USD17bn in equity issuance already confirmed for this month and at least seven others companies in the pipeline including Marfrig and Cetip (naming what is expected to be the largest ones) (BNP 100609)

o Brazilrsquos currency rose to the strongest level in more than a year after a statement from the Group of Sevenrsquos leaders lacked support to stem the dollarrsquos slide against major currencies prompting investors to buy higher- yielding assets (MercoPress 100509)

o Brazilrsquos real fell for a third day after the government lowered its target for the budget surplus excluding interest payments fueling concern the countryrsquos fiscal accounts are weakening amid the global recession (Bloomberg)

o September 15 2009 Brazilrsquos real climbed to its strongest level against the dollar in a year as accelerating retail sales in Brazil and the US bolstered speculation the global economy is recovering (Bloomberg 092109)

o BRL rose 2 to 18447USD from 18807 the previous day the biggest jump in more than two weeks ldquoas global equities rallied on stronger-than- forecast German investor confidence easing concern that a recovery in the global economy was faltering It had lost a combined 3 in the two previous sessionsrdquo (Fabio Alves Bloomberg 081809)

o BRL rose 171 from 18651 on July 31st to 1834USD the strongest [level] in almost 11 months after manufacturing in China the countrys biggest trading partner expanded to the highest level in a year spurring optimism for stronger exports from Latin Americas biggest economy (Fabio Alves Bloomberg amp Reuters 080309)

o Citibank Besides better-than-expected domestic fundamentals the BRL is benefiting from a more favorable global scenario reflected in improved risk appetite and higher commodity prices The VIX index (our imperfect proxy for global risk aversion) has dropped to 26 from about 40 earlier this year while the CRB index (our proxy for global commodity prices) has increased about 18 so far this year According to our short-run econometric models both variables tend to be highly correlated with USDBRL supporting the recent trend toward a stronger real

o BRL fell 09 to 18908USD from 18735 the previous day the biggest decline in 3 weeks The drop was spurred by weak consumer confidence in the US on the speed of economic recovery ldquoThis drop pared the realrsquos gain this year to 22 the best performance against the dollar among 26 emerging-market currencies tracked by Bloombergrdquo (Fabio Alves Bloomberg 072809)

o BRL advanced for a third day 12 to 18735USD from 18957 on July 24 This rise extended YTD appreciation to 24 the best performance against the dollar among the 16 most traded currencies tracked by Bloomberg According to Andre Ferreira from Nova Futura DTVM an improved outlook for the global economy is helping pushing commodities prices higher which is positive for the real as the country will probably post stronger trade surplus (Bloomberg 072709)

o July 20 BRL19106USD July appreciation of 110 June appreciation of 102 YTD appreciation of 212 From peak on the week of 11212008 (24613USD) appreciation of 289

FX Flow and Reserves

o August 4th international reserves at US$2124 billions June 2 Total reserves by the Brazilian Central Bank at US$2059 billions (BCB)

o July FX flow positive at US$13 billions up from US$107 billions in June In July merchandise operations brought a negative flow of -US$28 billions with most of the support coming from the US$41 billions via financial operations (BCB)

o BCB purchased so far in the month up to July 29th USD 20bn in the spot market representing an average of USD 100mnday along July But over the past two weeks the pace of intervention averaged USD 200mnday Since Mayrsquo09 the BCB purchased USD 82bn in the spot market Bankrsquos short position in the spot market ended July at USD 15bn above the short position of USD 05bn in June (BNP Paribas)

o Brazil may reinstate a financial transactions tax on purchases of local fixed-income assets by foreign investors The levy known as IOF would be 15 and would be charged as the cash came into Brazil to pay for purchases of local-currency bonds and other fixed-income investments Brazilian central bank President Henrique Meirelles said on May 27 that ldquonow is not the timerdquo to reinstate a tax on certain foreign capital inflows Meirelles made the comments during a congressional testimony in Brasilia after being asked about measures to stem a rally in Brazilrsquos currency which has gained 13 against the dollar in the past two months (BloombergValor Economico)

Will the Brazilian Real Continue to Appreciate Despite the Tax on Capital Inflows Oct 20 2009 httpwwwrgemonitorcom359Brazilcluster_id=13199

Economy

October 20 2009

Holding Off Disaster The Race to Save Lehman By ANDREW ROSS SORKIN

In the summer of 2008 two months before Lehman Brothers filed for bankruptcy Richard S Fuld Jr the firms chairman was continuing his desperate efforts to find a lifeline They had begun in March shortly after the demise of Bear Stearns when Mr Fuld called the legendary investor Warren E Buffett seeking a capital infusion to no avail Lehman had raised money elsewhere but that didnt help for long and its condition again was worsening

This article is adapted from Too Big to Fail How Wall Street and Washington Fought to Save the Financial System mdash And Themselves The book being published Tuesday by Viking reveals how officials in Washington worried about the impact of Lehmans possible failure on the financial system for months helped orchestrate efforts by Mr Fuld to seek a solution for the firm and stave off its collapse The conversations recounted are based on hundreds of hours of interviews with dozens of participants many of whom agreed to speak on the condition that they not be identified as sources

ldquoI know itrsquos not true you know itrsquos not truerdquo

Richard Fuld as tightly wound as ever was raging in his office on the morning of Thursday July 10 2008 to one of his lieutenants Lehman Brothersrsquo stock had opened down 12 percent to an eight-year low in response to a rumor that the Pacific Investment Management Company the worldrsquos biggest bond fund had stopped trading with the firm Speculation also was swirling that SAC Capital Advisors Steven A Cohenrsquos hedge fund was also no longer trading with Lehman ldquoYoursquove got to call these guys and get them to put out a statementrdquo Mr Fuld said

The constant stream of bad news was hampering Mr Fuldrsquos efforts to raise more capital He and his investment banking team had been reaching out to at least a dozen prospects mdash Royal Bank of Canada HSBC and General Electric among them mdash but was coming up empty

Increasingly desperate that morning mdash ldquoI feel like Irsquom playing Whack-a-Molerdquo he complained to his peers mdash Mr Fuld decided to call his old friend John Mack the chief executive at Morgan Stanley the second-largest investment bank after Goldman Sachs After dialing Morganrsquos New York office Mr Fuld was transferred to Paris where Mr Mack was visiting clients in the firmrsquos ornate headquarters a former hotel on the Rue de Monceau

After some mutual disparagement of the markets the rumors and the pressure on Fannie Mae and Freddie Mac Mr Fuld asked candidly ldquoCanrsquot we try to do something togetherrdquo It was a bold question and Mr Mack had suspected it was the reason for the call While he didnrsquot believe that hersquod be interested in such a prospect he was willing to hear Mr Fuld out

ldquoWersquoll come over to your officesrdquo Mr Fuld clearly anxious said

ldquoNo no that makes no sense What if someone sees you coming into the buildingrdquo Mr Mack asked ldquoWersquore not going to do that Come to my house wersquoll all meet at my houserdquo

On Saturday morning Mr Fuld pulled up to Mr Mackrsquos mansion in Rye NY Despite the beautiful weather he was tense He could already imagine the headlines if it leaked

The Morgan Stanley team had arrived and was socializing in the dining room where Mr Mackrsquos wife Christy had put out plates of food she had ordered from the local deli There was Walid Chammah and James Gorman the firmrsquos co-presidents Paul Taubman the firmrsquos head of investment banking and Mitch Petrick head of corporate credit and principal investments

Bart McDade Mr Fuldrsquos new No 2 showed up next dressed in a golf shirt and khakis Skip McGee the firmrsquos head of investment banking was running late his driver got lost

As the group took their seats on sofas around a coffee table an awkward silence followed no one knew exactly how to begin

Mr Fuld looked at Mr Mack as if to say Itrsquos your house you start Mr Mack imperturbably glared back You asked for the meeting Itrsquos your show

ldquoWell Irsquoll kick it offrdquo Mr Fuld finally said ldquoIrsquom not even sure why wersquore here but letrsquos give it a shotrdquo

ldquoMaybe therersquos nothing to dordquo Mr Mack said in frustration as he noticed the discomfort around the room

ldquoNo no nordquo Mr Fuld hurriedly interjected ldquoWe should talkrdquo

He began by discussing the possibility of selling Neuberger Berman Lehmanrsquos asset management business and one of its crown jewels He also suggested that Morgan might buy Lehmanrsquos headquarters on Seventh Avenue mdash the same building that had been Morgan Stanleyrsquos until Philip Purcell the firmrsquos former CEO sold it to Lehman after 911 The irony would be rich

ldquoWellrdquo said Mr Mack not entirely sure what Mr Fuld was proposing ldquothere are ways we can you know there are ways we can work togetherrdquo He wanted to segue the conversation to Lehmanrsquos internal numbers because even if nothing were going to come of the meeting it would be helpful to Morgan Stanley to get at least a peek at what was going on inside the firm

The Morgan team began to throw out a barrage of questions How are things marked they asked Wall Street jargon for how the assets were valued Were you able to sell them inside your marks How much business has left the firm

In the middle of the conversation Mr Fuldrsquos cellphone rang and to the amazement of the group he excused himself and retreated to the kitchen The Morgan Stanley side was perplexed Was Lehman working on another deal at the same time

What they didnrsquot know was that the caller was Treasury Secretary Henry M Paulson Jr at his office checking in on Mr Fuld

When Mr Fuld returned to the living room the conversation continued But the meeting ended with no agreement and what seemed like no incentive to keep talking ldquoWas he offering to merge with usrdquo Mr Mack asked after the Lehman executives departed

ldquoThis is delusionalrdquo Mr Gorman told his Morgan Stanley colleagues Mr Taubman had other worries Maybe they were being used to help Lehman goose its stock price ldquoIf I were their guys Irsquod want to put my own spin on thisrdquo

A Search for Answers

Mr Fuld discouraged but undeterred drove to Lehmanrsquos headquarters in Manhattan racing down the Henry Hudson Parkway

He had scheduled a call that Saturday afternoon with Timothy F Geithner president of the Federal Reserve Bank of New York who was helping manage the financial crisis

Mr Fuldrsquos outside lawyer Rodgin Cohen chairman of Sullivan amp Cromwell had recently suggested an idea to help stabilize the firm to voluntarily turn itself into a bank holding company The move Mr Cohen had explained would make it easier for Lehman to borrow money from the Fed ldquojust like Citigroup or JPMorganrdquo

Mr Cohen a 64-year-old mild-mannered mandarin from West Virginia was one of the most influential and yet least well-known people on Wall Street Pacing in his hotel room in Philadelphia before the wedding of his niece that night he joined the call between Lehman and the New York Fed

ldquoWersquore giving serious consideration to becoming a bank holding companyrdquo Mr Fuld started out by saying ldquoWe think it would put us in a much better placerdquo He suggested that Lehman could use a small industrial bank it owned in Utah to take deposits to comply with the regulations

Mr Geithner who was joined on the call by his general counsel Tom Baxter was apprehensive ldquoHave you considered all the implicationsrdquo he asked

Mr Baxter who had cut short a trip to Martharsquos Vineyard to participate walked through some of the requirements which would transform Lehmanrsquos aggressive culture minimizing risk and making it a more staid institution in league with traditional banks

Regardless of the technical issues Mr Geithner said ldquoIrsquom a little worried you could be seen as acting in desperationrdquo and the signal that Lehman would send to the markets with such a move

Exhausting Their Options Mr Fuld ended his call deflated Later that evening Mr Fuld called Mr Cohen finding his lawyer in the waiting room of a hospital attending to a cousin who had become ill at the wedding

It was time to consider a different deal he told Mr Cohen ldquoCan you reach out to Bank of Americardquo Still standing in the emergency waiting room of the hospital Mr Cohen found Greg Curl Bank of Americarsquos top deal banker on his cellphone in Charlotte NC where the bank was based Mr Curl a 60-year-old former naval intelligence officer had helped orchestrate nearly all of the many deals Bank of America had made over the last decade

ldquoDo you have any interest in doing a deal Of all the institutions wersquove been considering yoursquod be the best fitrdquo Mr Cohen said

Mr Curl though intrigued to be getting a call on a Saturday night was noncommittal he could tell they must be desperate ldquoHmm let me talk to the bossrdquo he said ldquoIrsquoll call you right backrdquo (The boss was Ken Lewis the silver-haired chief executive of Bank of America)

A half-hour later Mr Curl called back to say hersquod hear them out and Mr Cohen set up a three-way call with Mr Fuld

ldquoWe can be your investment banking armrdquo Mr Fuld explained the idea being for Bank of America to take a minority position in Lehman and for the two to merge their investment banking groups He invited Mr Curl to meet in person

Dressed in a blazer and slacks Mr Curl arrived at Sullivan amp Cromwellrsquos Midtown offices in the Seagram Building on Sunday afternoon July 13 having flown to New York from Charlotte that morning on one of his bankrsquos five private jets

Mr Fuld walked him though his proposal He wanted to sell a stake of up to one-third of Lehman to Bank of America and merge their investment banking operations under the Lehman umbrella

Mr Curl was dumbfounded though he characteristically gave no sign of what he was thinking Far from the plea for help he had been expecting the pitch he was hearing struck him as a reverse takeover Bank of America would be paying Mr Fuld to run its investment banking franchise for it

Mr Curl said he was interested but that he and Mr Lewis often disagreed about whether they should acquire an investment bank or continue buying other commercial banks

ldquoIrsquod prefer a deal with yourdquo Mr Curl continued ldquobut to be honest Ken would probably prefer to buy Merrill or Morganrdquo

Mr Fuld was confused What was Mr Curl signaling

ldquoSo do you think we have something hererdquo Mr Fuld asked

ldquoI donrsquot knowrdquo Mr Curl replied ldquoI need to talk to the boss Itrsquos obviously his decisionrdquo

Even before meeting with Mr Curl Mr Fuld had been ringing Mr Paulson about Bank of America trying to get Mr Paulson to make a call on behalf of Lehman ldquoI think itrsquos a hard sell but I think the only way yoursquore going to do it is go to him directlyrdquo Mr Paulson had told him ldquoIrsquom not going to call Ken Lewis and tell him to buy Lehman Brothersrdquo

Meeting in Secret To keep the talks alive after the session at Sullivan amp Cromwell Mr Paulson and Mr Geithner over the course of the next week arranged a secret meeting between Mr Fuld and Mr Lewis

It would take place at a previously scheduled event on the evening of Monday July 21 in New York Mr Paulson was being honored at a dinner at the New York Fed in Lower Manhattan organized by Mr Geithner as an opportunity for the secretary to get together with top leaders from JPMorgan Chase Goldman Sachs and Morgan Stanley as well as Mr Fuld and Mr Lewis

As the dinner was ending Mr Geithner approached Mr Lewis and leaning close whispered ldquoI believe you have a meeting with Dickrdquo

ldquoYeah I dordquo Mr Lewis replied

Mr Geithner gave him directions to a side room where the two could speak in private He had apparently already given Mr Fuld the same instructions because Mr Lewis noticed him across the room looking back at them like a nervous date Seeing Mr Fuld start to walk in one direction Mr Lewis headed in the other with half of Wall Street looking on the last thing either of them needed was to have word of their meeting get out

The two men eventually doubled back and found the room Mr Fuld explained that he would want at least $25 a share from Bank of America to buy Lehman Lehmanrsquos shares had closed that day at $1832 Mr Lewis thought the number was far too high and couldnrsquot see the strategic rationale Unless he could buy the firm for next to nothing the deal wasnrsquot worth it But he held his tongue

Two days later he called Mr Fuld back

ldquoI donrsquot think this is going to work for usrdquo Mr Lewis said as diplomatically as he could while leaving open the possibility that they could discuss the matter again

Mr Fuld was beside himself He called Mr Paulson to relay the bad news The only possible suitor left was a group of Korean banks who had expressed an interest in a separate deal Mr Fuld pressed Mr Paulson to call them on his behalf mdash a request that Mr Paulson resisted

ldquoIrsquom not going to pick up the phone and call the Koreansrdquo Mr Paulson told him exasperated ldquoDick if they call me and want to ask questions Irsquoll do what I can to be constructiverdquo

He added ldquoIf you want to scare someone call them up and tell them I said they should buy Lehman Brothersrdquo

Without the direct involvement of Mr Paulson Lehman pursued a deal with the Koreans But that too fell through in August after a visit by Korean bank executives to New York A month later two last-ditch efforts by Washington mdash to bring Bank of America back into the mix or broker a sale of Lehman to Barclays the British bank mdash failed Lehman was history

httpwwwnytimescom20091020businesseconomy20sorkinhtmlthampemc=th

20102009

FDP seems to prevail in coalition negotiations

So much for idea that Angela Merkel is going to pull a fast one on the Liberals As she did last time she once again seems very open to the concerns of her future coalition partner especially in respect of its central demand for tax cuts ndash vigorously resisted by the CDUrsquos We-Must-Balance-The-Budget-Every-Year-Even-In-a-Depression crowd FT Deutschlandreports that the coalition negotiations agreed to a massive increase in the deficit of some euro50bn to fund the deficits of the federal labour agency and the health insurance funds which will allow both parties to stabilise the social security contributions and to make room for tax cuts To circumvent the Maastricht Treaty the new coalition reverts to the old trick of off-balance sheet financing In 2010 the government will stabilise the social security system while in 2011 the tax cuts should become effective

Now Slovakia wants opt-out too Just when we thought that we are past the point when the story of the Lisbon Treaty turned from tragedy to farce we hear that Slovaks also want an opt-out from the Charter of Fundamental Rights Euractiv has the story that Slovak PM Robert Fico said that if the Czech Republic were to gain an opt-out Slovakia would remain in legal uncertainty as the Lisbon Treaty cannot be allowed to give different legal certainties to the two successor states in respect of the Benes decrees The problem of course is that Slovakia has already ratified the Treaty (presumably unaware that hoards of German Sudeten are just waiting to reoccupy their former homelands) Euractiv says Slovakiarsquos insistence on equal treatment might actually strengthen the EUrsquos resolve against yielding to Mr Klausrsquo demands

Bini-Smaghi warns of new wave of write-offs La Repubblica reports that ECB board member Lorenzo Bini-Smaghi warned of an imminent wave of bank writedowns because of a rapid expansions in provisions for credit risk This

could lead to a signficant fall in capital ratios While markets had recently been positive he said the ECB remains concerned about the fragility of the banking sector He is also quoted as saying that any rise in inflation would have immediate and negative consequences on the debt of various euro area member states

Tremonti thinks mobility is not for Italians Italyrsquos finance minister Giulio Tremonti has slaughtered another We-must-emulate-America attribute by saying that the benefit of labour mobility are highly overrated and that for Italy immobility is the very foundation of social stability According to La Repubblica he said it would be preferable to have a permanent job with a decent health and pension provision than a US system that relies on Wall Street for its pensions and when things go wrong you end up in a trailer and with no education for your children

European default rates to rise The FT has the story that default rates may have peaked for US mortgage-backed bonds but the worst is likely still to come for European securities Investors expect default rates on UK mortgage-backed securities to rise to 12 per cent in the next 18 months Investors in Spanish securities expect overall default rates including both prime and riskier bonds to more than double in two years from 18 to 4

A devastating critique of the euro as a global currency This is probably one of the most important contributions to the debate about Europersquos lack of economic policy leadership we have yet seen Jean Pisani-Ferry and Adam Posen have noted in the Financial Times that the frenzied debate about the dollarrsquos future role is not accompanied with a debate about the ascent of the euro They list a number of depressingreasons by sticky to the Maastricht criteria the euro area is keeping members at bay by discouraging euroisation and unilateral pegs they have widened the gap by channelling the anti-crisis response through the IMF they have reinforced the defensive view that an enlarged euro area is unsustainable Domestic factors include poor financial integration and supervision poor economic goverance especially in crisis management poor productivity growth They conclude ldquoIt is no accident limitations on the euro arearsquos productivity openness and governance are also the factors that limit the eurorsquos global rolerdquo

Bernanke on what caused the crisis The New York Times has an interesting comment on a Bernanke speech in which he recognised the complex origins of the crisis of which global imbalances played a central role While imbalances are falling during the crisis they could be rekindled through failure by the US to reduce its fiscal deficit He says the US must increase its national savings rate to protect against future crises while China must increase consumption Interesting also the comment on Bernankersquos by Mark Thoma in his blog who expressed disappointment at Bernankersquos emphasis on external causes (it is of course more convenient for economists to blame wholesale regulatory failure ie some exogenous shock than an internal malfunction of the global economic system that none of the macro models was able to predict Treat with caution)

httpwwweurointelligencecomarticle581+M52b598c020e0html

Europe securities defaults set to deepen By Jennifer Hughes

Default rates may have peaked for US mortgage-backed bonds but the worst is likely still to come for European securities

Investors expect default rates on more risky UK mortgage-backed securities issued in 2007 to rise to 12 per cent in the next 18 months from about 10 per cent currently according to a report from Standard amp Poorrsquos fixed-income risk management services division published on Tuesday

But investors in similar US securities surveyed by SampP expect default rates to hold steady from here before declining implying the worst could be over even as European woes deepen ldquoThe US bonds have taken the hit and the bad news has fed through quickly This has not yet fully happened in Europerdquo said Peter Jones head of SampPrsquos valuation scenario services group

Investors in Spanish securities ndash where the housing market has been hit particularly hard by the crisis ndash expect overall default rates including both prime and riskier bonds to more than double in two years from 18 per cent to 4 per cent

The report highlights the marketrsquos struggle to recover as higher default rates weigh on the prices for existing securities potentially damping appetite for new products

Many banks have slashed staffing in their securitisation teams since the financial crisis began as new issuance has dried up although they are expected to begin hiring if that market picks up

More than four-fifths of banks rely on third-party models rather than their own analysis to value mortgage-backed securities according to another survey by SampP This compares with more than half of investors who do their own analysis

Mr Jones said banksrsquo cutbacks had forced many investors to do more work themselves ndash but that this could ultimately benefit the market

ldquoMany investors thought they could go to their counterparty for valuations and theyrsquove instead been scrabbling around for good pricing information As investors get more comfortable with doing this themselves we could end up with more sophisticated analysisrdquo he said Jennifer Hughes Europe securities defaults set to deepen

httpwwwftcomcmss09ce6cb42-bcd6-11de-a7ec-00144feab49ahtml

Business

October 20 2009

Thin Line Separates Insider Trading and Research By ALEX BERENSON The most precious commodity on Wall Street is information and savvy players will do almost anything for it

Some investment funds canvass doctors to scout out blockbuster drugs Others pay meteorologists to forecast weather that will affect the price of oil and wheat And still others hire corporate executives to provide an inside view of companies and industries

But now some of Wall Streetrsquos biggest hedge funds are watching nervously as prosecutors say that Raj Rajaratnam a billionaire fund manager went too far in this relentless quest for a trading edge

On Friday federal prosecutors charged Mr Rajaratnam and five other people with insider trading mdash using information that they received illegally in an effort to make riskless profits on stocks Prosecutors have said they are still investigating the case and some defense lawyers who are not representing people already facing charges said Monday that they could not comment on the record because they may be retained soon

Insider trading however can be difficult to prove said Leslie R Caldwell the co-chief of the white-collar crime division at the law firm Morgan Lewis amp Bockius The line between buying legitimate research trading rumors and gossip and illegally paying for market-moving information can be complicated

ldquoThere are some obvious insider trading cases where people obviously have a duty theyrsquore obviously misappropriating informationrdquo said Ms Caldwell the former chief of the task force that prosecuted the Enron cases ldquoIn terms of money managers and other people where the duty becomes a little less clear the relationships become a little less clear the motivations become a little less clear it can become more and more challengingrdquo

Indeed the case against Mr Rajaratnam and his co-defendants appears to be far more complicated than a simple exchange of cash for information

A close reading of the two criminal complaints filed so far and an associated civil complaint filed by the Securities and Exchange Commission suggests a web in which hedge fund managers analysts corporate executives and consultants and other people outside Wall Street traded tips mdash sometimes for money sometimes for other tips and sometimes for little more than the promise of unspecified future favors

Not every trade that the complaint outlines was profitable In fact Mr Rajaratnamrsquos hedge fund the Galleon Group lost millions of dollars buying shares of Advanced Micro Devices the computer chip maker after learning that the government of Abu Dhabi planned to invest in AMD according to the complaint The investment did occur but AMD stock plunged between August 2008 when Galleon began buying and October 2008 when the deal was announced

At other times Mr Rajaratnam received information from an unnamed witness who is cooperating with the government investigation But the complaint does not state whether Mr

Rajaratnam knew the ultimate sources of the information he received from the witness Nor does it allege that Mr Rajaratnam paid the witness for the information

Still the existence of a cooperating witness mdash along with the fact that prosecutors wiretapped some of Mr Rajaratnamrsquos conversations mdash gives them a great advantage in the case said David S Ruder a law professor at Northwestern University and a former chairman of the SEC The conversations may help show that Mr Rajaratnam knew the information was valuable and that he should not be trading on it Mr Ruder said

ldquoIt gets you around the mens rea or state of mind questionrdquo he said ldquoIf you know itrsquos coming from an insider or if you have strong reason to believe itrsquos coming from an insider yoursquore in troublerdquo

The SEC has tried to combat insider trading for decades relying mainly on tips and reports of suspicious trading in a single stock Two years ago the commission began to install sophisticated data-mining software that examines trading records looking for patterns of trades across stocks that appear suspiciously profitable

Unlike the inquiries conducted by stock markets like the New York Stock Exchange which focus on individual stocks the SECrsquos program aims to identify traders who pop up repeatedly making surprisingly successful trades in many companies

The SEC has identified some insider trading cases through this project but the investigation of Mr Rajaratnam was not one of them

Federal securities laws put limits on the race for information Corporate executives are not allowed to give investors market-moving tips about their companies Companies must disclose critical news like quarterly earnings to everyone at the same time Investors who try to lock in guaranteed profits by say paying to see a news release an hour before a company posts it are engaging in illegal insider trading

Those are the laws that prosecutors said on Friday were broken by Mr Rajaratnam and five other investors and corporate executives

Michael J de la Merced contributed reporting

httpwwwnytimescom20091020business20insiderhtml_r=1ampthampemc=th

Economy

October 20 2009

Asia Said to Be Leading the Globe Out of Crisis By EDMUND L ANDREWS SANTA BARBARA Calif mdash Ben S Bernanke the chairman of the Federal Reserve said on Monday that Asian nations were pulling the global economy out of its downturn but warned that both Asia and the United States needed to do more to reduce global trade imbalances

Speaking at a conference on Asia hosted by the Federal Reserve Bank of San Francisco Mr Bernanke said Asian countries had bounced back from the global recession faster than the rest of the world and had reported ldquoimpressiverdquo growth

ldquoAsia appears to be leading the global economic recoveryrdquo the Fed chairman said noting that the region as a whole expanded at an annual rate of 9 percent during the second quarter and that some countries including China grew at rates of more than 10 percent

But Mr Bernanke also warned that huge trade imbalances between the United States and the rest of the world had played a central role in the global economic crisis and that they could do so again

ldquoWe were smugrdquo Mr Bernanke said of the United States in a question-and-answer session referring to the attitude of American policy makers toward the large inflows of cheap money from countries like China that were running huge trade surpluses The flood of foreign money might not have been a major problem he said but the American financial regulatory system was ldquoinadequaterdquo in preventing a surge of reckless lending that aggravated the bubble in housing prices

Mr Bernankersquos comments represented a sobering contrast to his assertions before the housing collapse that the main reason for the United Statesrsquo soaring foreign debt had less to do with American tendencies to spend too much than with a ldquoglobal savings glutrdquo in the rest of the world

Echoing the declarations last month by leaders from the Group of 20 industrialized and large emerging nations Mr Bernanke said the United States needed to get its fiscal house in order while Asian countries needed to rely less on exports for their growth

ldquoThe United States must increase its national saving raterdquo he said ldquoThe most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over timerdquo

The federal deficit for the 2009 fiscal year soared to $14 trillion almost triple the deficit in 2008 and budget analysts predict that budget deficits will average almost $1 trillion a year over the next decade

By the same token he said Asian countries needed to rely less on exports and more on their consumption at home for their economic growth One way to increase Asian household consumption he said would be for countries like China to increase their social safety net programs and reduce the uncertainty that currently hangs over many consumers

Mr Bernanke noted that global trade and financial imbalances had narrowed considerably since the crisis began largely because the volume of international trade contracted by 20 percent from its peak before the crisis

But he cautioned that the imbalances could widen again as economic growth revived

ldquoAdmittedly just as increasing private saving in the United States is challenging promoting consumption in a high-saving country is not necessarily straightforwardrdquo Mr Bernanke conceded

Indeed analysts and investors in Asia have become increasingly worried about the danger of new bubbles in Asian asset prices fostered by aggressive stimulus policies in China and by renewed attempts by policy makers in Asia to prop up the value of the dollar

Mr Bernanke avoided what was in many ways the elephant in the room the value of the United States dollar The dollar has dropped sharply in recent weeks against the euro and the Japanese yen a move that has helped increase American exports by making them cheaper in some foreign markets But the dollar has not budged in more than a year against Chinarsquos renminbi which the Chinese continue to tightly manage and which many economists say remains greatly undervalued EDMUND L ANDREWS Asia Said to Be Leading the Globe Out of Crisis October 20 2009 httpwwwnytimescom20091020businesseconomy20fedhtml

At the Federal Reserve Bank of San Franciscorsquos Conference on Asia and the Global Financial Crisis Santa Barbara California

October 19 2009

Asia and the Global Financial Crisis The rise of the Asian economies since World War II has been one of the great success stories in the history of economic development Japans transition to an economic powerhouse was followed by the rapid ascent of the Asian tigers and subsequently by China taking a prominent place on the world economic stage1 Since the beginning of this decade Asia has accounted for more than one-third of the worlds economic growth raising its share of global gross domestic product (GDP) from 28 percent to 32 percent2 Importantly its economic success has resulted in large-scale reductions in poverty and substantial improvements in the standards of living of hundreds of millions of people China and India which together account for almost 40 percent of the worlds population have seen real per capita incomes rise more than 10-fold and 3-fold respectively since 1980 As would be expected given the increasing size and sophistication of their economies the nations of the region have also begun to exert a substantial influence on global economic developments and on international governance in the economic and financial spheres

It is widely agreed that a key source of Asias rapid advancement has been the openness of countries in the region to global trade and finance Notwithstanding this consensus the considerable progress of these countries in developing domestic institutions policies and industrial capacity--together with their strong growth in the initial phase of the ongoing global financial crisis--led some to speculate that the Asian economies had decoupled from the advanced economies of North America and Europe Of course in hindsight given the magnitude of the shocks that have struck these advanced economies over the past two years as well as their strong economic and financial links to Asia it should not have been surprising that Asia was ultimately hit quite hard by the global downturn even though the origins of the turmoil were elsewhere

As a prelude to the papers and discussions to follow I will provide a brief overview of the Asian experience during the global financial crisis I will highlight the diversity of experiences both within Asia and between Asia and other regions and draw some inferences about the different channels through which the effects of the financial crisis were transmitted around the world I will discuss Asias policy response to the economic and financial consequences of the crisis Finally I will focus on medium-term challenges For both Asia and the United States perhaps the greatest medium-term challenge is to achieve more balanced growth and in the process to further reduce global imbalances

Asias Experience in the Crisis During the years following the financial crisis of the late 1990s many emerging market economies in Asia and elsewhere took advantage of relatively good global economic conditions to strengthen their economic and financial fundamentals they improved their

fiscal and external debt positions built foreign exchange reserves and reformed their banking sectors Hence at the onset of the financial turmoil in the summer of 2007 the Asian economies appeared well-positioned to avoid its worst effects Although global financial markets including Asian markets deteriorated sharply following the start of the crisis Asias recovered swiftly with equity prices reaching new highs early in the fourth quarter of that year Moreover economic activity in the region continued to expand

However toward the end of 2007 at about the same time that the United States entered a recession the headwinds facing the Asian economies appeared to strengthen Asian equity markets began to fall again--they were to underperform global markets throughout much of 2008--and other signs of financial stress such as widening credit spreads appeared as well By the second quarter of 2008 many of the regions economies were slowing and growth in Hong Kong Singapore and Taiwan--small open economies particularly sensitive to shifts in global conditions--had ground to a halt

In September and October 2008 as you know the global financial crisis intensified dramatically Concerted international action prevented a global financial meltdown but the effects of the crisis on asset prices credit availability and consumer and business confidence resulted in sharp declines in demand and production worldwide Reflecting this worsening economic climate Asian GDP growth slowed further in the second half of 2008 For the region as a whole the economic contraction in the fourth quarter of 2008 was pronounced with activity falling at an annual rate of nearly 7 percent3 The fourth-quarter declines were especially dramatic in Taiwan and Thailand (more than 20 percent at an annual rate) and in South Korea and Singapore (more than 15 percent at an annual rate) Among the major Asian economies only those of China India and Indonesia did not contract during the crisis

Early this year with many of the Asian economies in freefall a quick recovery seemed difficult to imagine but recent data from the region suggest that a strong rebound is in fact under way Although the regional economy continued to contract in the first months of 2009 it expanded at an impressive 9 percent annual rate in the second quarter with annualized growth rates well into double digits in China Hong Kong Korea Malaysia Singapore and Taiwan4 At this point while risks to the economic outlook certainly remain Asia appears to be leading the global recovery

Diversity of Experiences This brief review of Asias experience during the crisis raises a number of important questions Through what channels were the effects of the financial crisis transmitted across the globe In particular why was Asia whose financial systems largely escaped the serious credit problems that erupted in the United States and Europe hit so hard by the global recession What enabled the Asian economies to bounce back so sharply more recently And why did some countries--around the world and within Asia--suffer much deeper contractions than others Some light can be shed on these questions by examining the diversity of experiences among both Asian and non-Asian economies during the downturn

Transmission Channels Trade and Finance The crisis that began in the West affected Asia through various transmission channels whose relative importance depended in some degree on the particular characteristics of each economy However for virtually all of the Asian economies international trade appears to have been a critical channel Exhibit 1 shows the course of global merchandise exports since the beginning of this decade As the exhibit shows after a period of strong growth international trade plunged about 20 percent in real terms from its pre-crisis peak to its trough in early 2009 (the dashed red line) and about 35 percent in US dollar terms (the solid blue

line)5 The trade-dependent economies of Asia could certainly not be immune to the effects of such a decline

Why did global trade fall so abruptly The severe recession in the advanced economies greatly restrained aggregate spending including spending on imports but the decline in international trade appears surprisingly large even when the depth of the recession in the advanced countries is taken into account One possible explanation for the outsized decline in trade volumes lies in the extreme uncertainty that prevailed in the darkest months of the crisis Consumers and businesses knew last fall that economic conditions were poor but in light of the severity and the global nature of the financial crisis many feared outcomes that might be much worse Perhaps to a greater extent than they might have otherwise households and firms put off purchases of big-ticket items such as consumer durables and investment goods Durable goods figure prominently in trade and manufacturing so these sectors may have been particularly vulnerable to the elevated uncertainty and weakened confidence that prevailed during the height of the crisis

Credit conditions also likely affected the volume of trade through several channels The turmoil in credit markets doubtless exacerbated the sharp decline in demand for durable goods and thus in trade volumes as purchases of durable goods typically involve some extension of credit Manufacturing production a major component of trade flows may have been cut back more sharply than would otherwise have been the case as producers concerned about credit availability attempted to preserve working capital Finally although it is difficult to assess the size of the effect problems in obtaining trade finance may have also impeded trade for a time

With trade falling sharply around the world economies particularly dependent on trade were hit especially hard Exhibit 2 illustrates this point for a group of Asian and non-Asian economies The vertical axis of the figure shows real GDP growth measured relative to trend during the most severe stage of the downturn and the horizontal axis shows a measure of openness to trade6 Combinations of growth and openness observed in various economies are indicated by red squares for a number of Asian countries and by black dots for several non-Asian countries The exhibit shows that countries most open to trade (those located further to the right in the figure) suffered on average the greatest declines in growth relative to trend The most extreme cases are Hong Kong and Singapore shown to the far right the economies of Korea Taiwan Thailand and Malaysia which are also very open suffered significant growth deficits as well

Indeed the GDP contractions in some Asian economies during that period rivaled those during the Asian financial crisis of the late 1990s Relative to pre-crisis trend the six Asian economies just mentioned plus Japan experienced declines in real GDP growth of about 13 to 20 percentage points at an annual rate during the last quarter of 2008 and the first quarter of 2009 Growth fell somewhat less severely in the Philippines and only moderately in Australia and New Zealand As noted earlier real GDP growth remained positive throughout the crisis in China India and Indonesia but as exhibit 2 shows even those fast-growing economies experienced noticeable declines in growth relative to their earlier trends The exhibit shows that a similar relationship between growth and openness to trade holds for non-Asian countries for example more trade-dependent nations like Germany saw sharper declines in output during the crisis than other less-open economies

Variations across countries in trade openness do not fully explain the diversity of growth experiences during the downturn suggesting that other factors were also at work Notably although financial institutions in emerging market economies were not for the most part directly affected by the collapse of the market for structured credit products and other asset-

backed securities financial stress nevertheless affected these countries As international investors appetite for risk evaporated the flow of capital shifted away from countries that had historically been viewed as more vulnerable including some emerging Asian and Latin American economies even though many of these countries appeared to be much better positioned to weather an economic crisis than in the past Moreover regardless of perceived risks financial institutions pulled money from risky assets in advanced and emerging markets alike in an effort to strengthen their balance sheets

Following the reversal in capital flows engendered by the crisis strains in banking appeared across Asia leading to severe credit tightening in some countries Fears of counterparty risk disrupted interbank lending in many countries intensifying already existing funding difficulties The drying up of the wholesale funding market hurt Koreas banking system in particular prior to the crisis it had accounted for about one-third of Korean bank funding In Japan some banks exposures to equity markets damaged their capital positions With Asian banks experiencing dollar funding pressures similar to those arising elsewhere in the world the Federal Reserve established 5 of its 14 liquidity swap lines with central banks in the region Australia Japan Korea New Zealand and Singapore The reversal in capital flows also caused rapid exchange rate depreciation in some countries particularly Korea Indonesia and Malaysia The Korean won depreciated 40 percent against the dollar from the beginning of 2008 through its trough in March of this year and it has only partially recovered Over the same period the Indonesian rupiah fell 22 percent against the dollar

Exhibit 3 shows the relationship between rates of GDP growth during the downturn relative to trend and financial openness as measured by the sum of each countrys international assets and liabilities relative to its GDP7 The exhibit shows that for both Asian and non-Asian economies financial openness was associated with greater declines in output though the linkage appears somewhat less tight than that for trade8 Again the most extreme cases are Singapore and especially Hong Kong (which is not shown as it is more than twice as open as even Singapore) Taiwan is another example of a financially open Asian economy that experienced a particularly severe downturn By the same token China India and Indonesia the three Asian countries in which output expanded throughout the crisis are among the least financially open

Trade and financial channels influenced other emerging markets as well such as those in Latin America and Eastern Europe Many of these economies also contracted sharply but thus far they have recovered more slowly than economies in Asia In the case of Latin America closer links to the US economy (especially in the case of Mexico) and greater dependence on commodity exports (whose prices declined during the most intense phase of the crisis) were additional sources of weakness In Eastern Europe preexisting macroeconomic imbalances and structural weaknesses likely magnified the effects of the adverse global shocks

It is important not to take the wrong lesson from the finding that more open economies were more severely affected by the global recession Although tighter integration with the global economy naturally increases vulnerability to global economic shocks considerable evidence suggests that openness also promotes stronger economic growth over the longer term Protectionism and the erecting of barriers to capital flows should thus be strongly resisted Instead as I will discuss striking a reasonable balance between trade and growth in domestic demand is the best strategy for driving economic expansion

Policy Responses By and large countries in Asia came into the crisis with fairly strong macroeconomic fundamentals including low inflation and favorable fiscal and current account positions

Good fundamentals in turn provided scope for strong policy responses in many countries China Japan Korea and Singapore were among those employing relatively aggressive policy strategies in particular China undertook a sizable fiscal program supplemented by accommodative monetary and bank lending policies The stimulus packages in China and elsewhere have lifted domestic demand throughout the region boosting intraregional trade

Not all Asian nations responded so aggressively to the crisis Some countries with weaker fiscal positions no doubt felt constrained in the extent of fiscal stimulus they provided Similarly monetary policies were likely influenced by differences in inflation performance On the one hand countries experiencing low inflation or deflation such as China Japan and Thailand were able to implement expansionary monetary policies without concerns about increasing inflationary pressures Indeed Japan used unconventional monetary easing in part to avoid deeper deflation On the other hand inflation concerns were more pressing for Indonesia the Philippines and Korea with the result that their monetary policy responses may have been more muted than would otherwise have been the case The national variation in policy responses likely also reflected differences in the severity of the crisis across countries

Generally speaking the Asian response to the crisis appears thus far to have been effective Importantly as I have suggested the Asian recovery to date has been in significant part the result of growth in domestic demand supported by fiscal and monetary policies rather than of growth in demand from trading partners outside the region To illustrate the point for each of the countries in the region exhibit 4 shows industrial production (the solid blue bars) and exports (the striped red bars) measured relative to the pre-crisis peak9 You can see that the blue bars are generally taller than the red bars indicating that except for New Zealand and Hong Kong industrial production has rebounded by more than exports Indeed industrial production in China India and Indonesia has already reached new highs and it is within about 5 percent of its previous peak in Australia and Korea We would expect to see this pattern if growth in domestic demand rather than growth in exports was the predominant driver of increases in domestic production10 The revival of demand in Asia has in turn aided global economic growth

Despite the initial successes of Asian economic policies risks remain As in the advanced economies unwinding the stimulative policies introduced during the crisis will require careful judgment Policymakers will have to balance the risks of withdrawing policy support too early which might cut short a nascent recovery against the risks of leaving expansionary policies in place for too long which could overheat the economy or worsen longer-term fiscal imbalances In Asia as in the rest of the world the provision of adequate short-term stimulus must not be allowed to detract from longer-term goals such as the amelioration of excessive global imbalances or ongoing structural reforms to increase productivity and support balanced and sustainable growth

Lessons from Crises and Medium-Term Challenges For now Asian countries look to be weathering the current storm In part their successful responses reflect the lessons learned during the Asian financial crisis of the 1990s including the need for sound macroeconomic fundamentals

One crucial lesson from both that crisis and the recent one is that financial institutions must be carefully regulated transparent and sufficiently well capitalized and liquid to withstand large shocks In part because of the reforms put in place after the crisis of the 1990s along with improved macroeconomic policies Asian banking systems were better positioned to handle the more recent turmoil With the increased prominence of the Group of Twenty (G-20) as a forum for discussing the global responses to the crisis emerging market economies

including those in Asia will play a larger role in the remaking of the international financial system and financial regulation

Another set of lessons that Asian economies took from the crisis of the 1990s may be more problematic Because strong export markets helped Asia recover from that crisis and because many countries in the region were badly hurt by sharp reversals in capital flows the crisis strengthened Asias commitment to export-led growth backed up with large current account surpluses and mounting foreign exchange reserves In many respects that model has served Asia well contributing to the rapid growth rates in the region over the past decade In fact it bears repeating that evidence from the world over shows trade openness to be an important source of economic growth However too great a reliance on external demand can also pose problems In particular trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources resulting in an economy that is less able to meet the needs of its own citizens in the longer term

To achieve more balanced and durable economic growth and to reduce the risks of financial instability we must avoid ever-increasing and unsustainable imbalances in trade and capital flows External imbalances have already narrowed substantially as a consequence of the crisis as reduced income and wealth and tighter credit have led households in the United States and other advanced industrial countries to save more and spend less including on imported goods Together with lower oil prices and reduced business investment these changes in behavior have lowered the US current account deficit from about 5 percent of GDP in 2008 to less than 3 percent in the second quarter of this year Reflecting in part reduced import demand from the United States Chinas current account surplus fell from about 10 percent of GDP in the first half of 2008 to about 6-12 percent of GDP in the first half of this year

As the global economy recovers and trade volumes rebound however global imbalances may reassert themselves As national leaders have emphasized in recent meetings of the G-20 policymakers around the world must guard against such an outcome We understand at least in principle how to do this The United States must increase its national saving rate Although we should deploy as best we can tools to increase private saving the most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over time For their part to achieve balanced and sustainable growth the authorities in surplus countries including most Asian economies must act to narrow the gap between saving and investment and to raise domestic demand In large part such actions should focus on boosting consumption Admittedly just as increasing private saving in the United States is challenging promoting consumption in a high-saving country is not necessarily straightforward One potentially effective strategy is to reduce households precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education Of course such measures are likely to improve welfare and productivity as well as to contribute to more balanced robust and sustainable economic growth

Conclusion The United States has benefited significantly from Asias rapid development and integration into the global economy and the payoffs to the Asian economies from global economic integration have been substantial as well Indeed the financial crisis has starkly demonstrated the extent to which the fortunes of the United States Asia and the rest of the global economy are intertwined These powerful economic linkages as well as the

importance of both the United States and Asia in the global economy underscore the need for consultation and cooperation in addressing common issues and concerns Our shared stakes in the prospects of the global economy bring with them a heightened responsibility to work together to maintain those prospects I am optimistic that the United States and Asia will rise to the challenge and address in a mutually beneficial fashion the range of issues confronting the global economy Conferences such as this one which bring together policymakers and scholars from both sides of the Pacific will further the cause of this cooperation

Footnotes 1 The term Asian tigers refers to the economies of Hong Kong Singapore South Korea and Taiwan

2 This estimate is based on purchasing power parity measures of GDP

3 The Asian region here refers to Australia China Hong Kong India Indonesia Japan Malaysia New Zealand Pakistan the Philippines Singapore South Korea Taiwan Thailand and Vietnam The economic growth calculation weights these economies by GDP at market exchange rates

4 These growth rates are measured on a quarter-to-quarter basis at an annual rate Chinas quarterly growth rate is estimated from published four-quarter growth rates

5 The nominal data are the sum of the total merchandise exports of 44 economies including the United States expressed in US dollars The real data are calculated by deflating these dollar-value nominal exports by export price indexes constructed from local-currency deflators drawn from country sources and dollar exchange rates

6 Specifically the vertical axis shows each countrys deviation of average GDP growth from trend growth (at an annual rate) over 2008Q4 and 2009Q1 Trend growth is defined as the average annualized growth rate during 2006 and 2007 of historical GDP data smoothed using the Hodrick-Prescott filter The horizontal axis shows each countrys trade openness as measured by the sum of its imports and exports as a fraction of its nominal GDP in 2007

7 A countrys international assets are claims on foreigners by its residents and liabilities are foreigners claims on the countrys residents Data on these claims are from Haver and the US Bureau of Economic Analysis

8 Whether the relationship shown in Exhibit 3 is causal is not entirely clear however as economies that are more exposed to the global financial system also tend to be those economies most open to trade as can be seen by comparing Exhibit 3 to Exhibit 2 9 The data are quarterly through the second quarter of 2009 Exports are measured in US dollars

10 In principle some rebuilding of inventories for export could also be boosting production but such inventory data for the region that are available do not strongly support this view

Asia and the Global Financial Crisis October 19 2009 httpwwwfederalreservegovnewseventsspeechbernanke20091019ahtm

Exhibit 1 Global Merchandise Exports Billions of US dollars

Period Nominal Exports Real Exports (in 2000 dollars)

January 2000 45989 44816 February 2000 46723 45967 March 2000 46856 46256 April 2000 46013 45784 May 2000 47309 47637 June 2000 48170 47411 July 2000 47919 47522 August 2000 48898 48890 September 2000 47989 48713 October 2000 48038 49244 November 2000 47964 49370 December 2000 48467 49138 January 2001 49011 48956 February 2001 48596 49310 March 2001 47339 48725 April 2001 45945 47725 May 2001 46323 48276 June 2001 44983 47695 July 2001 44159 46959 August 2001 45853 47881 September 2001 44210 46283 October 2001 44669 47378 November 2001 43868 47015 December 2001 43101 46251 January 2002 44140 47658 February 2002 43938 47659 March 2002 44374 47778 April 2002 46575 49630 May 2002 47077 49436 June 2002 47633 48976 July 2002 49896 50852 August 2002 49296 50468 September 2002 49577 50648 October 2002 49810 50887 November 2002 50420 50980 December 2002 50107 49995 January 2003 53090 52012 February 2003 52883 51082 March 2003 52631 51124 April 2003 53085 51791 May 2003 54323 51479 June 2003 54527 51453 July 2003 55277 52801 August 2003 53861 51803 September 2003 56585 53741 October 2003 58708 54715 November 2003 57951 53689 December 2003 62317 56219 January 2004 61815 54906 February 2004 63912 56826 March 2004 64382 57401

Billions of US dollars

April 2004 64325 57984 May 2004 64475 57784 June 2004 66530 59175 July 2004 67023 59321 August 2004 66292 58541 September 2004 67744 59534 October 2004 68911 59314 November 2004 71909 60309 December 2004 73255 60929 January 2005 71894 59713 February 2005 71909 59619 March 2005 73725 60590 April 2005 75159 62153 May 2005 74254 62255 June 2005 73916 63111 July 2005 73338 62679 August 2005 76149 63930 September 2005 76816 64501 October 2005 76096 64404 November 2005 76926 65787 December 2005 79214 67327 January 2006 80703 67039 February 2006 80894 67514 March 2006 83172 69229 April 2006 82512 67664 May 2006 86944 69526 June 2006 86662 70050 July 2006 85325 68524 August 2006 88562 70492 September 2006 88322 70891 October 2006 87786 70722 November 2006 91227 72544 December 2006 92683 72719 January 2007 92679 72680 February 2007 93676 72858 March 2007 93331 72013 April 2007 95017 72256 May 2007 97025 73530 June 2007 96886 73352 July 2007 98944 73826 August 2007 100059 75260 September 2007 99782 73536 October 2007 105296 75873 November 2007 108913 76711 December 2007 107606 76202 January 2008 114128 78560 February 2008 114519 77413 March 2008 113164 74721 April 2008 121331 78423 May 2008 118710 76890 June 2008 119991 76177 July 2008 124690 78427 August 2008 116373 75552

September 2008 114276 76113 October 2008 105181 74932 November 2008 92001 68940 December 2008 89461 66471 January 2009 81773 61577 February 2009 79340 62200 March 2009 80254 62778 April 2009 80945 62729 May 2009 81091 61660 June 2009 86257 64226 July 2009 89263 66727 The nominal data are the sum of the total merchandise exports of 44 economies including the United States expressed in US dollars The real data are calculated by deflating dollar-value nominal exports by export price indexes constructed from local-currency deflators drawn from country sources and dollar exchange rates Source CEIC Haver and staff estimates

Exhibit 2 Trade Openness and GDP Growth (2008Q4-2009Q1) Country Growth Relative to Trend Trade Openness

Asia China -708 064 Hong Kong -1703 344 Indonesia -318 044 Korea -1372 069 Malaysia -1892 173 Philippines -899 073 Singapore -2015 336 Taiwan -1760 118 Thailand -1860 110 India -428 036 Japan -1369 029 Australia -371 033 New Zealand -373 044 Non-Asia Argentina -895 038 Brazil -1306 021 Chile -1000 068 Colombia -828 030 Mexico -1811 054 Euro Area -1021 033 France -701 045 Germany -1339 072 UK -994 038 US -755 022

Growth relative to trend is the percentage point difference between the realized rate of growth during 2008Q4 and 2009Q1 measured at an annual rate and trend growth Trend growth is the average annualized growth rate during 2006 and 2007 of smoothed gross domestic product (GDP) using the Hodrick-Prescott filter (Exports+Imports) GDP in 2007 Source CEIC Haver and staff estimates

Exhibit 3 Financial Openness and GDP Growth (2008Q4-2009Q1) Country Growth Relative to Trend Financial Openness

Growth relative to trend is the percentage point difference between the realized rate of growth during 2008Q4 and 2009Q1 measured at an annual rate and trend growth Trend growth is the average annualized growth rate during 2006 and 2007 of smoothed gross domestic product (GDP) using the Hodrick-Prescott filter (International Assets+Liabilities) GDP in 2007 Source CEIC Haver and staff estimates International investment position data are from Haver and the US Bureau of Economic Analysis

Exhibit 4 Asian Industrial Production and Exports Relative to Pre-Crisis Peak

Ratio Country Industrial Production Exports

China 107 073 India 104 070 Indonesia 100 074 Australia 096 068 Korea 094 076 Thailand 089 073 Singapore 088 069 New Zealand 088 090 Malaysia 087 067 Hong Kong 085 088 Philippines 082 071 Taiwan 081 077 Japan 071 064

Exports are measured in US dollars Industrial production and export data are through the second quarter

Source CEIC Haver and staff estimates

COMMENT

Why the euro is not the next global currency By Jean Pisani-Ferry and Adam Posen

The explosion of debate on the demise of the dollar has been instructive though vastly premature What is striking however is the absence of the euro from talk of alternatives as the global currency Currency baskets SDRs even internationalisation of the renminbi have been mooted but not the obvious alternative

This should have been the eurorsquos moment It is already the second global currency The gap between the overwhelming role of the dollar and the size of the US economy has long been recognised The crisis is accelerating the fall of the US share of global gross domestic product and the apparent neglect of fiscal sustainability is eroding the dollarrsquos relative attractiveness for the longer term

Over its 10 years the euro has been a huge success for its member states Its attractiveness in the economic storm has never been higher to European Union members and neighbouring economies Momentary currency appreciation aside however there is no sign of a move to the euro as a global currency The share of dollars in global reserves remains almost three times that of euros During the worst of the crisis dollars were demanded by institutions in trouble and it was the US Fed that provided up to $600bn in liquidity to non-US residents through swap lines Nothing of this sort happened with the euro It is a huge success in Europe but it remains a regional currency

There is speculation about pricing oil in something other than dollars but no evidence of that across the range of traded goods invoiced in dollars ndash and certainly no switch into the euro Companies trading goods outside the immediate euro region rely on dollars as the invoicing and settlement currency reflecting inertia but also liquidity availability and legal clarity No economies seem to be leaving dollar pegs for the euro

One reason for this is that the euro has not overcome its own self-imposed limits on usage and adoption abroad By strictly maintaining the ERM-II exchange rate stability requirements and the Maastricht deficit inflation and interest rate criteria for euro area entry it has kept new applicants at a distance By discouraging euroisation and unilateral pegging to the euro ndash even in its neighbourhood ndash it has widened the gap By channelling the response to the crisis in eastern Europe through the International Monetary Fund it has reinforced the defensive view that stability for the euro area is fragile if extended

This lack of leadership is a shame because the alternatives when the dollarrsquos role recedes are worse Baskets are notoriously hard to make work especially if they include an inconvertible currency Their stability is also in doubt as they rely on uncertain political agreements As to the SDR it is not a real currency either It would be better to have a period of co-dominance between currencies allowing for a smooth transition to a multi-currency regime This happened between sterling and the dollar although the unwillingness of the US government to ease this process in the 1920s and 1930s

led to a leadership vacuum and financial instability We fear the euro arearsquos reticence to take on a global currency role could lead to similar instability in the future

In fact the measures needed to secure the eurorsquos wider role are in the arearsquos own economic and political interest Financial integration should be completed and underpinned by solid European supervision second the economic governance of the EMU should be strengthened especially as regards crisis management third the euro area should adopt a more proactive strategy to enlargement and stand ready to provide liquidity support to partner countries where its currency is used fourth it should strengthen its economic base by raising the rate of sustainable growth Does this sound familiar It is no accident limitations on the euro arearsquos productivity openness and governance are also the factors that limit the eurorsquos global role By dodging some of its duties as a regional currency the euro area constrains the eurorsquos wider adoption globally The absence of the euro from talk of dollar alternatives shows that these internal failures also put at risk future monetary stability for the broader world

Jean Pisani-Ferry is director of Bruegel the Brussels think-tank Adam Posen is senior fellow at the Peterson Institute for International Economics They are editors of The Euro at 10 The Next Global Currency (BruegelPIIE 2009)

httpwwwftcomcmss01e661b42-bcdb-11de-a7ec-00144feab49ahtml

Opinion

October 19 2009

OP-ED COLUMNIST

The Banks Are Not Alright By PAUL KRUGMAN It was the best of times it was the worst of times OK maybe not literally the worst but definitely bad And the contrast between the immense good fortune of a few and the continuing suffering of all too many boded ill for the future

Irsquom talking of course about the state of the banks

The lucky few garnered most of the headlines as many reacted with fury to the spectacle of Goldman Sachs making record profits and paying huge bonuses even as the rest of America the victim of a slump made on Wall Street continues to bleed jobs

But itrsquos not a simple case of flourishing banks versus ailing workers banks that are actually in the business of lending as opposed to trading are still in trouble Most notably Citigroup and Bank of America which silenced talk of nationalization earlier this year by claiming that they had returned to profitability are now mdash you guessed it mdash back to reporting losses

Ask the people at Goldman and theyrsquoll tell you that itrsquos nobodyrsquos business but their own how much they earn But as one critic recently put it ldquoThere is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial systemrdquo Indeed Goldman has made a lot of money in its trading operations but it was only able to stay in that game thanks to policies that put vast amounts of public money at risk from the bailout of AIG to the guarantees extended to many of Goldmanrsquos bonds

So who was this thundering bank critic None other than Lawrence Summers the Obama administrationrsquos chief economist mdash and one of the architects of the administrationrsquos bank policy which up until now has been to go easy on financial institutions and hope that they mend themselves

Why the change in tone Administration officials are furious at the way the financial industry just months after receiving a gigantic taxpayer bailout is lobbying fiercely against serious reform But you have to wonder what they expected to happen They followed a softly softly policy providing aid with few strings back when all of Wall Street was on the ropes this left them with very little leverage over firms like Goldman that are now once again making a lot of money

But therersquos an even bigger problem while the wheeler-dealer side of the financial industry a k a trading operations is highly profitable again the part of banking that really matters mdash lending which fuels investment and job creation mdash is not Key banks remain financially weak and their weakness is hurting the economy as a whole

You may recall that earlier this year there was a big debate about how to get the banks lending again Some analysts myself included argued that at least some major banks

needed a large injection of capital from taxpayers and that the only way to do this was to temporarily nationalize the most troubled banks The debate faded out however after Citigroup and Bank of America the banking systemrsquos weakest links announced surprise profits All was well we were told now that the banks were profitable again

But a funny thing happened on the way back to a sound banking system last week both Citi and BofA announced losses in the third quarter What happened Part of the answer is that those earlier profits were in part a figment of the accountantsrsquo imaginations More broadly however wersquore looking at payback from the real economy In the first phase of the crisis Main Street was punished for Wall Streetrsquos misdeeds now broad economic distress especially persistent high unemployment is leading to big losses on mortgage loans and credit cards And herersquos the thing The continuing weakness of many banks is helping to perpetuate that economic distress Banks remain reluctant to lend and tight credit especially for small businesses stands in the way of the strong recovery we need

So now what Mr Summers still insists that the administration did the right thing more government provision of capital he says would not ldquohave been an availing strategy for solving problemsrdquo Whatever In any case as a political matter the moment for radical action on banks has clearly passed The main thing for the time being is probably to do as much as possible to support job growth With luck this will produce a virtuous circle in which an improving economy strengthens the banks which then become more willing to lend

Beyond that we desperately need to pass effective financial reform For if we donrsquot bankers will soon be taking even bigger risks than they did in the run-up to this crisis After all the lesson from the last few months has been very clear When bankers gamble with other peoplersquos money itrsquos heads they win tails the rest of us lose httpwwwnytimescom20091019opinion19krugmanhtmlthampemc=th

October 17 2009 1039 am

AHIP AHIP hooray President Obama httpwwwwhitehousegovthe_press_officeWeekly-Address-President-Obama-Calls-Hails-Progress-on-Health-Insurance-Reform-Despite-Defenders-of-the-Status-Quo

This is the unsustainable path wersquore on and itrsquos the path the insurers want to keep us on In fact the insurance industry is rolling out the big guns and breaking open their massive war chest ndash to marshal their forces for one last fight to save the status quo Theyrsquore filling the airwaves with deceptive and dishonest ads Theyrsquore flooding Capitol Hill with lobbyists and campaign contributions And theyrsquore funding studies designed to mislead the American people

hellip

Itrsquos smoke and mirrors Itrsquos bogus And itrsquos all too familiar Every time we get close to passing reform the insurance companies produce these phony studies

as a prescription and say ldquoTake one of these and call us in a decaderdquo Well not this time The fact is the insurance industry is making this last-ditch effort to stop reform even as costs continue to rise and our health care dollars continue to be poured into their profits bonuses and administrative costs that do nothing to make us healthy ndash that often actually go toward figuring out how to avoid covering people And theyrsquore earning these profits and bonuses while enjoying a privileged exception from our anti-trust laws a matter that Congress is rightfully reviewing

I almost wonder whether Karen Ignani is a progressive mole that AHIP study has turned out to be extremely helpful to the other side

Samuel Brittanrsquos recipe for recovery Ahem

Commercial banks certainly worsened the recession by greedily seeking higher returns than those provided by market interest rates and they can put grit in the recovery by refusing to lend I can only suggest making Paul Krugman the radical Keynesian economist Comptroller of the US Currency with over-reaching powers to take over old banks and initiate new ones with similar appointments in other countries

I would however quarrel with designating me a ldquoradical Keynesianrdquo Irsquom just a Keynesian willing to follow the logic of my analysis A perfectly standard New Keynesian model with intertemporal optimization and all that mdash the kind of model that is standard in freshwater courses mdash says that under current conditions fiscal stimulus should be very strong much stronger than what wersquore actually doing Ryan Lizzarsquos piece on the Obama economics team makes it clear that Christina Romer mdash whom nobody would call radical mdash reached more or less the same conclusions in her economic analysis that I did

The point is that what passes for ldquosoundrdquo economics these days (and maybe most days) isnrsquot actually sound economics mdash itrsquos economic analysis trimmed and softened to fit political realitiesprejudices Questioning that notion of soundness isnrsquot being radical itrsquos just being intellectually honest

December 29 2008 827 pm

Optimal fiscal policy in a liquidity trap (ultra-wonkish) One thing thatrsquos been bothering me about the discussion over fiscal stimulus is the virtual absence of fully worked-out models with all their trsquos dotted and eyes crossed or something Not that a rigorous model is always better than a rough-and-ready but more realistic approach but I like to have both on hand So Irsquove tried a very rough sketch of a full intertemporal maximization yada yada analysis of the fiscal policy issue It was written in a hurry so itrsquos surely incomprehensible to readers who donrsquot know the New Keynesian Economics literature and probably incomprehensible even to those who do

But herersquos what the model says when monetary policy is up against the zero bound the optimal fiscal policy is to expand government purchases enough to maintain full employment

Unreadable little paper here You have been warned

Global Business

October 19 2009

In Dollarrsquos Fall Upside for US Exports By NELSON D SCHWARTZ PARIS mdash As economists pundits and politicians debate the reasons for the dollarrsquos rapid fall Robert Stevenson and his workers in downtown Buffalo NY watch the slide with glee

Mr Stevensonrsquos family-owned company Eastman Machine has been making cutting tools for the textile industry for 120 years A year ago in the depths of the financial crisis Mr Stevenson had to lay off a dozen workers but the dollarrsquos almost 20 percent decline since March has made his goods much more competitive overseas Next month Mr Stevenson hopes to sign a multimillion-dollar deal in Europe that could enable him to rehire his workers

ldquoThis wouldnrsquot have happened five years ago or even two years agordquo he said ldquoBusiness conditions are still slow but the dollar has allowed us to be much more aggressive overseasrdquo

The story of Eastman Machine is a small echo of the larger shifts accompanying the dollarrsquos fastest drop in six years last week the dollar neared $150 against the euro compared with $125 in March The weakness of the dollar if sustained could force American consumers to get used to paying more for many imported goods as well as trips to their favorite vacation spots

But there is also an upside a weak dollar could prove beneficial to the American economy by aiding long-suffering manufacturers rebuilding a stronger industrial base and lifting exports even if it makes life harder for trading partners around the world especially in Europe

ldquoAs long as it doesnrsquot crash a gradual orderly decline is healthyrdquo said C Fred Bergsten director of the Peterson Institute for International Economics ldquoThe dollar went up 40 percent between 1995 and 2002 so this is a necessary rebalancingrdquo

It is a highly charged political issue and the sinking American currency has already spurred attacks on the Obama administration from Sarah Palin the former Republican nominee for vice president and others in her party who argue that a weaker dollar points to a weaker America

ldquoWe lose our position as the world leader if the dollar is no longer the currency of favorrdquo said Senator Jon Kyl of Arizona the No 2 Republican in the Senate He pointed out that he was critical of President George W Bush for letting the dollar fall too ldquobut this administration is making things worse by its spending and deficit policiesrdquo

Most ominously many foreign central banks are rethinking the dollarrsquos status as the worldrsquos premier reserve currency said Neil Mellor a currency strategist at BNY Mellon Global Markets in London That in addition to domestic factors like historically low United States interest rates and a ballooning federal budget deficit are worsening the dollarrsquos downward movement

In addition while the Obama administration maintains that it favors a strong dollar it has shown no sign of taking any major steps to support the currency

Whatever the politics the economics are complex Over the long term a weaker dollar could narrow the long-running United States trade deficit helping close the gap between exports and imports as American products become more affordable overseas

But that comes at a price mdash higher costs at home for imported goods as diverse as Italian suits French wines and Japanese stereos and cameras as well as more prosaic commodities like oil The dollarrsquos drop is a central factor in oilrsquos recent rise back above $75 a barrel which will mean higher gasoline prices

The dollar has moved sharply before Most recently it weakened in the summer of 2008 only to strengthen drastically after the collapse of Lehman Brothers a year ago sent investors worldwide fleeing to the relative security of American assets like Treasury bonds

Now the political arguments over the dollarrsquos trajectory are accompanied by a fierce debate among economists

ldquoDollar weakness is a major problem for American jobs and living standardsrdquo said David Malpass a longtime Wall Street economist who has been among the most outspoken critics of the dollarrsquos decline

ldquoAs the dollar devalues we have less capital and purchasing power compared to the rest of the world and there is an increasing risk of higher interest rates and inflationrdquo Mr Malpass said

But Mr Bergsten argues the dollar is only now getting back to a fair valuation against other currencies if the United States is to continue to close its trade gap

With the recent drop he said the dollar is fairly valued against the euro but needs to ease 10 percent against Asian currencies like the Japanese yen to create a level playing field for American business

And for all the fluctuations against the dollar by major currencies the dollar has not moved at all recently against the Chinese renminbi which is managed by Beijing in ways that allow Chinese exporters to enjoy a weaker currency and gain market share worldwide

The Treasury secretary Timothy F Geithner has consistently said the administration favors a strong dollar but currency markets focus on the unlikely prospect of concrete action like an interest rate increase

ldquoThe Obama administration may say they want a strong dollarrdquo Mr Mellor said ldquoBut everyone knows they havenrsquot got the means to support it The Federal Reserve canrsquot raise rates and the White House canrsquot cut the budget deficit anytime soonrdquo

If the dollar does keep falling and the euro keeps rising it could increase trade tensions with Europe especially big exporters like Germany which have already been hard hit by the global economic slump

ldquoThe strength of the euro is coming at absolutely the wrong timerdquo said Jens Nagel head of the international department of the German Exporters Association in Berlin ldquoThe US is our biggest trading partner after the European Union and itrsquos a big blow to the recovery of auto companies and industrial exportersrdquo

Mr Mellor predicts the dollar will keep dropping reaching $160 against the euro by early next year And there are signs that even much bigger companies than Eastman Machine are adapting

As the global economy recovers and international manufacturers ramp up output they are giving priority to their more competitive plants including those in the United States said Pierre Dufour senior executive vice president at Air Liquide a French supplier of industrial gases to steelmakers semiconductor firms and other industrial giants worldwide

ldquoIt has two sides like it always doesrdquo said Carl Martin Welcker owner of a machine tools maker Schuumltte in Cologne Germany

ldquoOn the one hand it makes our machines significantly more expensiverdquo said Mr Welcker whose equipment churns out 80 percent of the worldrsquos spark plugs ldquoOn the other hand wersquore seeing international companies move production back to the US which helps our sales thererdquo

Maiumla de la Baume contributed reporting from Paris

Nelson D Schwartz In Dollarrsquos Fall Upside for US Exports October 19 2009 httpwwwnytimescom20091019businessglobal19dollarhtml_r=1ampthampemc=th

Sep 18 2009

Global Recession Raises Unemployment Around the World Overview The global recession is raising unemployment rates close to double-digits in developed countries and to high levels in developing countries The pace of job losses have slowed in many countries in recent months from the late 2008early 2009 levels as demand and credit conditions have somewhat improved for companies But unemployment rates might continue to increase through 2010 constraining global consumption and pushing many workers into poverty Inadequate safety net and retraining programs and slow pick-up in hiring pose risks of long unemployment duration and deterioration of human capital To reduce the risk of structural unemployment and discontent among workers governments are implementing fiscal stimulus measures but are also resorting to populist measures

Forecasts for Unemployment Trends

o OECD In most countries unemployment will rise in 2010 and remain high in the near future If the recovery fails to gain momentum the OECD unemployment rate could even approach a new post-war high of 10 with 57 million people out of work Spending on labor market policies in many countries has risen only modestly relative to the job losses in the past year (September 2009)

o Dominique Strauss-Kahn managing director IMF High unemployment is the third phase of this crisis Unemployment will continue to rise through 2010 amid below-potential economic growth Despite improvement in global growth global economy will fully recover only when unemployment goes down (September 18 2009)

o Manpower Survey Employers in 17 out of 35 countries surveyed showed some positive hiring activity for Q4 2009 But 10 countries reported the weakest hiring plans since the survey began Hiring expectations have improved compared to the previous quarter with easing job losses Hiring plans are the strongest in emerging markets stable in the US and negative in Europe India Brazil Colombia Peru China Australia Singapore Canada Taiwan and Poland reported the strongest hiring plans whereas Romania Spain Ireland Japan and Mexico reported the weakest hiring plans (September 8 2009)

o World Bank Even if global growth turns positive in 2010 the unemployment levels will rise further in virtually every economy well into 2011 (via Bloomberg March 31 2009)

o International Labor Organization (ILO) Global recession would increase unemployment by 18-30 million or even by over 50 million if the situation continues to deteriorate which would take the number of unemployed to 230 million or 71 of the worldrsquos labor force

The number of people in working poverty earning less than $2 a day would rise to 14 billion (45 of worldrsquos labor force) from 12 billion in 2007 Workers in temporary and other non-standard jobs are the most vulnerable (January 2009)

o European Commission Unemployment in the 16-nation eurozone will rise to 115 in 2010 the highest level for several decades and will rise over 20 in Spain (via FT May 7 2009)

o Economist By the end of 2010 unemployment in most developed countries is likely to be above 10 In emerging markets export decline will lead to job losses and increase in poverty Structural changes in European labor markets suggest that jobs will be lost than in previous downturns (March 12 2009)

o Analysts Bruce Kasman and David Hensley JP Morgan With growth solid but not booming labor markets will likely stabilize only gradually There will be a jobless recovery in developed countries through the end of 2009 with the unemployment rates reaching 9 and falling slightly in 2010 (Report A little More Bounce But Still Plenty of Malaise September 4 2009)

Global Unemployment Trends

o The unemployment rate for the OECD area stood at 85 in July 2009 The US UK Canada Sweden Hungary Ireland and Spain have recorded large increase in unemployment rates with Germany showing the least increase The lowest rate was recorded in Netherlands (34) and the highest in Spain (185) Hungary and Ireland have registered double-digit unemployment rates The pace of job losses has slowed in most OECD countries recently but the unemployment rate is expected to peak sometime in 2010 and analysts are concerned about the weak hiring prospects

o From June 2008 to July 2009 the global unemployment rate rose from 57 to 83 For developed economies it rose from 58 to 85 for emerging markets from 56 to 70 for Latin America from 63 to 72 for emerging Asia from 34 to 47 and for Central and Eastern Europe from 70 to 94 (via JP Morgan August 26 2009)

o The euro area unemployment rate rose from 94 in June to 95 in July 2009 EUs unemployment rate rose to 90 The US unemployment rate reached 97 in August 2009 though job losses have slowed recently During this cycle the US has seen larger job losses and increase in unemployment rate with fewer safety nets relative to other high-income countries Germanys unemployment rate was unchanged at 77 in July 2009 Frances rose to 98 UKs increased to 79 while Canadas stayed unchanged at 87 in August 2009

o Asia has witnessed large lay-offs in the export and manufacturing sector but job losses have somewhat stabilized starting Q2 2009 The unemployment rate has risen steadily in Hong Kong Taiwan Malaysia and Singapore during this cycle given their high export dependence but the increase is less than those witnessed during 1997-98 In China the urban unemployment rate remained steady in Q2 2009 at 43 compared to Q1 2009 but over 20 million migrant workers have lost their jobs Japan and Australias unemployment rate rose to 57 and 58 respectively in July 2009 In India job losses have slowed but hiring remains subdued

o In Mexico the unemployment rate has been inching up and stood at 61 in July 2009 Brazils unemployment rate reached a high in Q1 2009 due to job losses in manufacturing But unemployment rate eased to 8 in July 2009 with slowing job losses

o In the GCC (Gulf Cooperation Council) countries foreign workers are the most affected by rising unemployment As a result remittances from this region are slowing In South Africa The unemployment rate increased to 236 in Q2 2009 with large number of discouraged workers dropping out of the labor force

o Analysts Bruce Kasman and David Hensley JP Morgan In most developed countries including EU and Japan the unemployment rate has increased in proportion to the decline in GDP based on Okuns Law whereas in the US unemployment has risen much sharply relative to the decline in GDP The rise in unemployment rates in emerging markets lagged the growth slowdown While unemployment rates have increased steadily it has been mild relative to the decline in GDP (Report To V or Not to V That is the Question August 28 2009)

o Economist Peter Berezin Goldman Sachs The increase in unemployment rate in the euro area is mild compared to the US and is mostly distorted by Spain and Ireland which witnessed housing bursts A reason for this trend might be government policies in the euro area that have focused on subsidies to prevent lay-offs However greater job cuts and decline in labor hours in the US relative to EU has raised productivity in the former Euro area will likely witness a longer jobless recovery and smaller decline in unemployment relative to the US Weak employment outlook in the US and euro area will keep up deflationary pressures and constrain aggressive monetary tightening during the recovery (Report The Striking Divergence of Labor Market Trends During the Recession August 25 2009)

Risks From Rising Job Losses

o Lay-offs during the current global recession will exceed those during the past recessions given that firms face the double whammy of subdued domestic and export demand and credit crunch Firms are also cutting work hours wages and benefits to cut labor costs and contain the pressure on profit margins Lay-offs are widespread in manufacturing (especially export related) auto sector construction (real estate bubble burst) and financial services (bank losses) Service sector in general will witness large job losses in most countries since service sectors share in GDP has increased in most countries

o Job losses and slower income growth have constrained consumer demand raising instances of loan defaults and adding to deflationary pressures in many economies

o Slow increase in hiring underemployment and long unemployment duration will hit long-term labor productivity and skills As the recovery churns out new industries and sectors policy measures will be needed to retrain workers with new skills

o OECD Higher unemployment is positively correlated to long-term unemployment especially for euro area relative to the US and Japan Long periods of unemployment exert less downward pressure on wages and inflation across OECD countries But this downward pressure is lower in Europe implying greater increase in structural unemployment in European countries Between 2007-end and 2010-end structural unemployment is expected to increase by 01-02 in the US and Japan and by 15 in euro area (June 2009)

o Governments are implementing fiscal stimulus measures to provide safety net to workers via unemployment insurance tax credits for households tax incentives for firms to hire workers or prevent lay-offs retraining programs for laid-off workers and temporary cuts in employersrsquo social security contributions

o OCED Temporary extension of unemployment benefits and training for unemployed hiring subsidies job search assistance and subsidized work experience especially for younger workers can contain the risk of long-term joblessness and poverty Social transfers to vulnerable groups including in-work benefit schemes focusing on minimum wages and work hours is also important In order to maintain effective labor supply for the recovery it is important to resist option like early retirement and disability benefits Since reallocation of workers from declining sectors to growing sectors enhances productivity governments should support workers only in sectors facing temporary slowdown in demand (September 2009)

o WSJ Labor market flexibility in the US compared to EU is one of the reasons why the US might recover faster from the downturn The EU has greater safety net for workers in terms of extent and duration of benefits including unemployment insurance and health insurance However this means that total tax and benefits expenditure on labor is higher in EU than in the US which acts as a burden on businesses (May 7 2009)

o Economist Job losses in US are exacerbating wealth erosion among consumers Need to improve labor market flexibility to make it easier for businesses to restructure (March 12 2009)

o FT Popular discontent as a result of high unemployment is a mounting problem The risk is that governments might respond with distorting measures (protectionism and subsidies) which would undermine economic rebound

Worker Anxiety Fuels Immigration Backlash o Large job losses globally is creating aversion to immigrants and leading to slowdown in

intra-Europe intra-Americas Middle-East Asia immigration Unemployment among immigrants especially in the lower-end and unskilled jobs such as construction agriculture and temporary jobs is rising The revival of immigration is likely to lag labor market recovery

o There are increasing anti-immigrant sentiments among laid-off workers in UK Europe and Ireland which have large immigrant populations from Central and Eastern Europe Immigrant layoffs have risen sharply in the Middle-East especially in Dubai Immigrants are returning from Russia the influx of Mexicans into the US has dropped while immigrant workers are returning home to Asia

o Rising job losses is leading to political pressure especially in countries with inadequate safety net for workers There are growing populist measures to protect national workers at the expense of immigrant workers thus undermining the recent boom in labor migration In developed economies with an aging population outflow of immigrants will impact the labor supply and availability of skilled workers during the recovery

o Several governments in Europe are reducing quotas for foreign workers imposing tougher entry requirements for immigrants and encouraging the outflow of immigrants by giving them monetary incentives Some countries are making it harder for immigrants to extend their stay or are canceling the visas of immigrants Governments are imposing restrictions on firms to hire nationals over immigrants and create jobs for local workers in the fiscal stimulus package Governments are also offering safety net for nationals rather than for foreign workers Some of these measures will be difficult to reverse during the recovery (via The Economist July 1 2009)

o Rising lay-offs among immigrants is putting pressure on remittances Many South and Central Asian African Eastern European and Latin American countries depend on

remittances to finance consumer spending and current account The World Bank estimates that remittances will fall 73 yy to US$304 billion in 2009 So far remittances have held up fairly well in many developing countries and the slowdown in remittances has been relatively less compared to the decline in foreign investment to developing countries But as job losses abroad continue until 2010 the impact on remittances might be felt with a lag

o Trade and globalization related job insecurity and inequality in recent years and job losses in the less-skilled or labor-intensive manufacturing in developed countries and emerging markets might also increase aversion to globalization in general

19102009

Fight over Klaus says he cannot stop Lisbon Treaty

Die Welt reports from an interview in the Czech newspaper Lidove Noviny that Czech president Vaclav Klaus said that it was now too late to stop the Lisbon Treaty He also said that he did not want his proposed amendment to be attached to the Lisbon Treaty which would have required re-ratification but to the next Treaty ndash presumably be the accession Treaty of Croatia He continues to insist on such a declaration which is currently opposed by Austria and Hungary While he did not say when he would sign the Treaty ndash he must wait until the Court decides probably mid-November ndash he said that he would not hold out until the British elections

Germany new coalition quarrels over taxation The rhetoric is heating in the final days of the coalition negotiations in Germany and the issue is tax cuts The FDP wants them the CDU thinks they are irresponsible Now there will be a deal probably by the end of the weak but this remains the biggest issue that divides the two party blocks An interesting comment came yesterday from economist Hans Werner Sinn who warned against a premature exit During a crisis such as this he said the government has to run large deficits This would be the ideal time for a deficit-financed tax cut He said German income taxes were too high as is the income tax progression die Welt reports

Ireland to make ferocious public sector cuts Irish PM Brian Cowen announced plans for massive public sector pay cuts according to the FT a course which risks a major confrontation with the countryrsquos trade union Before he made his announcement a senior cabinet minister had warned that the country was headed towards direct IMF intervention and had to act decisively The Irish government is looking to make cuts of some euro4bn through a combination of spending cuts and tax increasing to contain a deficit which is running out of control Most of those cuts will come from reductions in welfare and public sector pay The Economic and Social Research Institute said even with these cuts the country would still borrow around 12 of GDP to finance its deficit

Euro area exports tumble in August Euro area exports declined unexpectedly during August according to the FT raising doubts about the recovery Exports were down 58 compared with August more than reversing a 47 increase in July The article speculated whether the strength of the euro might be the

reason for the decline in exports It quoted one economist as saying that the eurorsquos rise would not have an impact on the latest data because it would take typically nine months before the effects feed through

Central banks fuel liquidity The FT has an excellent news report how central bank liquidity is feeding into frenzied market activity Equities are the main barometer of risk taking as markets all over the world hit 12 month peaks The article quotes an investment strategist as saying that almost every trade was working on the basis that short-term finance costs are close to zero which created an incentive to take on risk Others are wary about this recovery which could end abruptly if the environment were to change

Muumlnchau on Minsky In his FT column Wolfgang Muumlnchau says the next bubble had already started and that we are living in a world described by Hyman Minsky in his Financial Instability Hypothesis a world in which an overblown financial sector in combination with a production focus on investment goods produces inherent instability The way central banks and government react to crises triggers the onset of the next bubbleburst cycle except that this time the cycle will be shorter than the last one since central banks have significantly reduced leeway Either they raise interest rates sharply to prevent inflation in which case the economy is driven back into recession or they accommodate price rise and they risk a bond crash

Aurelio Maccario on the euro Aurelio Maccario writes in Europe Economonitor that the ECB is becoming increasingly aware that a stronger euro must absolutely be avoided Further euro strengthening in the remainder of the year will have a significant impact on 2010 economic growth and make the ECBrsquos own pessimistic forecast of 03 more probable He expressed the hope that this may become a new era of the ECBrsquos rhetoric on exchange rates He said it would be paradoxical that one of the few balanced economic areas of the world bears the burden of the global adjustment A strong euro is also a solid argument in favour of interest rates remaining at 1

Willem Buiter on the euro Willem Buiter has a long blog entry on the euro this morning in which he said that the ECB is in danger of running a deflationary policy that could ultimately destroy its independence If Mr Trichet was serious about a co-ordinated response to the dollarrsquos fall then the ECB mightbe told that it need to cut interest rates as no intervention policy would be credible for as long as the European refinance rate remains relatively high at 1 He said the Americans will undoubtedly ask the ECB to cut rates by up to 100 basis points before agreeing to joint intervention

A reflection on the G20 Writing in Vox Biagio Bossone says the G20 recently asserted itself as the ldquothe primary forum for our international economic cooperationrdquo Bossone questions the efficiency and legitimacy of such governance He says that the IMF ndash the only multilateral financial institution with universal representation ndash is the natural place for international financial policy cooperation

httpwwweurointelligencecomarticle581+M54b5bfe71c70html

EQUITIES

Central banks fuel risky assets By Michael Mackenzie in New York

Thanks to generous liquidity support from central banks risky assets have been moving in a broad relationship for some time and this week several markets reached or approached key levels

Of all the major markets equities are the main barometer of risk taking This week shares in Australia Hong Kong India Russia Europe London Brazil and New York all hit fresh peaks for at least the past 12 months

Rising appetite for risk was perhaps most apparent in the US crude oil price breaking above $75 a barrel which was its high in late August and had presented a barrier for oil bulls since June

The dollar index continued its slide towards 75 as the currency backed by the Federal Reserversquos zero interest rate policy is seen as the source of cheap funding for all types of risky trades for global investors As the dollar slid gold extended its record move above $1000 a troy ounce while US Treasury yields also rose

In recent months equities and Treasuries have often rallied in unison which has perplexed investors given the weakness of the dollar On Friday the rally in risk assets faltered but the flood of money behind markets remains in full flow

ldquoThe world is a liquidity junkierdquo says Alan Ruskin strategist at RBS Securities

ldquoPretty much every trade is functioning off the fact that short-term financing costs across the G7 are about as close to zero as they ever will be It creates an incentive to take on risk all over the maprdquo

There is a growing worry that this weekrsquos convergence towards key levels means the risk trade may be approaching a point where some investors are tempted to cash in gains

The SampP 500 closed at a 12-month peak of 109656 on Thursday shy of the 1100 year-end target established by many analysts To date the SampP has rallied 60 per cent from its low in March This bounce has characterised the performance of global equity markets in recent months

ldquoBroadly speaking markets are moving together and you canrsquot rule out the possibility of a correctionrdquo said Stuart Schweitzer global markets strategist for JPMorganrsquos Private Bank

ldquoI encounter a lot more pessimism than optimism about the outlook for equities from meetings with clientsrdquo he added

One source of concern is that the equities rally has been mainly an institutional affair with retail investors staying on the sidelines This say some observers suggests a ldquotradersrsquo marketrdquo with the risk that at some point this yearrsquos big rebound in risky assets ndash oil is up 120 per cent from its February low of about $34 a barrel while US high-yield corporate bonds

have generated returns in the region of 50 per cent year to date ndash will meet a wall of profit-taking

Mr Ruskin does not rule out a squaring of risk trades particularly ahead of Thanksgiving in November given the current extended valuations

One market that appears extended is gold say some analysts as bullionrsquos fans worry about the threat of inflation from central banksrsquo easy money policies

ldquoThe economic environment is one in which the authorities would find it very hard to generate much inflation even if they wanted tordquo says Julian Jessop analyst at Capital Economics ldquoWe expect gold prices to fall back below $1000oz by the end of this year and to $800 in mid-2010rdquo

But perhaps the most vulnerable part of the risk market party is oil which briefly traded above $78 a barrel on Friday

Mr Ruskin said ldquoOil is potentially the villain as there comes a point when its rise based on an improving economic backdrop can run the risk of damping growth expectations A steady oil price around $70 a barrel has been good for the risk trade but there is a worry it goes higherrdquo

Another aspect of a ldquotraders marketrdquo is that positions can become crowded which can cause extreme volatility when positions are unwound There is a concern that the dollar trade is exhibiting such characteristics Since making a high of 8910 in March when equities plumbed their lows the dollar index has fallen more than 15 per cent to just above 75 on a trade-weighted basis

Don Galante senior vice-president of fixed income at MF Global said ldquoThere are a lot people selling the dollar and itrsquos become a crowded trade at some point it will bounce back as the economy stabilisesrdquo

For now the weak dollar is feeding risk appetite as companies in the SampP 500 derive 47 per cent of revenues from outside the US says Standard amp Poorrsquos Others say the nature of the economic recovery will have a bigger say on whether markets can stay at current levels Steven Ricchiuto chief economist at Mizuho Securities says ldquoThe economic data had better be in line with the sustained recovery story discounted by the marketsrdquo

Mr Ricchiuto says any sign of the recovery faltering will spark some unwinding of the ldquocorrelation traderdquo between equities oil and the dollar

httpwwwftcomcmss007203ef2-ba8a-11de-9dd7-00144feab49ahtml

Ralph Atkins Eurozone exports tumble sharply By Ralph Atkins in Frankfurt

Eurozone exports tumbled unexpectedly sharply in August raising fresh doubts about the strength of the 16-country regionrsquos economic recovery

Exports to countries outside the eurozone fell 58 per cent compared with July reversing a 47 per cent increase seen in the previous month according to Eurostat the European Unionrsquos statistical office

The latest decline is a blow to the eurozonersquos economic prospects because a pick-up in global demand for its exports had appeared likely to drive a rebound in the second half of this year But even before the latest data economists had worried that a strengthening euro would act as a significant brake on growth

The European Commission has warned that the unwinding of global economic imbalances could ldquosignificantlyrdquo affect the eurozone

Marco Valli economist at Unicredit in Milan said the eurorsquos rise would not have had an impact on the latest data because it typically takes about nine months before the effects of a rise in the euro feed through

He played down the significance of Augustrsquos fall however because eurozone manufacturing survey results still pointed to robust export growth in the third quarter ldquoThere is nothing in todayrsquos data that points to a sudden change in the outlook of improvementrdquo he said

The latest fall in eurozone exports was the largest since the 125 per cent month-on-month plunge seen in January this year

Monthly export data are often volatile and Augustrsquos figures may have been distorted by companies shutting down production for longer than normal over the summer because of the economic crisis Nevertheless the data were a setback to hopes that exports were on a strongly rising trend

Italy reported a particularly sharp 191 per cent month-on-month fall in exports beyond the 27-country EU while Germany and France reported falls of about 3 per cent Spain however reported a 07 per cent rise

Eurozone economies were badly hit by the global loss of confidence that followed the collapse of Lehman Brothers late last year After the latest fall eurozone exports were still almost 25 per cent lower in August than a year before

Earlier this week Jean-Claude Trichet European Central Bank president indicated that he remained wary about the strength of the recovery ldquoWe have halted the freefall in economic activity that we witnessed around the turn of the year There are reasons to believe that a gradual recovery lies ahead But the uncertainty surrounding this outlook remains highrdquo he

told a banking conference in Frankfurt The ECBrsquos caution explains why financial markets do not expect a rise in official interest rates until late next year at the earliest

Ralph Atkins Eurozone exports tumble sharply October 16 2009 httpwwwftcomcmss0c14fd5c0-ba40-11de-9dd7-00144feab49ahtml

Wolfgang Muumlnchau Countdown to the next crisis is already under way October 18 2009

By Wolfgang Muumlnchau

We did not need to wait until the Dow Jones Industrial Average hit 10000 It has been clear for some time that global equity markets are bubbling again On the surface this looks like 2003 and 2004 when the previous housing credit commodity and equity bubbles started to inflate helped by low nominal interest rates and a lack of inflation There is one big difference though This bubble will burst sooner

So how do we know this is a bubble My two favourite metrics of stock market valuation are Cape which stands for the cyclically adjusted priceearnings ratio and Q Cape was invented by Robert Shiller professor of economics and finance at Yale University It measures the 10-year moving average of the inflation-adjusted pe ratio Q is a metric of market capitalisation divided by net worth Andrew Smithers has collected the data on Q a concept invented by the economist James Tobin Cape and Q measure different things Yet they both tend to agree on relative market mispricing most of the time In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent The markets have since gone up a lot more than the moving average of earnings You can do the maths

The single reason for this renewed bubble is the extremely low level of nominal interest rates which has induced people to move into all kinds of risky assets Even house prices are rising again They never fell to the levels consistent with long-term price-to-rent and price-to-income ratios which are reliable metrics of the property marketsrsquo relative under- or over-valuation

But unlike five years ago central banks now have the dual role of targeting monetary and financial stability As has been pointed out time and again those two objectives can easily come into conflict In Europe for example the European Central Bank would under normal circumstances already have started to raise interest rates The reason it sits tight is to prevent damage to Europersquos chronically under-capitalised banking system which still depends on the ECB for life support The same is true more or less elsewhere Now I agree there is no prospect of a significant rise in inflation over the next 12 months but the chances rise significantly after 2010

Once perceptions of rising inflation return central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly ndash much quicker than during the previous cycle A short inflationary boom could be followed by another recession another banking crisis and perhaps deflation We should not see inflation and deflation as opposite

scenarios but as sequential ones We could be in for a period of extreme price instability in both directions as central banks lose control

This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices While according to Minsky these are the deep causes of instability the mechanism through which instability comes about is the way governments and central banks respond to crises The state has potent means to end a recession but the policies it uses give rise to the next phase of instability Minsky made that observation on the basis of data mostly from the 1970s and early 1980s but his theory describes very well what has been happening to the global economy ever since especially in the past decade The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models Minsky is about all we have

His policy conclusions are disturbing especially if contrasted with what is actually happening In their crisis response world leaders have focused on bonuses and other irrelevant side-issues But they have failed to address the financial sectorrsquos overall size So if Minsky is right instability should continue and get worse

Our present situation can give rise to two scenarios ndash or some combination of the two The first is that central banks start exiting at some point in 2010 triggering another fall in the prices of risky assets In the UK for example any return to a normal monetary policy will almost inevitably imply another fall in the housing market which is currently propped up by ultra-cheap mortgages

Alternatively central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible This I believe would cause the mother of all financial market crises ndash a bond market crash ndash to be followed by depression and deflation

In other words there is danger no matter how the central banks react Successful monetary policy could be like walking along a perilous ridge on either side of which lies a precipice of instability

For all we know there may not be a safe way down

Wall Street Revalued Imperfect Markets and Inept Central Bankers Wiley 2009

Stabilising an Unstable Economy McGraw-Hill 2008

munchaueurointelligencecom

httpwwwftcomcmss0b82d2b96-bc02-11de-9426-00144feab49ahtml

Business

October 18 2009

A Lifeline Not Made in the USA By MICHELINE MAYNARD Millions of Americans work for foreign companies operating in the United States but their stories are rarely told As the country pulls out of a devastating recession foreign employers could help revive the economy

This article is adapted from ldquoThe Selling of the American Economy How Foreign Companies Are Remaking the American Dreamrdquo by Micheline Maynard a reporter for The New York Times The book to be published on Tuesday by Broadway Business explores the impact of foreign investment on American workers communities and the political scene

NEVADA RYAN 35 is from a family of crop-dusters Her grandfather father mother mdash and Ms Ryan herself mdash have all spent countless hours flying planes that drop plumes of chemicals on corn and cotton fields near her hometown of Sumner Miss

Time spent as a child in those nimble little planes inspired her to get her pilotrsquos license and study engineering But the kind of attractive job she wanted could not be found when she was attending college in Mississippi during the 1990s So like many others she left the area to find employment mdash going first to Charleston SC then to Atlanta

In 2006 she heard of a chance to return to her home state for a job at American Eurocopter part of the EADS consortium the European airplane and military equipment maker

EADS planned to build a second plant in Columbus Miss and make rescue helicopters for the United States Army Ms Ryan applied was hired as a flight test engineer and immediately flew to Germany for training

Asked how she and her co-workers felt about owing their livelihoods to a company based overseas Ms Ryan 35 responded ldquoI donrsquot think anybody here has a problem with itrdquo

As scores of companies are hemorrhaging jobs closing plants and slashing compensation foreign employers have become a lifeline for Ms Ryan and millions of other Americans While they havenrsquot been immune from the recession foreign-owned companies in the United States have a work force of more than 53 million or some 35 percent of all workers and are spread across the 50 states in sectors from manufacturing to retail and publishing If these jobs did not exist the nationrsquos unemployment rate would be above 13 percent

Investments in the United States by big car companies like Toyota Honda Nissan and Mercedes-Benz have received the greatest share of attention over the past two decades But there are also tens of thousands of Americans working for companies like the Tata Group of India which recently reopened the Pierre Hotel in Manhattan and makes Eight OrsquoClock Coffee Haier the Chinese appliance maker with a refrigerator plant in South Carolina and an impressive headquarters in a landmark building in Manhattan and Nestleacute the Swiss food company which employs hundreds to make Nesquik and Coffee-Mate in Indiana

Even Anheuser-Busch Americarsquos best-selling beer maker is now owned by a Belgian company InBev

Foreign companies may touch a nerve in American society and may still be an object of fear and distrust among many who view foreign investment as a threat to the American worker and way of life But foreign investment isnrsquot simply about helping workers earn a weekly paycheck Foreign companies that invest in the United States are having a significant mdash and largely positive mdash impact on not only the lives of workers but also the health of the American economy and society as a whole

When foreign companies open a factory or buy a business in a region they also stimulate local commerce and create a demand for more homes shops schools and restaurants They contribute money to schools parks and towns and lure consultants and technicians who then provide more jobs This ripple effect explains why governors mayors and economic development officials are so eager for foreign investors

Without foreign investment says Mitch Daniels the Republican governor of Indiana ldquowersquod be a Dust Bowlrdquo

IN Ms Ryanrsquos case a job with a foreign company was an opportunity to move back home and be close to relatives and friends But whether home is Mississippi or Michigan Nashville or New York mdash or even if moving home isnrsquot the goal at all mdash foreign companies provide American workers with more than jobs They also provide them with options

Judy Flynn one of Ms Ryanrsquos co-workers got a second chance at a manufacturing career through American Eurocopter For 20 years she ran the purchasing operations at United Technologies in Columbus Miss an American-owned company that supplied auto parts to customers like GM and Chrysler She started on the assembly line and spent 10 years assembling motors before she was promoted to an office job and then to purchasing supervisor

But soon Ms Flynn who saw every parts order that came into the factory noticed that requisitions for parts the plant had previously been fulfilling were instead being sent to its operations in China ldquoI had an idea that something was happening globallyrdquo she said Indeed it was In 1999 United Technologies put her division up for sale and in 2003 it closed the plant entirely putting its 2000 employees out of work

Ms Flynn the mother of three daughters with no college degree mdash ldquoI had lsquolife experiencersquo rdquo she said with a smile mdash applied at American Eurocopter as soon as she heard it planned to open its original facility a plant making civilian rescue helicopters at the nearby Golden Triangle Airport

She landed an office job and after four years worked her way to supervisor in the materials department Known to her co-workers as ldquoMiss Judyrdquo she is easy to spot by her bright blue lanyard bearing her company identification card and lapel pins with pictures of American Eurocopter aircraft

Still for her as for many American Eurocopter employees the adjustment wasnrsquot so easy In the companyrsquos first year turnover was rampant as workers struggled to adjust to the painstaking routine of assembling helicopters Inside the factory the time-consuming work was as challenging as a skilled trades position in a car plant demanding precision attention to detail and a reasonable understanding of helicopter mechanics It was a departure from the routine of a typical factory

The dropout rate was high ldquomainly driven by the fact of people not knowing very well what we were doingrdquo said Marc Paganini the chief executive of American Eurocopter Executives soon realized that something had to be done to protect their new investment Most of the original workers had left taking what little experience they had with them and newcomers were making all kinds of mistakes which were costly given that the helicopters being assembled were used for rescue missions where lives were quite literally at stake

But instead of giving up on their workers and replacing them with more-experienced counterparts from overseas managers decided to spend more time interviewing and assessing American workers and to provide more training once they were on the plant floor

Ms Flynn said the attitude at the plant became ldquoWe will help you to succeed we are determined you will succeed hererdquo Soon the turnover slowed and a second plant opened next door

The factories gave EADS the opening it wanted in the American market letting it compete for an even bigger prize a $35 billion contract to build refueling tanker planes for the Air Force which it landed in February 2008 in a stiff competition with Boeing

EADS which subsequently lost the contract after the General Accounting Office found flaws in the way the work was awarded plans to try again for the deal as does Boeing If it succeeds EADS plans to build an assembly plant in Mobile Ala

ldquoFrom the very beginning of the creation of EADS we were looking at doing more in the United Statesrdquo Mr Paganini said ldquoWe knew if we built here we could sell hererdquo

FACTORY work might sound dull and unappealing to many Americans But for those struggling to make ends meet an assembly line job at a foreign-owned factory is a coveted opportunity

Brian Howard lives with his wife Stephanie and their sons Jordan and Dillon in a new three-bedroom house with green shutters in Williamstown Ky The house custom built has furniture and cabinets made by Mr Howard an amateur woodworker The neighborhood is dotted with new homes some owned by his co-workers at Toyota in Georgetown Ky nearby

When Mr Howard learned about the plant he sent for an application card But he hadnrsquot yet finished college there was no automotive experience in his background and he knew little of what to expect from working at a car plant let alone one run by a Japanese company So he first went back to school receiving his degree in business management at Northern Kentucky University in 1989 before applying at the plant

Twenty years later he is a team leader managing a group of workers in the paint department at one of the two assembly plants at the Georgetown complex which also includes an engine plant and employs 7800 workers Most like Mr Howard had college degrees and little experience on an assembly line before they joined Toyota Competition was stiff as soon as the state opened the application process more than 80000 people submitted cards hoping to be considered for the original 2000 jobs or 40 applicants for every position

For Mr Howard the main attraction was the pay and benefits such as health care and a retirement plan and the opportunity to advance within the plant He began at about $20 an hour and now earns roughly $25 an hour about $8 over the national average according to the Bureau of Labor Statistics Even with concessions the union made during the devastating auto slump veteran workers at Detroit plants are still paid slightly more about

$28 an hour But workers who will be hired in the future mdash if any mdash will receive about half that

The wages and ample opportunities for advancement may help explain why unions are absent at many foreign-owned plants So does location Many though not all foreign-owned operations have been in Southern states that are most likely to have right-to-work laws These laws mean workers canrsquot be legally required to join a union even if one is organized in the workplace (Foreign car plants built in Indiana Ohio West Virginia and Kentucky are not in right-to-work states but the UAW has either not tried or failed to organize them)

No matter where they are located it will be the actions of the foreign companies themselves that will determine whether their workers stay independent or choose to join unions

ldquoThe best selling point that unions have is that workers in foreign-owned companies are employed at managementrsquos largessrdquo said Gary N Chaison a professor of industrial studies at Clark University in Worcester Mass Beyond labor laws he added ldquothey have no protection except for what management will let them haverdquo Unions could have a chance he said if the companies institute mass layoffs in a ldquoclearly arbitrary uncalled for and unfair mannerrdquo

A decision by Toyota to follow GM in pulling out of a joint venture in California has angered the UAW and California legislators who have vowed to find a new owner for the car plant But in general management at foreign-owned factories knows that its best weapon against unions in this economy is a job

Asked about the prospect of a union in the American Eurocopter plant in Columbus Miss Ms Ryan said ldquoIf it ainrsquot broke donrsquot fix itrdquo She is not so dismissive about the idea of eventually working for an American employer mdash if it could offer a job equivalent to the one she holds now and if she could stay in her home state which both seem unlikely

ldquoIrsquom not saying I wouldnrsquot work for an American company I would love tordquo she said ldquo Maybe someday the tide will turn and there will be one that invests hererdquo

Mickey Meece contributed reporting from Georgetown Ky

httpwwwnytimescom20091018business18excerpthtmlthampemc=th

Europe EconoMonitor

Who is Afraid of the Global Rebalancing Aurelio Maccario | Oct 16 2009

More than the uneventful October ECB meeting the stream of strong IP numbers in the three largest economies of the area was the real news of last week As a consequence we decided to revise up our eurozone GDP forecast for the third quarter We now see 3Q GDP at 04 qoq vs our previous expectations of 02 strongly up from the prior -02 and pretty much in line with an educated guess of the post-crisis eurozone growth potential No doubt this is very good news but the risk of a renewed slowdown in the last quarter of the year is very concrete We changed the quarterly profile of growth and now expect GDP to slow to 02 in the last quarter of the year and to decelerate again to 01 in the first three months of 2010 In our view itrsquos too early to change the overall picture which remains one of below-trend GDP growth throughout the forecast horizon

This week is very light in terms of data releases and events The German ZEW index for October (Tue 13) should add further though slowing momentum to the brighter sentiment picture whereas ECB rhetoric (Tumpel-Gugerell on Tue 13 and Bini Smaghi on Wed 14) should stick to the plot played by Trichet in Venice welcoming recent improvements but warning on the fragility of the recovery Slightly more important will be the final estimate of eurozone September inflation (Thu 15) - which we expect confirmed at -03 yoy ndash especially if core prices drift downward to 12

Preventing the exchange rate from being another drag As mentioned the October ECB press conference delivered no relevant news One of the possible exceptions has been Trichetrsquos comments on the strength of the euro Trichet clearly claimed that there is agreement among G20 participants on the need to reduce excessive volatility in FX markets and he very cautiously hinted at some sort of agreement on possible coordinated intervention to counteract a very unwelcome further appreciation of the euro

The exchange rate issue has been always a very tricky one in the ECBrsquos history Nowadays it has to be considered also in the wider perspective of the ongoing correction in global imbalances Our view is that global imbalances probably were not among the main causes of the financial apocalypse of the last two years but likely one of the key factors that aggravated its harsh consequences on the real economy All of a sudden after the collapse in global trade last autumn the US consumer found himself with no savings to use as a buffer to offset the negative wealth effect of housing and equity markets and large-surplus countries didnrsquot have any endogenous engine of growth to rely upon amid plunging exports

The situation is definitely improving latest figures tell us that the US current account deficit is now lower than 3 of GDP surpluses of oil-exporting countries are shrinking in the wake of the plunge in oil quotations from the peak of July 2008 and also in China in the first half of 2009 there has been a significant narrowing in the trade surplus The eurozone shifted from a broadly-balanced current account to a small deficit thanks to a certain resilience in private consumption that has made imports fall less than exports

What we should expect on the matter going forward remains difficult to detect However an article published in the latest Quarterly Report on the Euro Area published by the European Commission (EC) helps in shedding some light The EC argues that although the euro area played a negligible role in the building up of global imbalances it may be one of the casualties of the ongoing rebalancing process httpeceuropaeueconomy_financepublicationspublication15971_enpdf)

No surprises lots will depend on the role China will decide to play In the ECrsquos opinion in a more benign scenario the Chinese economy would take care of absorbing all the projected reduction in the US trade deficit via a significant appreciation of the real effective exchange rate In this scenario the euro area will experience a significant narrowing of the trade deficit with China and a fall in the trade surplus with the US as a consequence of a mild appreciation of the euro The worst case scenario is one where China could resist absorbing US products or allow only a very modest appreciation of the renminbi In this case a significant trade deficit for the eurozone would emerge because of the likely very sizeable appreciation of the euro

It seems to us that in the current beginning of a very fragile recovery (apart from the nice rebound we are going to see in the third quarter) the ECB is becoming increasingly aware that a stronger euro must be absolutely avoided A couple of years ago we developed a model aimed at providing a rule of thumb to determine the dampening effect of currency appreciation on economic activity Indeed rather than export we chose the GDP as the endogenous variable of the model because we wanted to allow for spill-over effects of changes in export demand onto domestic variables ndash mostly investment spending The dampening effect on GDP of a 1 appreciation in the nominal trade-weighted (TW) euro is about 01 in a two-year time the impact is negligible in the first two quarters but becomes significant thereafter and the largest single-quarter effect (50 of the total cumulative response) is felt after nine months This means that the 2 appreciation seen since the beginning of 3Q 2009 may shave off 02pp from an already-anemic GDP over the forecast horizon Further euro strengthening in the remainder of the year will bring down our baseline 08 growth forecast for 2010 worryingly closer (or even below) to the 03 that the ECB staff is currently envisaging

This is a new era for lots of aspects of monetary policy We think that it may also become a new era of ECBrsquos rhetoric on the exchange rate It would be paradoxical that one of the few balanced economic areas of the world bears the burden of the global readjustment What can be certainly said is that irrespective of how the ECB decides to tackle the exchange rate issue a strong euro is another solid argument in favor of our view of a refi rate stuck at 1 throughout 2010

httpwwwrgemonitorcomeuro-monitor257835who_is_afraid_of_the_global_rebalancing

Willem Buiter ftcommaverecon

Time for the ECB to get serious about the overvalued euro October 18 2009 103pm The euro has become a currency on steroids Its relentless nominal and real appreciation since the end of 2000 was briefly interrupted in the second half of 2008 but resumed with a vengeance during 2009 The strength of the currency is hurting the exporting and import-competing sectors of the Euro Area Unemployment and excess capacity continue to rise The eurorsquos excessive strength is also contributing to a significant and persistent undershooting of the rate of inflation the ECB deems to be consistent with price stability in the medium term headline HICP inflation in December 2008 was 160 percent in December 2008 hit zero in May 2009 and has been negative since then

The next two tables demonstrate the relentless climb of the euro since 2001 The narrow effective exchange rate is for the euro 11-16 nations and involves a trade-weighted average of 12 bilateral exchange rates vis-a-vis the euro The CPI measure for the real exchange rate is used Prior to 1999 (the start of the euro) a synthetic euro-index is used Data are from Eurostat

The broad effective exchange rates are for the euro-16 nations and involve a trade-weighted average of 41 bilateral exchange rates The CPI measure of the real exchange rate is used Data are from Eurostat

What accounts for the strength of this uumlber-currency The professionrsquos inability to understand let alone predict things monetary is amplified when it comes to explaining or predicting the relative price of (at least) two currencies Nevertheless any disinterested observer would be hard-pushed to avoid the conclusion that the Eurozone is paying the price for the ECBrsquos excessively tight monetary policy

The ECBrsquos monetary policy is excessively tight in relation to the ECBrsquos self-imposed quantitative expression of its Treaty-based price stability mandate In the ECBrsquos own words ldquoThe primary objective of the ECBrsquos monetary policy is to maintain price stability The ECB aims at inflation rates of below but close to 2 over the medium termrdquo

There is no doubt in my view that the ECB has an asymmetric interpretation of its price stability mandate Excessive inflation is to be avoided at all cost However excessive deflation can be tolerated and rationalized

The ECBrsquos monetary policy stance is also excessively tight in relation to the monetary policy stances of the other advanced industrial countries especially those in the US Japan and the UK By keeping the official policy rate at 100 percent while the corresponding rates are 0 to 025 percent for the US 050 percent for the UK and 010 percent for Japan the ECB has constructed a tailor made intra-advanced-industrial-countries carry-trade vehicle

Can the ECB pay attention to the exchange rate beyond what the behaviour of the exchange rate implies for price stability in the medium term Of course it can It is indeed mandated to do so Just because price stability is the primary objective of the ECB taking pole position in a lexicographic ordering of central bank objectives does not mean that the ECB can afford to ignore other objectives as long as their pursuit does not prejudice the price stability objective The Treaty is very clear on this

Article 105 of the Treaty Establishing the European Community states ldquoThe primary objective of the ESCB shall be to maintain price stability Without prejudice to the objective of price stability the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 The ESCB shall act in accordance with the principle

of an open market economy with free competition favouring an efficient allocation of resources and in compliance with the principles set out in Article 4rdquo

Article 2 reads ldquoThe Community shall have as its task by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in Articles 3 and 4 to promote throughout the Community a harmonious balanced and sustainable development of economic activities a high level of employment and of social protection equality between men and women sustainable and non-inflationary growth a high degree of competitiveness and convergence of economic performance a high level of protection and improvement of the quality of the environment the raising of the standard of living and quality of life and economic and social cohesion and solidarity among Member Statesrdquo

The relevant bit of Article 4 reads ldquo2 Concurrently with the foregoing and as provided in this Treaty and in accordance with the timetable and the procedures set out therein these activities shall include the irrevocable fixing of exchange rates leading to the introduction of a single currency the ecu and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and without prejudice to this objective to support the general economic policies in the Community in accordance with the principle of an open market economy with free competitionrdquo

Even through the ECB may have limited scope for promoting equality between men and women through its monetary and exchange rate policies (it can do so of course through its hiring and promotion policies) it can at times pursue a high level of employment by targeting a more competitive exchange rate without in doing to undermining its primary objective price stability Indeed under present conditions the ECB is undermining its price stability objective by passively twiddling its thumbs while the euro appreciates

The deflationist bias of the ECB

The asymmetry in the response of the ECB to inflation rates above the level deemed consistent with price stability in the medium term as opposed to inflation rates below that level is staggering and poses a material risk to the independence of the institution When headline HICP inflation rose above the tolerance level of lsquobelow but close to two percentrsquo during 2005 and the first three quarters of 2006 and from the last quarter of 2007 till almost the end of 2008 the ECB emphasized the threat posed by the headline inflation rate and poo-pooed the relevance of the much lower core inflation rate (core inflation is HICP inflation net of the energy food tobacco and alcohol components)

The table below shows the divergent behaviour of the headline and core HICP indices during those periods as well as during the period since the very end of 2008 when the relationship between headline and core inflation in the Euro Area was reversed with headline inflation significantly below core inflation

The ECB rightly warned against deriving too much comfort from a core inflation rate that was still in the comfort zone while the headline inflation was well above the tolerance level For instance in the ECB statement on December 1 2005 Jean-Claude Trichet stated that ldquoIn interpreting current inflation rates it is important to make a clear distinction between temporary short-term factors on the one hand and factors of a more lasting nature on the other In that respect it is of crucial importance to take a strictly forward-looking perspective which does not allow much comfort to be drawn from the current comparatively lower rates for measures of inflation that exclude certain components such as energy or certain categories of food Such measures of ldquocorerdquo inflation have at least in the past been shown to lag behind rather than lead the developments in headline inflationrdquo

President Trichet was absolutely correct temporary vs permanent need bear no relation at all to non-core vs core To assume that core = permanent and non-core = transitory as was common practice among Federal Reserve Board members and Fed research staff until quite recently is bad economics and bad statistics I have argued this at some length in earlier posts (eg (1) and (4))

However this explosion of good sense did not survive the onset of a period of excessively low headline inflation The latest (October 2009) edition of the ECBrsquos Montly Bulletin states (in Box 3 page 39) that ldquoat the current juncture it is particularly insightful to look at the less volatile components of the HICP in order to analyse the forces driving inflationrdquo And guess what the less volatile components of the HICP are the core components

To a disinterested observer like myself this suggest strongly that the ECB is talking out of both sides of its mouth and that it speaks with a forked tongue when it insists it has a symmetric interpretation and implementation of its price stability mandate Clearly it is more concerned about inflation than about deflation It is in violation of its mandate

What is to be done

The ECB is violating its price stability mandate by tolerating aiding and abetting deflation in the Euro Area It has the option of cutting the official policy rate by at least 100 basis points but chooses not to exercise this option It should cut the official policy rate (the Main refinancing operations (fixed rate)) from 100 percent to 000 percent and the interest rate on the deposit facility (reserves held by commercial banks with the Eurosystem) from 025 percent to minus 075 percent To those who argue that euro currency sets a zero lower bound to all short nominal interest rates I recommend a reality check do they really believe that Euro Area commercial banks would stockpile euro notes in large warehouses rather than holding deposits with the Eurosystem if the spread between the interest rate on deposits with the Eurosystem and the (zero) interest rate on euro currency were minus 75 basis points

Perhaps the banks might consider a switch from reserves with the central bank to euro currency if the ECBrsquos deposit rate were set at minus 5 percent or minus ten percent Even then the negative nominal interest rate on deposits could be enforced if the ECB were to abandon the fixed exchange rate between euro deposits and euro currency a minus ten percent interest rate on euro deposits with the Eurosystem would amount to the same pecuniary return as a zero percent interest rate on euro currency if the ECB were to announce and implement a ten percent appreciation of euro deposits vis-a-vis euro currency But none of that is necessary when the official policy rate is at zero and the deposit rate at minus 75 basis points

Coordinated foreign exchange market intervention

The exchange rate when it is not market-determined (floating) is not an instrument that is managed solely at the discretion of the ECB Even when it is market-determined policy actions implemented by the ECB that may influence the external value of the currency are not determined solely by the ECB The exchange rate is a joint competency of the ECB and the Council of Ministers Articles 105 and 111 of the Treaty (Consolidated Version) are clear on this

Article 105 states that the ECB will implement foreign exchange market interventions

ldquo1052 The basic tasks to be carried out through the ESCB shall be mdash to define and implement the monetary policy of the Community mdash to conduct foreign-exchange operations consistent with the provisions of Article 111 mdash to hold and manage the official foreign reserves of the Member States mdash to promote the smooth operation of payment systems ldquo

Though the ECB implements any foreign exchange market intervention that has been decided upon whether to intervene or not and in what manner is not decided by the ECB alone as is clear from Article 111

ldquoArticle 111 1 By way of derogation from Article 300 the Council may acting unanimously on a recommendation from the ECB or from the Commission and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability after consulting the European Parliament in accordance with the procedure in paragraph 3 for determining the arrangements conclude formal agreements on an exchange-rate system for the ecu in relation to non-Community currencies The Council may acting by a qualified majority on a

recommendation from the ECB or from the Commission and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability adopt adjust or abandon the central rates of the ecu within the exchange-rate system The President of the Council shall inform the European Parliament of the adoption adjustment or abandonment of the ecu central rates

2 In the absence of an exchange-rate system in relation to one or more non-Community currencies as referred to in paragraph 1 the Council acting by a qualified majority either on a recommendation from the Commission and after consulting the ECB or on a recommendation from the ECB may formulate general orientations for exchange-rate policy in relation to these currencies These general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stabilityrdquo (Article 300 can be found here it doesnrsquot add much)

I happen to be rather sceptical about the effectiveness of sterilised foreign exchange market intervention in a world with a very high degree of international capital mobility But even it does not help it is unlikely to hurt For the first time in as long as I can remember President Trichet has hinted openly at the possibility of coordinated foreign exchange market intervention In the QampA following the October ECB Governing Council meeting he stated ldquoAs regards your question on the dollar and the euro I would say that where the floating currencies the major floating currencies are concerned we the Governing Council of the ECB believe that excess volatility and disorderly movements in exchange rates have adverse implications for economic and for financial stability And as you know we are in agreement in this respect on both sides of the Atlantic We will continue to monitor the exchange markets closely and cooperate as appropriate I would also say that I trust that the statement of the US authorities on the strong-dollar policy is extremely important in the present circumstances When the Secretary of the Treasury and our friend Ben Bernanke say that a strong dollar is in the interests of the US economy and that they are pursuing a strong-dollar policy this is a judgement that is obviously very important for us and for the global economyrdquo (emphasis added)

Cooperation here means only one thing and it isnrsquot coordinated prayer But even if President Trichet were opposed to intervention or if the majority on the Governing Council were now would be the time for the Council of Ministers to rdquoformulate general orientations for exchange-rate policy rdquo as per articles 105 and 111 and to instruct the ECB to intervene to stop any further rise of the euro and preferably to bring it down

Obviously ldquoThese general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stabilityrdquo but that would not be an issue under current economic circumstances when price stability is violated in a downward direction A 15 or 20 percent depreciation of the effective exchange rate of the euro would not threaten the price stability mandate it would help achieve it

Incidentally the Treaty says nothing as to who will be the judge of whether a general orientation concerning exchange rates is ldquowithout prejudice to the primary objective of the

ESCB to maintain price stabilityrdquo The ECB views itself as the natural guardian of price stability but the Treaty leaves this open no doubt reflecting an uneasy compromise between those involved in its writing

What hope is there of the other central banks that matter (the Fed the Bank of Japan the Peoplersquos Bank of China and the Bank of England) joining in a coordinated intervention to bring down the euro Unless the intervention is coordinated it will not even be worth trying

As regards the PBC the odds are zero Without the ECB throwing in a sweetener the odds on the Fed the Bank of Japan and the Bank of England intervening jointly are lower than that of the governors of the four institutions jointly participating in a public broadcast of a Pilates class The US fiscal and monetary policy makers may pay public lipservice to the strong dollar but they thank the good Lord in private every time the dollar weakens The chairman of the Fed the US Treasury Secretary and the big fellow in the NEC all would like to see the US dollar weaker as long as dollar weakening does not become a disorderly rout that threatens to raise US longer-term interest rates

The Bank of Japan and the Japanese ministry of finance want to see a weaker yen not a stronger yen In the UK the governor of the Bank of England has been actively talking down the pound sterling The fact that there still is a UK economy after more that a decade of overvaluation of sterling and intersectoral misallocation of resources is in no small part due to the weakness of sterling this past year

So if president Trichet wanted to orchestrate a coordinated intervention to bring down the euro (or if he were to receive a general exchange rate orientation from the Council of Ministers to that effect) he would find no takers unless he had something to offer And he does He has 100 basis points to play with off the official policy rate and a similar amount off the interest rate on deposits

Even if the instinctively cautious ECB were to implement just a 50 bps cut in the Main refinancing operations (fixed rate) and in the rate on the Deposit facility to complement a coordinated foreign exchange market intervention to weaken the euro this would enhance the odds that the intervention would be effective There was a coordinated intervention by the ECB the Fed the Bank of Japan and the Bank of England to strengthen the euro on 22 September 2000 but without any complementary change in official policy rates It was a mixed success at best A unilateral intervention by the ECB to strengthen the euro followed on November 3 2000 it was a failure

The coordinated interventions following the 911 attacks in 2001 were sui generis they had no normal monetary or exchange rate policy objectives but were aimed at maintaining orderly markets and access to US$ euro and other liquidity worldwide following the terrorist outrages The mutual extension of swap lines were spectacularly successfull of course On November 8 and November 18 2004 president Trichet engaged in open mouth operations aimed at weakening the euro whose steep rise he described as ldquobrutalrdquo These verbal interventions were subject to diminishing marginal productivity

By proposing a coordinated intervention to bring down the euro (presumably combined with coordinated open-mouth operations by the central bank governors involved) supplemented with say a 50 basis points rate cut for the Euro Area the ECB would render ineffective the obvious US and Japanese rejoinder to a request for joint intervention to weaken the euro ldquoyou have unused ammunition in your arsenal - 100 basis points worth of potential interest rate cuts for the official policy rate and the rate on deposits use that first before you come calling for external assistancerdquo

It is time for the ECB to demonstrate that despite all the evidence of recent years it does not pursue an asymmetric deflationist monetary agenda but that it takes a violation of its price stability mandate in a downward direction equally seriously as a deviation in an upward direction If the ECB persists in acting in a willfully asymmetric manner its cherished independence will be taken from it The letter of the Treaty will provide no protection against popular anger and political opportunism

October 18 2009 103pm Willem Buiter Time for the ECB to get serious about the overvalued euro October 18 2009 httpblogsftcommaverecon200910time-for-the-ecb-to-get-serious-about-the-overvalued-euro

Negocios

Todo el dinero para el alquiler Varios expertos proponen eliminarla vivienda protegida en propiedad LUIS DONCEL 18102009

La idea es dejar de subvencionar el ladrillo y hacerlo a las personas con rentas bajas que necesiten una casa Pero eacutesta tiene que ser de alquiler eso siacute Una veintena de expertos reunidos por la Fundacioacuten de Estudios de Economiacutea Aplicada (Fedea) ha presentado esta semana el documento Por un mercado de la vivienda que funcione una propuesta de reforma estructural El texto como ya ocurrioacute con la poleacutemica propuesta de introducir un contrato laboral uacutenico supone un intento de agitar el debate econoacutemico en un paiacutes que seguacuten sus autores se encuentra inmerso en la paraacutelisis

Los profesores de Fedea parten de los perjuicios que causa el excesivo peso de la propiedad en Espantildea la escasa movilidad laboral en un paiacutes que se encamina a marchas forzadas a una tasa de paro del 20 Y del problema que supone para grandes capas de la poblacioacuten acceder a una vivienda Un espantildeol tiene que destinar 68 veces su renta anual disponible bruta para comprar un piso En Estados Unidos se consideran subprime los creacuteditos que suponen maacutes de cinco veces la renta disponible Asiacute que desde este punto de vista todo el mercado hipotecario espantildeol seriacutea subprime sentildeala el catedraacutetico de la London School of Economics Luis Garicano Y esto ocurre en un mercado en el que seguacuten los caacutelculos maacutes conservadores hay un milloacuten de viviendas vaciacuteas que no encuentran comprador

Asiacute ante las grandes ineficiencias del mercado los profesores de Fedea proponen grandes reformas La maacutes radical seriacutea la paralizacioacuten inmediata de la construccioacuten de viviendas de proteccioacuten oficial en propiedad y destinar todas las ayudas puacuteblicas al fomento del alquiler en el mercado libre No proponemos una disminucioacuten de la proteccioacuten social sino redirigir las ayudas a los que maacutes las necesitan Y ninguna de las reformas que proponemos tendriacutea caraacutecter retroactivo matizoacute antes de comenzar la presentacioacuten Ceacutesar Molinas para evitar ataques prematuros Los firmantes del documento consideran que el sistema de proteccioacuten oficial se ha convertido en una loteriacutea que beneficia a unos pocos y que no soluciona el problema de la accesibilidad a la vivienda Por ello proponen que todas las ayudas puacuteblicas se destinen a fomentar el alquiler en el mercado libre

iquestY por queacute no crear un parque de pisos de propiedad puacuteblica en reacutegimen de alquiler como defiende el Gobierno Las experiencias de otros paiacuteses no han funcionado bien Los inquilinos no consideran suyo el edificio y la gestioacuten burocraacutetica puede ser una carga responde Garicano Pero otros expertos ajenos al documento de Fedea como el estadiacutestico Julio Rodriacuteguez difieren de esta opinioacuten En Alemania ha funcionado muy bien como saben los inmigrantes espantildeoles que se alojaron en este tipo de pisos Me sorprenden los tics liberales de esta propuesta y el canto al mercado que supone Sabemos que cuando hablamos de vivienda y suelo el mercado por siacute solo no basta responde Rodriacuteguez

La segunda cuestioacuten maacutes poleacutemica es la propuesta de reformar la Ley de Arrendamientos Urbanos para rebajar de cinco a uno la duracioacuten miacutenima del contrato y liberalizar los aumentos de la renta que paga el inquilino Lo que proponen es volver al decreto Boyer de 1985 Yo creo que un antildeo es un plazo demasiado corto que genera mucha inestabilidad a los inquilinos ataca Rodriacuteguez ex presidente del Banco Hipotecario Es necesario ademaacutes aumentar la seguridad juriacutedica de los propietarios en caso de impago reza el texto Una de

las propuestas es dotar a los notarios de la posibilidad de acreditar el incumplimiento del pago del alquiler para agilizar el proceso de desahucio

Las otras dos recomendaciones de Fedea consisten en suprimir con caraacutecter inmediato todos los incentivos fiscales a la compra de vivienda y suprimir el impuesto de transmisiones patrimoniales en las compraventas de pisos La primera idea coincide con la del presidente del Gobierno pero con la diferencia de que Joseacute Luis Rodriacuteguez Zapatero anuncioacute que entrariacutea en vigor el 1 de enero de 2011 Al retrasar su puesta en marcha el Ejecutivo pretende reactivar la demanda en los meses que quedan de 2009 y 2010 Este retraso favorece la venta de viviendas pero estaacute retrasando la bajada de precios atacoacute uno de los firmantes del documento Rafael Repullo director del Cemfi Este tipo de trucos al que es tan aficionado el Gobierno no funcionan antildeadioacute el empresario Molinas

La eliminacioacuten del impuesto de transmisiones patrimoniales perseguiriacutea dinamizar la compraventa de viviendas y por tanto la movilidad geograacutefica de los propietarios Sugerimos que la peacuterdida de la recaudacioacuten podriacutea completarse a traveacutes de un aumento del IBI antildeaden

Los firmantes estaacuten convencidos de que estas medidas ayudariacutean a Espantildea a salir de la crisis en mejores condiciones

EL GOBIERNO

Siacute a la filosofiacutea del texto no a la letra 18102009 Los responsables del Ministerio de Vivienda comparten la filosofiacutea del documento de Fedea -impulsar el alquiler- pero no algunas de las medidas que propone para alcanzar este objetivo No conozco ni un solo paiacutes desarrollado que haya prescindido de la vivienda de alquiler puacuteblica responde Marcos Vaquer subsecretario del Ministerio que dirige Beatriz Corredor Estamos de acuerdo con que hay que fomentar el alquiler mediante mejoras regulatorias Hemos introducido incentivos fiscales como la iniciativa de equiparar la deduccioacuten por compra a la del alquiler Ademaacutes el Senado aprobaraacute el proacuteximo jueves la Ley de Fomento y Agilizacioacuten Procesal del Alquiler antildeade el responsable de Vivienda Respecto a la propuesta de reducir la duracioacuten de los contratos del alquiler Vaquer recomienda echar la vista atraacutes para ver la efectividad de esta medida La liberalizacioacuten total estuvo vigente de 1985 a 1994 No aumentoacute de forma significativa la oferta de alquiler y en cambio siacute subieron los precios dice

LAS INMOBILIARIAS

Un periodo transitorio 18102009 Pedro Peacuterez es la voz y cara del G-14 el lobby que reuacutene a las grandes promotoras Este antiguo alto cargo del Gobierno socialista de Felipe Gonzaacutelez cree acertada la aproximacioacuten que hace Fedea al mercado de la vivienda pero reclama un periodo transitorio no inferior a cuatro o cinco antildeos para que todos los agentes puedan adaptarse a la redefinicioacuten del nuevo modelo Muchas empresas tienen suelos urbanizados cuyo uacutenico destino es la vivienda de proteccioacuten oficial y a estas empresas no se les puede decir de la noche a la mantildeana que no van a poder utilizar esos suelos asegura La misma filosofiacutea vale para la eliminacioacuten de la deduccioacuten por compra de vivienda No seriacutea justo que a las personas que buscan ahora un piso en compra se les ponga un plazo perentorio para no perder este beneficio fiscal justifica el responsable del G-14 Peacuterez estaacute de acuerdo con los firmantes del documento en que es mucho maacutes justo el alquiler que la compra para los beneficiarios de las viviendas sociales

httpwwwelpaiscomarticuloempresassectoresTododineroalquilerelpepueconeg20091018elpnegemp_9Tes

NEGOCIOS TRIBUNA JOSEacute A HERCE Y AacuteLVARO LISSOacuteN

La liga de salida JOSEacute A HERCE Y AacuteLVARO LISSOacuteN 18102009

Estaacute la economiacutea mundial saliendo ya de la crisis Sorprendioacute hace poco la recuperacioacuten del PIB del segundo trimestre en economiacuteas avanzadas como las de Alemania Francia y Japoacuten aunque en las restantes economiacuteas de este selecto club la actividad se redujo de forma considerable

En las economiacuteas emergentes las sentildeales son tambieacuten mixtas Las economiacuteas asiaacuteticas registraron una recuperacioacuten muy intensa creciendo un 5 en su conjunto en ese segundo trimestre frente al 3 en el trimestre anterior con China creciendo al 79

Las economiacuteas de Europa del Este muestran sentildeales de estabilizacioacuten pero se encuentran en niveles muy deprimidos de actividad (cayendo un 10 en su conjunto) mientras que las economiacuteas latinoamericanas han acelerado su contraccioacuten (al -44 desde -35) Entre ellas sin embargo Brasil ha sido la significativa excepcioacuten al registrar un soacutelido crecimiento gracias a la fortaleza de su demanda domeacutestica De hecho la economiacutea brasilentildea ha centrado la atencioacuten de los mercados financieros en las uacuteltimas semanas con la revisioacuten al alza de su rating a grado de inversioacuten por parte de la agencia de Moodys una sentildeal muy positiva en un contexto como el actual

Los primeros indicadores de por doacutende puede ir el tercer trimestre de este antildeo dan continuidad a la senda de recuperacioacuten iniciada por la produccioacuten industrial en el segundo trimestre de forma global

Esta recuperacioacuten se debe al inicio de un ciclo de recuperacioacuten de existencias en los principales paiacuteses industriales avanzados y emergentes tras el fuerte ajuste de las mismas hasta principios de este antildeo una vez que el comercio mundial comienza a cobrar impulso y mejoran las expectativas de las empresas del sector manufacturero acerca del ciclo econoacutemico

No es de extrantildear pues que el Fondo Monetario Internacional (FMI) haya revisado sus previsiones de crecimiento para la economiacutea mundial al alza apuntando a un crecimiento del PIB mundial del 31 en el ejercicio 2010 (frente al 25 de la proyeccioacuten del mes de julio) apoyado por la recuperacioacuten del bloque emergente (51 en 2010) impulsado a su vez por la aportacioacuten de la regioacuten asiaacutetica

Los planes de estiacutemulo monetario y fiscales han sido determinantes para frenar la caiacuteda libre de la actividad ahora es el turno del consumo privado y la inversioacuten como puntos de apoyo a lo largo de 2010 que no se daraacute por igual en todos los paiacuteses

La recuperacioacuten advierte el Fondo Monetario Internacional seraacute lenta y plagada de peligros como que se revelen peor de lo esperado los fundamentos del ciclo alcista de las existencias el resurgir de las tensiones en los precios del petroacuteleo y otras materias primas ante siacutentomas de expansioacuten de la actividad o los errores de poliacutetica econoacutemica retirando antes de tiempo los estiacutemulos Pero ya se perfila con nitidez la liga de salida de la crisis Obviamente soacutelo unos pocos paiacuteses estaacuten en los puestos de Champions Espantildea no estaacute entre ellos -

httpwwwelpaiscomarticuloeconomiagloballigasalidaelpepueconeg20091018elpnegeco_3Tes

Negocios TRIBUNA coyuntura nacional AacuteNGEL LABORDA

A vueltas con la deflacioacuten AacuteNGEL LABORDA 18102009

La informacioacuten principal de la semana se ha centrado en los precios Conocimos el IPC de septiembre y los precios de la vivienda del tercer trimestre en la versioacuten del ministerio del ramo La otra en el aacutembito oficial es la del INE La visioacuten general que se desprende del comportamiento de los precios es la misma que podemos obtener de los indicadores de demanda y produccioacuten la economiacutea espantildeola se encuentra sumida en un proceso de ajuste duro para digerir y purgar los muchos excesos cometidos en los cuatro o cinco uacuteltimos antildeos de expansioacuten cuya causa principal no fue otra que la de disponer y hacer uso intensivo de unas condiciones financieras extremadamente relajadas

La inflacioacuten interanual de los precios de consumo se mantiene en zona negativa desde el pasado marzo Tras alcanzar un miacutenimo en julio con una tasa del -14 cambioacute de tendencia en agosto (-08) y todo apuntaba a que iba a seguir en ese camino en septiembre (las previsiones de Funcas eran del -06) Sin embargo la sorpresa ha sido que de nuevo se ha ido para abajo situaacutendose en -1 Algo parecido ha sucedido en la zona euro donde esta tasa ha pasado del -02 en agosto al -03 en septiembre La causa principal ha sido el descenso mensual de los precios de la energiacutea y la mayor moderacioacuten de la tasa subyacente que se ha reducido hasta el 01

Todo ello ha provocado que los comentaristas retomaran las discusiones sobre si la economiacutea se encuentra en deflacioacuten lo que seriacutea un presagio de que la recesioacuten lejos de moderarse va a ir a maacutes Como he sentildealado varias veces en esta paacutegina el que la inflacioacuten de los precios de consumo se encuentre en zona negativa desde hace siete meses no significa que se esteacute produciendo un proceso deflacionista Miremos el graacutefico superior izquierdo si en vez de analizar la evolucioacuten de la inflacioacuten a partir de la tasa interanual lo hacemos con tasas maacutes cortas por ejemplo la media de los iacutendices desestacionalizados de los tres uacuteltimos meses sobre los tres anteriores vemos que cuando cayoacute intensamente la inflacioacuten fue en los meses finales de 2008 y primeros de 2009 debido a que fue entonces cuando los precios del petroacuteleo -la causa fundamental de que la inflacioacuten se encuentre en zona negativa- se redujeron a 30 euros el barril Posteriormente la recuperacioacuten de dichos precios hasta 50 euros ha cambiado la tendencia de la inflacioacuten que en esos teacuterminos se situacutea ahora en torno al 2 No llevamos por tanto siete meses con caiacutedas de los precios Ademaacutes las previsiones aunque se han revisado a la baja siguen apuntando a que el antildeo lo terminaremos en positivo en torno al 04

En todo caso si la economiacutea en su conjunto no estaacute en deflacioacuten -lo estaacute el mercado de la vivienda donde los precios caen maacutes intensamente que los del consumo y las expectativas son de que sigan cayendo- siacute que estaacute en un proceso desinflacionista Uno de los fenoacutemenos de la etapa de crecimiento desequilibrado fue una inflacioacuten persistentemente superior a la de los paiacuteses de la zona euro que infloacute los maacutergenes empresariales de todos los sectores productores de bienes y servicios no comerciables internacionalmente y dejoacute a un lado las mejoras de productividad como base del progreso de las rentas empresariales y no empresariales sustituyeacutendolas por la viacutea maacutes coacutemoda de aumentar los precios algo faacutecil en un contexto de fuerte pulsacioacuten de la demanda Todo ello deterioroacute notablemente nuestro tipo de cambio real es decir la competitividad Ahora al igual que se estaacute purgando el exceso de consumo y de inversioacuten en vivienda toca volver a situar el tipo de cambio real en un nivel maacutes competitivo

De momento dada la rigidez de los salarios a la baja (algo achacable fundamentalmente a los mecanismos de formacioacuten de los mismos que habriacutea que reformar) se estaacute haciendo por dos viacuteas reduccioacuten de los maacutergenes empresariales yo aumentos de la productividad a traveacutes de la reduccioacuten de las plantillas Pero este mecanismo darwiniano tiene sus problemas muchas empresas se quedan en el camino y muchos trabajadores pierden su empleo Dado que el proceso desinflacionista puede llevar su tiempo deberiacuteamos evitar que se hiciera como se ha hecho hasta ahora Hay soluciones soacutelo falta acertar en el diagnoacutestico y ser consecuentes - httpwwwelpaiscomarticuloeconomiaglobalvueltasdeflacionelpepueconeg20091018elpnegeco_4Tes

NEGOCIOS El matemaacutetico que agitoacute la Bolsa El adioacutes del guruacute de la gestioacuten cuantitativa James Simons coincide con las criacuteticas a la proliferacioacuten de sistemas inteligentes por distorsionar el mercado DAVID FERNAacuteNDEZ 18102009

Wall Street no es Hollywood pero tambieacuten fabrica mitos Warren Buffet Peter Lynch Mark Mobius o Bill Gross son algunas de sus leyendas Se trata de profesionales que han aportado un estilo propio al mundo de la inversioacuten En este Olimpo bursaacutetil tambieacuten tiene su hueco James Simons El fundador de Renaissance Technologies una de las entidades de hedge funds maacutes importante del mundo con cerca de 20000 millones de doacutelares bajo gestioacuten ha comunicado que se retira en 2010

Muchos le consideran un pionero en el uso de sistemas matemaacuteticos combinados con aplicaciones informaacuteticas para batir el mercado Su adioacutes coincide con el deseo de los reguladores de poner coto a los sistemas de inversioacuten inteligentes (robots) que este erudito contribuyoacute a desarrollar por distorsionar el comportamiento bursaacutetil

La vida de Simons encaja como un guante en el mito del suentildeo americano Hijo de un zapatero nacioacute hace 71 antildeos en los suburbios de Boston Dotado con una habilidad innata para los nuacutemeros colaboroacute con el Departamento de Defensa descifrando coacutedigos secretos Ademaacutes obtuvo el Premio Veblen la mayor distincioacuten en el aacutembito de la geometriacutea con soacutelo 38 antildeos Antes de fundar Renaissance Simons fue presidente del Departamento de Matemaacuteticas de la Universidad Stony Brook En esta eacutepoca tuvo el primer contacto con el mercado invirtiendo parte de sus ahorros en la compraventa de divisas

En 1978 abandonoacute el mundo acadeacutemico para fundar su firma de inversiones bautizada como Limroy embrioacuten de la actual Renaissance Simons se rodeoacute desde el principio de talento puro Sus ofertas de empleo no iban dirigidas a licenciados en Econoacutemicas o Derecho de Harvard o Yale sino a matemaacuteticos astrofiacutesicos e informaacuteticos paridos por centros como el Instituto Tecnoloacutegico de Massachusetts (MIT)

El secretismo en torno a coacutemo desarrolla Renaissance sus programas de inversioacuten es similar al que rodea a la foacutermula de la Coca-Cola El campus de 20 hectaacutereas levantado por la gestora en Nueva York es un buacutenker a prueba de filtraciones Simons prefiere participar en foros matemaacuteticos antes que pisar Wall Street Lo uacutenico que se conoce son generalidades aplicables a todos los fondos que siguen un modelo de inversioacuten cuaacutentico Es decir con el uso de algoritmos y series estadiacutesticas Estos fondos intentan lograr dos objetivos anticiparse a lo que haraacute el mercado basaacutendose en patrones de comportamiento repetidos en el pasado y rastrear ineficiencias en la formacioacuten de precios para arantildear rentabilidades a muy corto plazo

Simons ha confiado siempre en la inteligencia del ser humano Si podemos predecir la oacuterbita de un cometa iexclcoacutemo no vamos a ser capaces de predecir la evolucioacuten de las acciones de Citigroup explicoacute a la revista Bloomberg Markets en enero de 2008

El fondo estrella de Renaissance es Medallion Lanzado en 1988 nunca ha cerrado un antildeo en peacuterdidas acumula una rentabilidad media anual del 30 y en un ejercicio tan malo para el mercado como fue 2008 logroacute una rentabilidad del 80 lo que convirtioacute a Simons gracias a las altas comisiones de eacutexito que cobra en el gestor mejor pagado del mundo con unos ingresos de 2500 millones de doacutelares seguacuten la revista Alpha Magazine

El eacutexito de Medallion llevoacute a que este matemaacutetico metido a inversor a reducir draacutesticamente el tamantildeo del fondo en 2005 devolviendo el dinero a buena parte de sus clientes Medallion soacutelo gestiona ahora el dinero de los 300 empleados de la gestora Para contentar a los expulsados creoacute dos nuevos fondos llamados Reinaissance Institutional Equity Fund (RIEF) y Renaissance Institutional Futures Fund (RIFF) La crisis ha lastrado el despegue de estos productos RIEF cayoacute un 16 en 2008 y en 2009 perdiacutea un 95 hasta septiembre RIFF cedioacute un 12 el pasado antildeo y eacuteste soacutelo gana un 16 En un reciente artiacuteculo The New York Times sentildealaba que a pesar de este borroacuten en su historial (tambieacuten cayoacute en la trampa de Bernard Madoff) muchos en Wall Street siguen pensando que Simons tiene un talento sobrenatural para hacer dinero

Aparte de incrementar su cuenta corriente y la de muchos de sus clientes Simons ha contribuido al desembarco de las matemaacuteticas en los mercados financieros Su aportacioacuten junto con el desarrollo tecnoloacutegico han disparado el uso de las estrategias cuaacutenticas De hecho la consultora TABB Group preveacute que en 2010 la gestioacuten algoriacutetmica suponga el 50 del volumen de negociacioacuten en Estados Unidos

Semejante proliferacioacuten de los sistemas inteligentes de inversioacuten despierta recelos entre los gestores tradicionales y los reguladores Los primeros critican que el repunte de la volatilidad en los mercados durante la crisis econoacutemica ha dejado en evidencia las lagunas de los sistemas estadiacutesticos Por su parte los supervisores bursaacutetiles advierten que el uso masivo de oacuterdenes automaacuteticas (no soacutelo las utilizan los hedge funds tambieacuten las mesas de tesoreriacutea de los bancos) puede distorsionar el mercado y manejarlo a su antojo Los robots programados con algoritmos pueden comprar y vender acciones con una velocidad mil veces superior al parpadeo del ojo humano

La SEC el supervisor estadounidense estaacute siendo el maacutes activo en la presioacuten sobre los hedge funds Su penuacuteltima cruzada se centra en la prohibicioacuten de las denominadas flash orders Este sistema permite a las Bolsas y a las plataformas bursaacutetiles alternativas proporcionar informacioacuten sobre el libro de oacuterdenes a determinados inversores con la tecnologiacutea adecuada una fraccioacuten de segundo antes que al resto de participantes en el mercado

El cerco contra los sistemas de inversioacuten inteligentes pilla a Simons de retirada La mayor parte de su fortuna personal ha sido destinada a su fundacioacuten familiar volcada en la investigacioacuten cientiacutefica y la educacioacuten matemaacutetica Despueacutes de dejar los mandos de Renaissance piensa dedicar maacutes tiempo a comprender las causas del autismo Quieacuten sabe si su nueva aventura volveraacute a echar mano de los logaritmos

Logaritmos a la espantildeola

El eacutexito de Renaissance no ha calado entre los inversores espantildeoles Cygnus registroacute en 2007 un fondo que invertiacutea en dos de los productos de James Simons En agosto pasado optaron por disolverlo El problema no fue la rentabilidad sino la poca demanda explica Blanca Gil directora de Cygnus El escaso eco de Renaissance en nuestro mercado no quiere decir que no haya una amplia oferta de fondos que usan estrategias matemaacuteticas GVC Gaesco es una de las gestoras maacutes activas No hacemos trading sino que utilizamos teacutecnicas matemaacuteticas para identificar patrones de comportamiento y maximizar la desviacioacuten en las cotizaciones sentildeala Jaume Puig director de inversiones de GVC Gaesco Este tipo de fondos seguacuten Enrique Bailly director de desarrollo de productos de Altex Partners ha contribuido a mejorar la industria al incorporar talento de otros aacutembitos como la matemaacutetica o la fiacutesica al sector financiero Esta firma gestiona el fondo Altex Arb amp Quant

Bankinter tiene un fondo cuantitativo que usa un modelo propio Con la crisis han optado por diversificar las estrategias quant Con escenarios de extrema volatilidad si lo basas todo en un solo modelo hay riesgo de que las correlaciones se rompan explica Antonio Banda director de la gestora de Bankinter iquestRobot o maacutequina Prefiero los fondos quant en los que no todo lo decide la maacutequina dice Viacutector Alvargonzaacutelez director de Profim -httpwwwelpaiscomarticulodineroinversionesmatematicoagitoBolsaelpepueconeg20091018elpnegdin_1Tes

Record-High Deficit May Dash Big Plans $14 Trillion in Red Ink Means Less to Spend On Obamas Ambitious Jobs Stimulus Policies By Lori Montgomery and Neil Irwin Washington Post Staff Writers Saturday October 17 2009

The federal budget deficit soared to a record $14 trillion in the fiscal year that ended in September a chasm of red ink unequaled in the postwar era that threatens to complicate the most ambitious goals of the Obama administration including plans for fresh spending to create jobs and spur economic recovery

Still the figure represents a significant improvement over the darkest deficit projections which had been as much as $400 billion higher earlier this year when the economy was wallowing in recession Since then the outlook has brightened and a government bailout has successfully stabilized the nations troubled financial sector In a report released Friday Treasury Department officials said the government had spent $132 billion less than expected in August due primarily to a drop in anticipated spending on the banking bailout

At about 10 percent of the overall economy the gap between federal spending and tax collections is the largest on record since the end of World War II and bigger in nominal terms than the past four years of deficits combined Next year is unlikely to be much better budget analysts say And Obamas current policies would drive the budget gap into the trillion-dollar range for much of the next decade

As they unveiled the final 2009 figure administration officials argued that expensive emergency programs -- such as the $700 billion bank bailout requested by the Bush administration and the $787 billion economic stimulus package Obama signed during his first days in office -- were essential to halting a frightening economic slide earlier this year The deficit ultimately was lower than expected because those programs worked they said

But they tacitly acknowledged that the administration has yet to chart a clear path through the fiscal thicket

This years deficit is lower than we had projected earlier this year in part because we are managing to repair the financial system at a lower cost to taxpayers Treasury Secretary Timothy F Geithner said in a statement But future deficits are too high and the president is committed to working with Congress to bring them down to a sustainable level as the economy recovers

White House budget director Peter Orszag added The president recognizes that we need to put the nation back on a fiscally sustainable path As Obama draws up his second budget blueprint due to be delivered to Congress in February Orszag said we are considering proposals to put our country back on firm fiscal footing

Another Budget Go-Round Orszag has already instructed federal agencies to identify spending cuts for next years budget but the report comes as lawmakers contemplate proposals that would drive spending even higher

Congress is enmeshed in a deeply partisan battle over Obamas plan to overhaul the nations health-care system which would add billions of dollars to the federal budget if not future deficits Democrats also are considering extending safety-net programs for the unemployed funding new job-creation strategies to combat a 98 percent unemployment rate and cutting seniors another round of $250 checks to make up for the governments decision to withhold cost-of-living increases for Social Security recipients Meanwhile Obama has said he wants to extend an array of expensive tax cuts enacted during the Bush administration that are set to expire next year And Senate leaders hope to vote next week on a plan to block scheduled pay cuts for doctors who treat Medicare patients a move that would add nearly $250 billion to deficits over the next 10 years

With midterm elections approaching in 2010 Republicans are hoping to capitalize on the bleak budget picture and have cast Obama as a big-spending liberal looking to expand the reach of government into every facet of American life

There is no doubt we started the year in a difficult fiscal situation But Congress and the administration have made a bad situation much worse with an unrelenting spending binge that has plunged our nation into a dangerous level of deficit and debt said Rep Paul D Ryan (R-Wis) the senior Republican on the House Budget Committee

Added Senate Minority Leader Mitch McConnell (R-Ky) Congress simply cant continue acting like a teenager on a spending spree with his parents credit card with no regard to who pays the bill

Democratic lawmakers defended the president calling the massive deficit the unavoidable product of profligate spending during the Bush administration and the worst recession in decades But even if the health-care package reduces future deficits as Obama has pledged Senate Budget Committee Chairman Kent Conrad (D-ND) acknowledged It is clear that much more will be needed to set our nation back on a sound long-term fiscal path

Revenue Down Outlays Up

A combination of factors combined to produce the $14 trillion gap A deep recession caused tax revenue to plummet by more than $400 billion this year while the governments economic rescue efforts swelled federal spending In all the government spent $35 trillion in fiscal 2009 while taking in only $21 trillion in taxes the Treasury Department said Among the outlays $113 billion in stimulus cash $154 billion for the bank bailout and nearly $96 billion in capital payments to Fannie Mae and Freddie Mac the troubled mortgage insurance giants that the government took over last year

The government had been running deficits even before the recession began in December 2007 due largely to the Bush tax cuts in 2008 the budget gap was $455 billion or 32 percent of the overall economy

If the economy rebounds strongly tax revenues would surge automatically driving the deficit lower The more difficult question is what to do if the economy remains sluggish or dips back into recession

In the short term the deficit is not our primary problem said Heather Boushey a senior economist at the left-leaning Center for American Progress The unemployment rate is near 10 percent and the key thing is to get the economy growing which will increase tax revenues But in the long term we do need to think about the deficit problem and do something about it

Economists universally agree that the nation cannot run such massive deficits indefinitely The question now facing Obama budget experts said is how to bring spending and revenue more closely into balance in the years ahead after the economy fully recovers

[T]he significance of the number is not what happened to cause it to be so large The question is what happens next said William Gale a senior fellow at the Brookings Institution

Economy

October 17 2009

Bailout Helps Fuel a New Era of Wall Street Wealth By GRAHAM BOWLEY Even as the economy continues to struggle much of Wall Street is minting money mdash and looking forward again to hefty bonuses

Many Americans wonder how this can possibly be How can some banks be prospering so soon after a financial collapse even as legions of people worry about losing their jobs and their homes

It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington Many of the steps that policy makers took last year to stabilize the financial system mdash reducing interest rates to near zero bolstering big banks with taxpayer money guaranteeing billions of dollars of financial institutionsrsquo debts mdash helped set the stage for this new era of Wall Street wealth

Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds rather than in the ho-hum business of lending people money They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder mdash a benefit of less competition after the failure of some investment firms last year

So even as big banks fight efforts in Congress to subject their industry to greater regulation mdash and to impose some restrictions on executive pay mdash Wall Street has Washington to thank in part for its latest bonanza

ldquoAll of this is facilitated by the Federal Reserve and the government who really want financial institutions to get back to lendingrdquo said Gary Richardson a research fellow at the National Bureau of Economic Research ldquoBut we have just shown them that they can have the most frightening things happen to them and we will throw trillions of dollars to protect them I have big concerns about thatrdquo

Not all banks are doing so well Giants like Citigroup and Bank of America whose fortunes are tied to the ups-and-downs of ordinary consumers are struggling to turn themselves around as are many regional banks

But the decline of certain institutions along with the outright collapse of once-vigorous competitors like Lehman Brothers has consolidated the nationrsquos financial power in fewer hands The strong are now able to wring more profits from the financial markets and charge higher fees for a wide range of banking services

ldquoThey are able to charge more for all kinds of services because companies need banks and investment banks more now and there are fewer strong ones to help themrdquo said Douglas J Elliott of the Brookings Institution

A year after the crisis struck many of the industryrsquos behemoths mdash those institutions deemed too big to fail mdash are in fact getting bigger not smaller For many of them it is business as usual Over the last decade the financial sector was the fastest-growing part of the economy with two-thirds of growth in gross domestic product attributable to incomes of workers in finance Now the industry has new tools at its disposal courtesy of the government

With interest rates so low banks can borrow money cheaply and put those funds to work in lucrative ways whether using the money to make loans to companies at higher rates or to speculate in the markets Fixed-income trading mdash an area that includes bonds and currencies mdash has been particularly profitable ldquoRobust trading results led the wayrdquo said Howard Chen a banking analyst at Credit Suisse describing the latest profits

To prevent a catastrophic financial collapse that would have sent shock waves through the economy the government injected billions of dollars into banks Some large institutions like Goldman and Morgan have since repaid their bailout money But most of the industry still enjoys other forms of government support which is helping to stoke profits

Goldman Sachs and its perennial rival Morgan Stanley were allowed to transform themselves into old-fashioned bank holding companies That switch gave them access to cheap funding from the Federal Reserve which had been unavailable to them

Those two banks and others like JPMorgan were also allowed to issue tens of billions of dollars of bonds that are guaranteed by the Federal Deposit Insurance Corporation which insures bank deposits With the FDIC standing behind them the banks could borrow the money on highly advantageous terms While some have since issued bonds on their own they nonetheless enjoy the benefits of their cheap financing

Granted banks are also benefiting from a stabilizing economy The fear that gripped the markets earlier this year when doomsayers predicted a second Great Depression has largely dissipated Stocks corporate bonds even risky corporate ioursquos mdash have all rallied from

their bear market lows some spectacularly so The Dow Jones industrial average has soared 50 percent this year and touched 10000 this week for the first time since the crisis

Banks that had marked down the value of the assets on their books during the dark days of the crisis are now enjoying a rebound in the value of many of those assets ldquoConfidence has returnedrdquo said Shubh Saumya a financial services specialist at the Boston Consulting Group ldquoSome of the assets that bankers wrote down last year in the midst of the crisis now they have got some of that backrdquo

As the number of banks has dwindled the survivors are moving into the void left by rivals that are either dead or limping and unwilling to take risks

A big reason for Goldman Sachsrsquos blowout profits this year has been the willingness of its traders to take big risks mdash they have put more money on the line while other banks that suffered last year have reined in such moves Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks and those that are treading a safer path

Banks that have waded back into the markets have been able to exploit large gaps in the prices of various investments a feature of the postcrisis financial markets The so-called bid-ask spreads mdash the difference between the price at which banks are willing to buy things like bonds and the price at which they are willing to sell mdash are roughly twice what they were two years ago

Still the newfound success is largely limited to the big securities houses on Wall Street This week Citigroup and Bank of America reported losses from credit card delinquencies and mortgage defaults mdash a sign of the lingering pain on Main Street

httpwwwnytimescom20091017businesseconomy17wallhtmlthampemc=th

Oct 16 2009

Renminbi Politics US Starting To Toughen on RMB o Overview Despite the fact that the US government and the IMF (as well as many

economists) believe that the Chinese currency is undervalued given Chinese growth and productivity a more conciliatory tone has prevailed in 2008 and 2009 Yet with the dollar falling against G10 currencies and some EM currencies the tone of the US and G7 may be fixated again on the need for the RMB to appreciate In October the US Treasury warned that continued inflexibility of the RMB could impede the moves towards sustainable growth

o As of the end of September Chinas reserves were US$325 billion higher than they were at the end of 2008 RGEs adjustments for valuation changes suggest that China added an estimated US$285billion in the first three quarters of 2009 with the fastest pace in Q2 (US$140 billion) and Q3 (US$110 billion) Maintaining the RMBs effective dollar peg to maintain currency stability and a competitive currency implies that China will keep adding to reserves including US dollar assets

US Government Views

o The most recent (October) US Treasury report to Congress on exchange rates warns that Chinas recent currency inflexibility has contributed to a real effective currency depreciation of 69 from February 2009 to June 2009 that risks undoing the gains made in unwinding global imbalances once fiscal stimulus wanes in Chinas trading partners The Treasury again concluded that no trading partner is in violation of

o Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger more balanced global economy consistent with the G-20 Framework

o Following Treasury Secretary Geithners written testimony at his confirmation hearing when he suggested China was manipulating its currency the administration has avoided using the term currency manipulation and has instead emphasized cooperation

o In September 2009 at the World Economic Forum in Dalian China David Dollar the treasurys economic head in China suggested that it makes a lot of sense for [China] to diversify [its reserves] I think it has reached a point that it is healthy to have a variety of different reserve-type of currenciesWe welcome the internationalization the CNYrdquo (September 2009)

o Simon Derrick of BNY suggested that Dollars comments may reflect the beginning of a change in thinking within the treasury His statement supportive of reserve diversification stands in interesting contrast to Secretary Geithnerrsquos comment in early June (following a meeting in Beijing) that I believe the Chinese expect the USD to be the principal reserve currency for a long period of time as do we It could also be seen as an acknowledgment

by the Treasury to China that a long term shift in the USDrsquos role is now under way and that there is little point in fighting it (September 14 2009)

o Treasury Secretary Geithner noted in April 2009 (the previous semi-annual report) noted that No US trading partner manipulated its exchange rate for the purposes of preventing effective balance of payments adjustment or to gain unfair competitive advantage in H2 2008 Although the Treasury believes that the Renminbi is undervalued China has taken steps to enhance exchange rate flexibility and the Chinese currency appreciated by 166 in real effective terms between June 2008 and February 2009 appreciating slightly against the dollar when most other EM and other currencies fell sharply Chinas fiscal stimulus package should help spur domestic demand growth and rebalance the Chinese economy

o US and Chinese policymakers have tried to repair ties given that negative rhetoric would be counterproductive to both and in responding to global crises

o Treasury Secretary Timothy Geithners congressional testimony suggested that Obama believes China is ldquomanipulatingrdquo its currency but provided no details of how it might accomplish this

Views From the IMF

o Chinas 2009 Article IV consultation suggests that several IMF board members believe that the RMB is ldquosubstantially undervaluedrdquo Dominique Strauss-Kahn the head of the IMF reiterated that the renmimbi is undervalued at the IMFWorld Bank annual meeting on October 2 2009

o IMF guidance to staff suggests that the institution will no longer use the term fundamentally misaligned to describe member currencies It hopes the new guidance will increase the quality of collaboration with its members China had the first Article IV consultation in two years after language on the currency provoked deadloc

o China purchased as much as US$50 billion of notes to meet IMF funding needs The country also seeks more voting power in the institution

o China has also suggested that reserve currency issuers like the US receive more scrutiny from the IMF and other institutions given the critical role they play in the global economy

Currency Manipulation

o The Bush administration was reluctant to label China a currency manipulator which would have required trade retaliation instead urging China to speed appreciation of the currency to alleviate domestic imbalances Chinese RMB appreciated at a faster pace from late 2007-early 2008 but has since reverted to a virtual repeg to the dollar as Chinese exports and growth slowed It is unlikely to allow much appreciation lest it weaken exports

o Willem Buiter Should the US Treasury officially determine China to be a currency manipulator it can utilize several remedies including antidumping measures countervailing duties and safeguards Although the WTO permits certain retaliatory responses from importing nations who prove material injury from unfair trade practices much of what Congress and some members of the administration have in mind may violate WTO obligations Any bilateral trade war could easily spread to the EU Japan and emerging markets outside China

o US-China Business council noted that A single-minded focus on Chinarsquos currency is a distraction Chinarsquos exchange rate is less significant in the bilateral trade balance tha other factors

o C Randall Henning Peterson Institute suggests that Congress should amend the Exchange Rates and International Economic Policy Coordination Act of 1988 to increase reports clearer definition of currency manipulation to include fx intervention or official lending exchange restrictions or actions with effect if not the intention of preventing external adjustment

o CRS The IMF and WTO approach the issue of currency manipulation differently IMF prohibits countries from manipulating currency to obtain unfair trade advantage but cannot force a country to change is fx policies WTO has narrow policies that do not seem to deal with currency manipulation

httpwwwrgemonitorcom26Chinacluster_id=12382

Oct 16 2009

TIC Data and the US Current Account Deficit Still Buying Treasuries But at a Slower Pace Overview According to the Treasury Departments monthly data on capital flows to the US foreign investors are continuing to buy US government debt since the end of Q2 2009 matching the return to reserve accumulation The share of total Treasuries held by foreign investors has fallen as the US savings rate rose The fall in the current account deficit (led by a collapse of imports means the US requires less foreign investment even as the financing needs of the government have climbed

August 2009 Data

o Net foreign inflows to the US (including short- and long-term flows and bank deposits of foreigners) were positive US$10 billion in August (from -US$95 billion in July) as foreign purchases of long-term US securities offset a decline in short-term assets like Treasury bills

o However purchases of long-term securities fell to US$329 billion (from US$44 billion in July) private investors accounted for US$213 billion foreign official institutions (central banks) were US$116 billion

o Foreign holdings of short-term debt (less than one year to maturity) fell by US$185 billion in July as investors including China continued to sell off some of the record purchases of short-term debt acquired since the Lehman bankruptcy

o On net foreign buyers added US$239 billion in long-term treasuries (US$311 billion in July) added US$52 billion in agencies (-US$47 billion in July) sold US$66 billion in corporate bonds and added US$105 billion in equities (all data from the US Treasury)

o As of August China was the largest foreign holder of Treasuries at about US$797 billion in US assets falling from US$800 billion in July 2009 China has been shifting back to purchases of longer-dated treasuries after buying more T-bills in late 2008 and early 2009

o Michael Woolfolk of BNY ongoing foreign divestment of US deposits and short-dated securities and accelerating net purchase of US equities reflect a reversal in safe-haven flows into the USD seen late last year and continuation of demand for risky assets with the US stock markets reflecting the lions share of global equity capitalization The rally was fuelled in Q2 by the green shoots rally and positive earnings in Q3

Q2 2009

o Purchases of US long-term Treasuries were much higher than needed to finance the US current account deficit in Q2 2009 (RGEs Rachel Ziemba) In June Net foreign purchases of long-term US securities were US$1236 billion in June 2009 up from US$79 billion in May and much higher than the January-May 2009 average Earlier in 2009 many foreign investors shifted to the short end of the Treasury curve

o Foreign investors had net purchases of US$1005 billion in June purchases of agency bonds reached US$5 billion net sales of US$1 billion in corporate bonds and bought US$191 billion in equities the highest in recent months

Implications of Recent Trends

o RGEs Rachel Ziemba Emerging market kept buying US dollar assets in May but only the shortest-term most liquid assets (Treasury bills) Q2 was the first quarter of significant reserve accumulation of the last year (July 17 2009)

o BoNY Foreign investors are putting US funds back into higher-yielding assets overseas fueled by the green shoots rally This summer this trend should wane as asset allocations are set (July 16 2009)

o Brad Setser Follow the Money The rise in Chinarsquos Treasury holdingsmdasheven after adjustments for the holdings through Londonmdashwas modest Chinarsquos overall US portfolio isnt rising at anywhere like the pace it did in 2006 2007 or even 2008 Ultimately that is a healthy adjustmentmdashthe more unwanted dollars China ends up holding the bigger the ultimate risk of a disruptive shift out of the dollar (June 15 2009)

o In January and February 2009 the deterioration in the TIC data was largely due to an alleviation in risk-averse purchases of US dollar-denominated deposits

o Economist Steven Wieting Citi Official data show foreign central bank holdings of Treasuries increasing despite a diminished external financing need now that the US trade deficit has halved The rise in US and global bond yields has occurred despite the Feds purchase of Treasuries

o The US Department of the Treasury noted that financial development combined with sound macroeconomic policies and open markets should lead to an increased international role for emerging market currencies and a greater diversification of foreign currency reserves Nevertheless as long as the United States maintains sound macroeconomic policies and deep liquid and open financial markets the dollar will continue to be the major reserve currency (October 2009)

o Danske In February 2009 US investors stopped repatriating foreign investments for the first time since June 2008 Long-term capital flows are still broadly sufficient to fund the US current account deficit While Asian demand for US Treasuries remained intact British investors who are often the vehicles for Middle Eastern and other investors were large sellers

o Monthly TIC data tracks capital flows to and from the US including the net purchases and sales by foreigners of US financial assets government and private debt and equity It thus provides an indication of whether such inflows cover the US current account deficit though it does not include FDI and some other flows

o Federal Reserve Economist Carol Bertaut Recent record foreign inflows into US securities have not in fact materially changed the relative allocations between US and other foreign securities in their portfolios in recent years Most countries continue to be more underweight in US assets according to the standard model of international asset allocation

httpwwwrgemonitorcom96Global_Current_Account_Imbalancescluster_id=6911

NEGOCIOS

De beta a alfa Goldman Sachs cree que es hora de discriminar en Bolsa

En Bolsa hay un eterno enfrentamiento una especie de guerra civil entre estilos de inversioacuten Alfa contra beta O lo que es lo mismo los fieles de la gestioacuten activa que intentan batir al mercado frente a los creyentes de una taacutectica maacutes pasiva que buscan aquellos valores de mayor correlacioacuten con el mercado

Peter Oppenheimer estratega de Goldman Sachs ha vuelto a desempolvar el abecedario griego para asesorar a sus clientes Movieacutendose de beta a alfa Asiacute ha titulado su uacuteltimo informe sobre renta variable europea Traduciendo este tiacutetulo a romaacuten paladino Oppenheimer quiere decir que el fuerte rebote que acumula la Bolsa desde sus miacutenimos de marzo ha arrastrado a todos los valores (liderados por el sector financiero) Y ahora tras una subida acumulada superior al 50 en la mayoriacutea de los iacutendices llega el momento de elegir bien en doacutende se invierte El mercado ha llegado a un punto donde las revalorizaciones no seraacuten generalizadas

El repunte desde miacutenimos ha tenido como base las valoraciones de las compantildeiacuteas que llegaron a ser muy bajas Ahora llega el momento de las estrategias basadas en los fundamentales Los beneficios tomaraacuten el relevo a las valoraciones explica Durante estos periodos el mercado a menudo proporciona menos beta y florecen maacutes oportunidades alfa La recompensa por una mayor discriminacioacuten aumenta La rentabilidad es menor por el lado del perfil de riesgo de las compantildeiacuteas y su exposicioacuten al ciclo y mayor por catalizadores especiacuteficos de ese valor o de su sector antildeade

Goldman Sachs recomienda dos estrategias para aprovecharse del cambio de fase que vive la Bolsa La primera recibe el nombre de Dispersion Basket Teniendo en cuenta que esperamos una mayor discriminacioacuten entre valores creemos que el mercado estaraacute dispuesto a pagar unos muacuteltiplos maacutes altos por aquellas compantildeiacuteas con perspectivas de crecimiento en sus resultados Entre aquellas empresas con mayor potencial estos expertos incluyen a dos entidades espantildeolas Banco Santander y BBVA

La segunda estrategia es bautizada como GS Sustain e identifica queacute compantildeiacuteas tienen capacidad para liderar el crecimiento en sus sectores y tener retornos de capital superiores a la media en un periodo de maacutes de tres antildeos Aquiacute Goldman Sachs incluye a Gamesa BBVA

Iberdrola Renovables y Red Eleacutectrica

httpwwwelpaiscomarticulodineroinversionesbetaalfaelpepueconeg20091018elpnegdin_2Tes

16102009

Sarkozy says Klaus must sign or else

No Sarkozy did not exactly say that failure by Klaus to sign the Lisbon Treaty would lead to an attempt by the other to isolate the Czech Republic or to implement the Treaty without the Czech Republic or any of the other number of aggressive actions one could think of But the implications of his interview with Le Figaro tomorrow are clear ldquoDecision time is coming for him and it will not be without consequence And whatever happens this issue will be resolved by the end of the yearrdquo The article pointed out that other EU leaders have studiously avoided any public comment at this time in order not to frustrate the current attempts to find a form of words to be agreed on at a forthcoming EU summit to assuage Mr Klaus stated concerns that the Sudeten Germans might flood the Czech Republic waving the Charter of Fundamental Rights A French official also quoted in the FT article previewing the interview said that failure to sign by Klaus would be ldquobreaking the word of the Czech Republicrdquo adding that there would be consequences (This is a case where you might conceivably invoke the Vienna Convention on International Treaties if you can make that the case that the country agreed the treaty in bad faith in the knowledge that it will not ratify This could indeed have serious consequences under international law)

Bank of Italy alarmed about state of economy In its latest bulletin the Bank of Italy painted a dark picture of the impact of the economic crisis on employment and public revenues according to La Repubblica There has been a loss of 500000 jobs not counting immigrants including of 300000 previously considered at risk mostly young people Public revenues have fallen in nominal terms for the first time in 50 years

Japanese currency strategist forecasts the demise of the dollar The chief currency strategist of Sumitomo Mitsui Banking Corp Daisuke Uno said the dollar would drop to 50 yen and lose its role as the worldrsquos reserve currency according to Bloomberg This is the gutsiest forecast we have yet heard from a serious forecaster who also said that the US economy will decline into 2011 as the consumer and financial sector continue to adjust The dollar has so far fallen to 75 yen close to its all time record He

said after the dollar will have lost its reserve currency status the world will fall into three trading blocks - US Europe and Asia - with volumes of global currency trading destined to fall in the long run

while these guys believe that the dollar will go up in 2010 While the consensus is that the dollar will continue to depreciate over the foreseeable future Christian Broda Piero Ghezzi Eduardo Levy-Yeyati say in a column in Vox that it may strengthen in 2010 if the Federal Reserve exits quantitative easing sooner than its counterparts and the US economy enjoys a strong rebound

Is the ECB now interest in core inflation The Wall Street Journal has made the interesting observation that the ECB appears to have changed the tune on core inflation as its latest monthly bulletin made the point that ldquoat the current juncture it is particularly insightful to look at the less volatile components of the [consumer prices] in order to analyze the forces driving inflationrdquo (we recall that when inflation peaked at 4 the ECB argued at the time that it was not insightful at all to look at core inflation)

The Outlook for Real Estate Cacluated Risk has an excellent discussion about why the real estate market is currently so distorted that it defies predictions about its near term development On the supply side there is distortion due to a severe restriction of distressed homes due to foreclosure delays while on the demand side there are distortions due to first-time buyer mortgage credits other US government schemes to support the housing market and the Fedrsquos credit easing policies to drive down mortgage rates

(These policies mean that house prices which have already fallen over 30 in the US do not adjust to the levels where they normally would be expected to bring the market back into equilibrium The situation is even more extreme in the UK where house prices have not fallen by nearly as much as they have in the US and where they are already been rising recently in part due to cheap and variable mortgage rates helped greatly by the Bank of Englandrsquos QE policies)

De Larosiere on banking reform Writing in the FT Jacques de Larosiere warns about excessive zeal in imposing new capital requirement on banks The effect could be lethal for the European economy ldquoCapital ratios if they are not well conceived could substantially harm our economies I see a great danger here Regulators must not start piling new ratios on the existing ones adding further requirements (leverage ratios special ratios on large systemically important institutions anti-cyclical capital buffers) to the normal ndash and revamped ndash Basel 2 risk-based system Each of these new measures may have individually some rationale But together their impact could prove lethalrdquo

httpwwweurointelligencecomarticle581+M54e30d5d6380html

16102009

The winners curse By Jean-Pisani Ferry

Central banks emerged from the crisis as winners They provided liquidity when in demand They were inventive when needed They exhibited boldness in front of storms They proved capable of fast decisions Especially the ECB defied all predictions and showed up to the task of managing a crisis It is only natural therefore that central banks are in the process of being given additional responsibilities for financial stability The question however is at what cost to the clarity of their mandate their accountability and possibly even their independence The increased weight of the financial stability objective alongside the price stability objective is suddenly making things complex again Instead of the one-instrument one-objective framework they were converging on central banks will have to pursue two objectives with one instrument which is bound to bring back the very trade-offs they had succeeded of getting rid of Having to choose between two objectives also makes accountability more difficult because you need to explain why precedence has been given to one of the goals at the expense of the other one There will be no shortage of Jesuitical arguments to explain that financial stability is nothing else than price stability envisaged over a little longer horizon but facts are likely to prove stubborn things

Not entirely by coincidence a new instrument is in the making under the name of macroprudential supervision Following the De Larosiegravere report the EU has decided to create a new European Systemic Risk Board (ESRB) with the task of contributing to financial stability According to the proposal put forward by the Commission at end-September it will be chaired by a central banker (in all likelihood the president of the ECB) and the majority of its members with voting rights will be central bankers Its secretariat will be provided by the ECB So the ESRB wonrsquot legally be a central bank but it will be a central bankrsquos subsidiary and its public face will be undistinguishable from that of the ECB

The ESRB will be deprived of decision-making powers and policy instruments but it will issue warnings and recommendations to supervisors and governments in the EU and monitor their implementation So for example if it assesses that housing credit developments are unhealthy it will recommend a tightening of credit standards or of mortgage regulations

There is a debate about whether this approach will prove effective But let us assume it will This will be because the ESRB will have led governments or supervisors to take decisions in fields where they have competence such as supervision regulation or even perhaps taxation This will go beyond the mere opinion central banks give on all sort of policy issues from fiscal policy to structural reform because here the ESRB will in the name of its very mandate request other policy bodies to lsquocomply or explainrsquo In the process the strict separation between the domain of the central bank and that of government bodies is likely to be challenged ndash and perhaps with it the intellectual and institutional edifice that has been painfully built over the last three decades

To start with there will be disagreements over the assessment of the situation and the risks involved In the mid-2000s there were such disagreements between the EU and Spain about the risks involved in Spanish housing developments The reason why the Spanish authorities were inclined to a rather lenient view of the situation was that virtually anyone in Spain who had some money was buying and selling real estate The EU actually had the power to issue a recommendation ndash but failed to do it The ESRB will be confronted with similar problems Second there will also be questions about who is to blame for failure if there is one in other words the risk of blurred accountability If this happens it will be uncomfortable for anyone but first and foremost for the central bank as it will de facto have to share responsibility with government for policy mistakes

Finally the ECB has this far been extremely cautious to avoid being involved in policy decisions affecting one particular country or a subset of countries as opposed to the euro area as a whole But the ESRB will have explicit powers to addressing recommendations to a particular country ndash if only because threats to financial stability can be country-specific So another Chinese wall is likely to fall in the process To give additional competencies and increasingly shared responsibilities to the central bank may be the best thing to do in order to preserve financial stability But this is no reason to ignore that such a move will bring it to the very terrain monetary authorities had gradually exited from over the last decades

Jean Pisani Ferry is Director of the Bruegel think tank in Brussels and Professor at the Universiteacute Paris-Dauphine

httpwwweurointelligencecomarticle581+M5965a3eb3640html

Google da por finalizada la recesioacuten y vuelve a elevar sus ingresos Lo peor de la crisis ya ha pasado al menos para el gigante de internet Google que ayer se congratuloacute de haber aumentado un 27 su beneficio del tercer trimestre y un 7 sus ingresos estancados desde comienzos de antildeo De esta forma ha superado las expectativas del consenso de los analistas

Google trabaja con HP y Acer para lanzar su sistema operativo Sede de Google en Zuacuterich - REUTERS

Efe - San Francisco - 16102009

Creemos que hemos superado lo peor de la recesioacuten y nos sentimos con confianza para invertir en el futuro dijo Eric Schmidt consejero delegado del buscador insinuando que la empresa volveraacute a aumentar su ritmo de contratacioacuten y gasto en nuevos productos

Desde que los ingresos de la firma cayeran en el primer trimestre por primera vez en su historia Google ha disminuido considerablemente sus gastos y cancelado todos aquellos proyectos poco productivos para concentrarse en sus actividades maacutes rentables Frente a su freneacutetico ritmo de contratacioacuten de los uacuteltimos antildeos el buscador congeloacute su plantilla e incluso redujo personal en aacutereas como maacuterketing

Pero como preveiacutean los expertos Google ha sido una de las primeras empresas en beneficiarse de la tiacutemida recuperacioacuten econoacutemica y del crecimiento del gasto de los anunciantes en publicidad online con la que genera la mayoriacutea de sus ingresos El beneficio neto fue entre junio y septiembre de 1640 millones de doacutelares un 27 maacutes que en el mismo periodo de 2008 y la cifra maacutes alta en un trimestre en los once antildeos de vida de la compantildeiacutea

Por su parte la facturacioacuten llegoacute a los 5940 millones de doacutelares un 7 maacutes Dos factores fueron claves en la subida de las ventas Por un lado el nuacutemero de clicks pagados sobre anuncios en las paacuteginas de Google y en las de sus socios avanzoacute un 4 por ciento respecto al anterior trimestre y un 14 por ciento respecto a los mismos tres meses del antildeo anterior

Ademaacutes la cantidad pagada por los anunciantes cada vez que alguien pinchoacute con el ratoacuten en sus anuncios subioacute un 5 frente al trimestre anterior aunque permanecioacute auacuten un 6 por ciento por debajo del nivel del antildeo pasado La compantildeiacutea de internet antildeadioacute que el beneficio operativo crecioacute en 420 millones hasta los 2070 millones de doacutelares y que descontando las

comisiones que Google paga a sus socios las ventas fueron de 4380 millones de doacutelares El beneficio por accioacuten fue de 589 doacutelares por tiacutetulo frente a los 429 doacutelares por tiacutetulo de hace un antildeo y los 539 doacutelares que esperaban los expertos

En la bolsa los tiacutetulos de Google subiacutean un 18 hasta los 540 doacutelares poco despueacutes de conocerse los resultados Aunque auacuten estaacuten lejos de su maacuteximo histoacuterico de 714 doacutelares registrado a finales de 2008 las acciones de la que fuera una de las mejores inversiones en la red han recuperado maacutes de un 18 de su valor desde junio y un 79 desde comienzos de antildeo

Google ha demostrado tambieacuten ser praacutecticamente inmune al aumento de los competidores en su aacuterea aunque los inversores seguiraacuten atentos al efecto de Bing la renovada herramienta de buacutesqueda en la red de Microsoft

httpwwwcincodiascomarticuloempresasGoogle-da-finalizada-recesion-vuelve-elevar-ingresos20091016cdscdsemp_2cdsempview=print

Oct 16 2009

Is There Too Much or Too Little Liquidity A Contrarian View

Overview Lex The reality is that monetary conditions are not loose at all Sure real short-term interest rates are low across the globe But a composite measure of real private borrowing rates in the US Japan euroland and the UK including consumer loans and mortgages corporate loans and asset-backed securities weighted by amounts outstanding shows rates near 4 per cent according to the International Monetary Fund That is higher than for most of this decade (FT 100509)

o BBVA First the aggregate US commercial banking liquidity will grow at an average rate 47 below its 2003-2007 pre-crisis growth rate Second liquidity is at its greatest deviation from trend since 1990 but has likely reached a bottom despite a significant shock Third increased savings by consumers cannot translate into balance sheet repair if commercial banks are not creating liquidity

o Scott Sumner (via VoxEU) Contrary to common belief monetary policy is still too tight not too loose if you compare market participants inflation expectations despite the zero nominal interest rates Indeed tight monetary policy was the main cause for the broad-based crash in the fall of 2008 according to any market indicator you look at When looking back at the Great Depression economists point to the increase in reserve requirements as one of the main policy mistakes but how is this different from paying interest on reserves starting October 2008 Both measures increase bank demand for reserves instead of passing liquidity on to market participants who in turn revise down their growth estimates To do In the first four months after FDR set an explicit price level target in 1933 nominal spending soared at the fastest rate in US history despite the fact that the US banking system was shut down for months Alternative adopt a nominal GDP growth target

o Tim Duy A sustained period of very low interest rates during this decade was barely able to coerce firms to invest in the high single digits That in my mind is a critical problem reflecting low expected returns to capital investment In effect the policy error might not have been low rates Indeed rates do not look to have been low enough to stimulate sufficient investment demand to absorb the productive capacity of the nation (Economists View 100109) See Do We Need a Higher Inflation Target A Price Level Target

o James Kwak (Baseline Scenario) The problem with securitization is that the private market may never recover

o But do we need the private securitization market to come back According to Paul Krugman The banks donrsquot need to sell securitized debt to make loans mdash they could start lending out of all those excess reserves they currently hold Or to put it differently by the numbers therersquos no obvious reason we shouldnrsquot be seeking a return to traditional banking with banks making and holding loans as the way to

restart credit markets Yet the assumption at the Fed seems to be that this isnrsquot an option (100709)

o Mark Kiesel (PIMCO) In order to make sense of credit markets we need to analyze technical supply and demand factors valuations and fundamentals

o 1) On technicals cash is leaving money market funds and is being redirected into credit markets given very poor cash returns (see also Big Picture) Going forward a situation of bond oversupply may drive spreads higher as high yield investors check back with economic fundamentals and especially with final consumer demand

o 2) On valuations despite the rally investment-grade credit still looks attractive relative to cash and stocks Especially in the New Normal scenario corporate bonds are preferable also because of their seniority in the capital structure

o 3) On fundamentals while cash flow has increased due to significant cost cutting we remain cautious on the sustainability of longer-term corporate profitability and free cash flow generation as the US economy becomes increasingly more dependent on policy support to offset weak final demand and consumer fundamentals

o Keep also in mind that the corporate default rate follows nominal GDP so if growth is anemic as assumed in the New Normal scenario the default rate will tend to stay elevated due to poor top-line revenue growth particularly for highly-leveraged companies As of now the high yield rally is overdone on a risk-adjusted basis (1009)

httpwwwrgemonitorcom10006Finance_and_Bankingcluster_id=14435

Oct 16 2009 OTC Derivatives Regulation House Financial Services Committee Votes on Draft Bill

Overview On October 15 2009 the House Financial Services Committee passed a draft bill regulating over-the-counter derivatives for the first time The draft bill goes less far than the administrations proposal but Treasury accepted the changes that exempt the great majority of businesses that use derivative instruments to hedge their business risks from trading such instruments through exchanges or clearinghouses There are at least another four committees working on the bill which could still see significant changes (NY Times 10152009)

o Geithner Testimony July 10 To force clearing of all derivatives would ban customized [products] and we dont believe thats necessaryI think our responsibility is to make sure those benefits come with protections See Economic Risks and Benefits of Credit Derivatives

o July 14 The US Justice Department is investigating the CDS market In particular the antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information (Bloomberg)

o On May 13 the US Treasury announced comprehensive OTC derivatives trading reform In particular the US$684 trillion OTC derivatives markets must be moved onto regulated exchanges and regulated transparent electronic trade execution systems The reforms will tackle systemic risk (see GAO report) and price and counterparty transparency by making aggregate data available to the public and detailed positions available to regulators Meanwhile regulators will gain the authority to limit market abuse and stronger consumer and investor protection mechanisms will be put in place The emerging consensus If a clearinghouse accepts to clear a derivative it is standardized and must trade through a central counter party

o June 26 Gary Gensler the new Commodity Futures Trading Commission (CFTC) chairman in a speech proposed higher capital requirements for customized products to encourage standardization and on-exchange trading He also pointed to hedge funds as causing a run on liquidity

o Senate Hearing Results June 23 Securities and Exchange Commission (SEC) Chairman Mary Schapiro proposed that her agency oversee derivatives linked to stocks bonds (including corporate CDS) and securities and that the CFTC oversee all other derivatives including derivatives related to interest rates foreign exchange commodities energy and metals (via WSJ)

o Bloomberg May 14 Regulators at the SEC are considering price-reporting standards similar to TRACE for the OTC derivatives market The switch to TRACE reduced bank profits by almost half seven years ago

o Professors Viral Acharya and Robert Engle NYU Stern The focus on standardized OTC products alone is dangerous all derivative products should be addressed in the new regulations (via WSJ)

o Robert Claassen Chairman of the Derivatives and Structured Products Group Paul Hastings To the extent the committee is concerned about speculation in CDS they should consider giving the CFTC or the Federal Reserve Board the right to establish margin requirements for CDS exchange trades that are not bona fide hedges or the like similar to the rules governing futures contracts (via FT Alphaville)

o Bloomberg January 30 Faced with tougher regulation dealers will overhaul CDS trading by March 2009 with Big Bang reform For the first time the market will have a committee of dealers and investors making binding decisions about the event of default and potential recovery value Traders who buy protection will pay an upfront fee based on current market prices and then a fixed US$100000 or US$500000 annual payment for every US$10 million of protection purchased Now upfront payments are only required for riskier companies whose spreads exceed 10

o Stephen Cecchetti FT Amaranth and LTCM impact comparisons show that regulated exchange trading should be the norm Its advantages include less counterparty risk with centralized clearing house and margin calls asset valuation certainty and standardized products

o Lynn Stout UCLA July 9 OTC derivatives worked for centuries until the Commodity Futures Modernization Act (CFMA) of 2000 among others deregulated the old rule against difference contracts The old common law rule against difference contracts was a simple elegant legal sieve that separated useful hedging contracts from purely speculative wagers protecting the first and declining to enforce the secondAnd it didnrsquot cost a penny of taxpayer money

o See BIS H2 2008 OTC Derivatives Survey OTC Derivatives Regulation House Financial Services Committee Votes on Draft Bill Oct 16 2009

httpwwwrgemonitorcom691

Opinion

October 16 2009

OP-ED COLUMNIST

A Hatchet Job So Bad Itrsquos Good By PAUL KRUGMAN In the past the insurance industryrsquos power has been a major barrier to health-care reform Most notably the industry paid for the infamous ldquoHarry and Louiserdquo ads that helped kill the Clinton plan But times have changed

Last weekend the lobbying organization Americarsquos Health Insurance Plans or AHIP released a report attacking the reform plan just passed by the Senate Finance Committee Some news organizations gave the report prominent uncritical coverage But health-care experts quickly and correctly dismissed it as a hatchet job And the end result of AHIPrsquos blunder may be a better bill than we would otherwise have had

For 2009 it turns out is not 1993 Once again Republicans have tried to kill reform with smears and scare stories But all they seem to have killed with their cries of ldquosocialismrdquo and warnings about ldquodeath panelsrdquo is their own credibility Some form of health-care reform is highly likely to pass

So itrsquos a different game than it was 16 years ago And itrsquos a game that the insurance industry apparently doesnrsquot know how to play The motivation for the AHIP report seems to have been the decision by the Finance Committee to weaken the penalties for individuals who donrsquot sign up for insurance even as it retains regulations requiring that insurers offer the same policies to everyone regardless of medical history The industry worries that some people will game the system remaining uninsured as long as theyrsquore healthy then signing up when they get sick

This is believe it or not a valid concern Many health-care economists believe that a strong individual mandate requiring that almost everyone sign up will be needed to make health reform work And the Finance Committee probably did weaken the mandate too much

But AHIP apparently unable to help itself didnrsquot stop there Instead the report threw every anti-reform argument the authors could think of at the wall hoping that something would stick

One argument was particularly striking the claim that attempts to limit Medicare spending would lead to higher insurance premiums In fact the report assumes that 100 percent of any reduction in Medicare payments to hospitals will translate into higher costs for patients with private insurance

The only way to justify this claim is to assume that all hospitals are purely charitable institutions charging as little as they possibly can Now some hospitals may fit this description But all of them

Whatrsquos more this argument stands the usual logic of markets on its head if you believe AHIPrsquos story competition raises prices instead of reducing them And it doesnrsquot matter where the competition comes from anyone who gets a better deal whether itrsquos Medicare

or a private insurer makes life worse for everyone else I donrsquot believe that and neither should you Of course the report doesnrsquot mention these implications The only bad competition it talks about is competition from the government Specifically it claims that a public insurance option would be a bad thing mdash not because it would be inefficient but because the public plan would negotiate better prices Isnrsquot that an argument for not against such a plan Which brings us to the ways in which AHIP may have done health reform a favor

As I said the individual mandate probably should be stronger than it is in the Finance Committeersquos bill But therersquos a reason the mandate was weakened fear that too many people would balk at the cost of insurance even with the subsidies provided to lower-income individuals and families So why not address that cost

Aside from making the subsidies larger which they should be there are at least two changes to the legislation that would help limit costs First health exchanges mdash special regulated markets in which individuals and small businesses can buy insurance mdash can be made stronger in effect giving small buyers a better bargaining position Second the public option mdash missing from the Finance Committeersquos bill mdash can be brought back in giving private insurers some real competition The insurance industry wonrsquot like these changes but that matters less than it did a week ago

Therersquos also another point which House Speaker Nancy Pelosi has stressed Part of the opposition to a strong individual mandate comes from the sense that Americans will be forced to buy policies from a greedy insurance industry Giving people literally another option mdash the right to buy into a public plan instead mdash would defuse that opposition

Even with stronger exchanges and a public option health reform would probably increase not reduce insurance industry profits But the insurers wanted it all The good news is that by overreaching they may have ensured that they wonrsquot get it

Smart guys and Wall Street Irsquom a little late on this great Calvin Trillin piece but it accords with my own more specialized memories from grad school The year I got my PhD (1977) there was a very clear ranking of desirable career paths The best economics grad students went into academic jobs the middle went to the Fed or the IMF the bottom went poor souls to Wall Street

Even then this meant an inverse relationship between academic ranking and income since new assistant professors were paid only around $15000 equivalent to a bit more than 50K today But the prestige differences more than offset the pay differentials at least as we saw it then And one thing thatrsquos hard to convey is how boring business seemed in the 1960s and 1970s (rdquoIrsquove got just one word for you plasticsrdquo)

But even a decade later it was the guys who went off to investment banks who were buying the third homes while the top students were trying to eke out their incomes with an occasional consulting gig And it wasnrsquot just the money business stopped being so boring

and was even getting to be fun for some people The old conviction that the academic life was the ideal definitely began to fray at the edges

Did the influx of smart people bring on disaster Thatrsquos a longer story But the change in who went where is utterly real

Jim Rogers makes my head hurt After my talk in Seoul I participated in a panel discussion on The Future The summary doesnrsquot mention it but I made notes on a comment by Jim Rogers who was all ldquothe West is in decline everythingrsquos going to Asiardquo He was asked whether he was predicting that capital will start flowing into Asia mdash which he certainly seemed to be implying mdash and responded

ldquoWell capital has already been flowing into Asian economies as you can see by the fact that theyrsquore the worldrsquos biggest creditorsrdquo

Your homework assignment is to explain mdash in English mdash whatrsquos wrong with that sentence October 15 2009 443 pm

Thought for the day rerun edition

I used this back in October but it works now for different reasons

ldquoStock markets are the best barometer of the health wealth and security of a nationrdquo

Larry Kudlow

20091013~15 091014_0920_Vista

Title The Global Economy Speaker Paul Krugman 2008 Nobel Prize Laureate in Economics

Moderator In June Kim Professor Seoul National University

Paul Krugman 2008 Nobel laureate in economics gave a speech at the World Knowledge Forum Wednesday on the causes of the current economic crisis and the obstacles to recovery Krugman said that while economic challenges remain a deeper crisis has been avoided

ldquoIf I had to come up with a quick summary of what has happened to the world economy over the last few months it would be lsquoapocalypse not nowrsquordquo said Mr Krugman who is also a regular columnist for the New York Times

One of the striking aspects of the current crisis according to Krugman is how it differs from the supply shock of the 1970s Since then he said we thought we had learned to manage economic downturns

ldquoThis was not supposed to happenrdquo Krugman said ldquoWe thought we had improved management [of the] volatility of the business cycle Drop in demand was supposed to be easy to fix by increasing money supplyrdquo

Krugman delineated three major causes of the crisis housing bubbles a build-up of private-sector debt and global imbalances He said that these elements had been building for decades

ldquoIt didnrsquot start in 2002 or under any political administration It goes back to the early 1980srdquo Krugman said

In particular Krugman noted the stark imbalances between what he called surplus countries such as China with low debt and investment and high savings and deficit countries which have low savings and housing bubbles

ldquoAll around the world there is a division of surplus countries with high savings relatively low household debt trade surpluses and unfortunately low investmentrdquo he said adding that those countries export capital ldquoto countries with high deficits low household savings and high debts and housing bubblesrdquo Pointing to the United States as an example of the latter category Krugman called this an unsustainable outlook for the future

ldquoThis must end in a difficult fashionrdquo Krugman said

The key to understanding how the current crisis happened Krugman said is to understand the change in the nature of the financial system Alongside traditional banks the run-up to the crisis saw the emergence of a shadow banking system

20091013~15

ldquoThe parallel or shadow banking system by the eve of the crisis was bigger than the conventional banking system and it had no safety net There was very little effective regulationrdquo Krugman explained

The sudden withdrawal of capital from this shadow banking system after the fall of US banking giant Lehman Brothers significantly added to the $13 trillion of net worth lost in the US during the financial crisis Krugman also noted that some of the economists who saw the warning signs of the current crisis did so based on knowledge of the Asian financial crisis of the late 90s ldquoIt [the Asian crisis] was a full dress rehearsal for what was about to comerdquo Krugman said ldquoThe scale [of this crisis] has exceeded anything that we were prepared forrdquo

According to Krugman four factors helped avoid a deeper recession aggressive interest rate cuts financial sector rescues and interventions automatic stabilizers and deliberate fiscal policy

Large-scale government spending on rescues and bailouts Krugman said rescued the economy

ldquoIt is not what we want to do but necessaryrdquo Krugman said ldquoDeficits saved the worldrdquo

However Krugman added several obstacles to recovery remain The hangover of debt international imbalances and the intellectual difficulty of adapting to a changed economic landscape all pose significant problems

International imbalances in spending saving demand and investment need to be resolved

ldquoIn the end the world has to have much smaller deficits than surpluses For that to happen there has to be a redistribution of world demand ldquoKrugman said

The outlook for the future is uncertain Krugman said and there is still a long road ahead Economic challenges are now more difficult to manage because the worldrsquos economies are so closely integrated

ldquoThe IMF has found that synchronized financial crises have more prolonged effectsrdquo Krugman said referring to the International Monetary Fund ldquoRight now we have the mother of all synchronized crisesrdquo Krugman said that despite our intellectual tendency to preach austerity and end governmental support and stimulus we need to continue rescue efforts He urged avoiding a return to the ldquo1930s gold standard mentalityrdquo which aggravated the Great Depression

ldquoIf we do we will experience a global lost decaderdquo Krugman said

The immediate emergency has passed Krugman said explaining that ldquowe have reached the end of the beginningrdquo

20091013~15 But he warned that we must continue to support the economy in the long run

ldquoIn some ways itrsquos harderrdquo Krugman said ldquoWe need to accept the need for a sustained effort that may be more difficult than the crises Letrsquos hope we find the wisdom and courage to deal with the 20 years aheadrdquo

Question and Answer Session Q mdash you define the current crisis as more of a macroeconomic crisis or liquidity mdashWhat is the difference between the views

A There is a liquidity crisis but it does not capture the full extent of the crisis What needs to be done is to get credit flowing High savings and reduced spending needs to be avoided because it is difficult to offset Liquidity is part of the decline of the economy but is not the only thing to blame

Q What should Korea do to minimize the effect of the global financial crisis in the future

A Korearsquos flowing exchange rate and independent monetary policy ldquoneed a framework [because] therersquos only some insulation you can getrdquo Korea does benefit from the world inventory balance However based on what we have learned macroeconomic dependence is strong For Korea ldquothe best thing to do is talk sense to the bigger members of the G20rdquo

By Shawn Bedell Shadiyah Lim Uri Kim amp Hazel Lee Edited by Glenn May HTTPFILEMKCOKRKNOWLEDGEWKF091014_0920_KRUGMAN_VISTAPDF

COLUMNISTS SAMUEL BRITTAN

Whatever happened to imbalances By Samuel Brittan

Do you remember all the fuss about international imbalances China some of the emerging countries the oil exporters Germany and Japan were building up huge current account surpluses while the US the UK Australia some other European countries such as Spain and Ireland and central and eastern European countries were enormously in deficit

In dollar terms the sums seemed huge For instance the US had in 2006 a current deficit of $760bn while by 2008 the Chinese surplus was well over $400bn and that of the ldquofuel exportersrdquo over $600bn In relative terms the numbers are much less frightening At their 2008 peak on International Monetary Fund estimates the global imbalances amounted to 2frac12 per cent of world gross national product measured by total surpluses or deficits

Nevertheless they worried many observers Indeed to the extent to which the present recession was even faintly foreseen it was expected to come from a run on the dollar triggered by these imbalances We may or may not be seeing the beginning of such a run now but its timing makes it quite implausible as a recession trigger

I am afraid I could never see what the fuss was about International capital flows which are the counterpart to these imbalances are a normal feature of a global economy Some of the fuss was at bottom moralistic A poor country such as China should not be lending to finance a US consumer boom Or if the Chinese surplus could not be helped at least it should have been passed on to other emerging countries If US voters had shared these feelings of the east coast economic intelligentsia the remedy would have been straightforward impose a value added tax to curb domestic consumption and use the proceeds for aid or loans to developing countries I leave aside for the moment the debate on the efficacy of such aid But as the US public was not of this mind its role as consumer of last resort staved off world recession for many years

In any case those who fear imbalances should be reassured Total imbalances are estimated by the IMF to be slashed this year to 1frac12 per cent of world gross domestic product This may be an underestimate of the correction as the IMF admits For like most national forecasters it works on the absurd assumption of unchanged exchange rates On the surplus side the correction is expected to come from the oil-exporting countries and to a lesser extent from Japan and Germany None of the adjustment comes from China On the deficit side far and away the biggest reduction in red ink comes from the US with the rest spread out among a number of countries It should be said that the IMF expects a return to larger imbalances in future years but as most of this is due to the reappearance of our old friend the ldquostatistical discrepancyrdquo little more can be said here

It is possible to give a simpler analysis than the IMFrsquos of these imbalances based on the hypothesis of a world savings glut advanced by Ben Bernanke chairman of the US Federal Reserve This is a modern version of the over-savings theory of recession first advanced by John Maynard Keynes A feature of Keynesian analysis that few understand is that you never see a surplus of savings over investment in the figures as these two are defined to be identical (When we had the opposite problem of a supposed ldquoinflationary gaprdquo Milton Friedman

described a vain drive through the Appalachian mountains looking for a gap that never appeared) If attempted savings exceed perceived investment opportunities the first thing that happens is that interest rates fall ndash Greenspan or no Greenspan When they have fallen as far as practical the stress is taken by falling output and jobs hence the recession and also the shrinkage of ldquoimbalancesrdquo

Recovery depends on a rediscovery of investment opportunities ndash ldquoanimal spiritsrdquo if you really must ndash reduced attempted savings or injection of demand by governments or central banks China is not going to save less because of western lectures which would be better directed to the political tyranny in that country Until western consumers have reduced their indebtedness to reasonable proportions demand must be supported by the monetary injections and budget deficits now in place and possibly more of them Thus the IMF is right to warn against premature withdrawal of these stimuli British Tory Bourbons who want a draconian belt-tightening policy either have not read these warnings or think they know better

Please note that I have got so far without once mentioning banks other than central banks Commercial banks certainly worsened the recession by greedily seeking higher returns than those provided by market interest rates and they can put grit in the recovery by refusing to lend I can only suggest making Paul Krugman the radical Keynesian economist Comptroller of the US Currency with over-reaching powers to take over old banks and initiate new ones with similar appointments in other countries

HTTPWWWFTCOMCMSS0777B3940-B9CC-11DE-A747-00144FEAB49AHTML

ELMUNDOES TRIBUNA LA REFORMA DEL SECTOR INMOBILIARIO|LUIS GARICANO

Un mercado de la vivienda que no funciona 15102009

EL INADECUADO marco regulatorio del mercado inmobiliario en Espantildea ha generado importantes distorsiones econoacutemicas tales como la escasez artificial de viviendas de alquiler una elevada absorcioacuten de la inversioacuten productiva por parte de este sector e indirectamente un bajo crecimiento de la productividad Sin embargo son mucho maacutes importantes sus consecuencias sociales como el excesivo endeudamiento de las familias la disminucioacuten de la accesibilidad de la vivienda o las distorsiones a la movilidad de los trabajadores La correccioacuten de esta situacioacuten requiere un cambio profundo de la regulacioacuten de este mercado

El mercado inmobiliario espantildeol presenta un conjunto de rasgos que lo diferencian de otros paiacuteses europeos El maacutes notorio es la alta tasa de propiedad que supera el 85 del total de viviendas principales y que implica que el mercado de alquiler sea muy deacutebil (en torno al 13) Esta tasa es especialmente baja si se compara con la de otros paiacuteses europeos como Alemania o Francia (con tasas superiores al 40) o el Reino Unido (en torno al 30) Al mismo tiempo en Espantildea la tasa de viviendas vaciacuteas supera el 16 una cifra excepcional

Con estas caracteriacutesticas la economiacutea espantildeola ha experimentado un gran aumento del precio de la vivienda que se ha doblado en teacuterminos reales entre 1999 y 2007 Asimismo se ha construido un nuacutemero de viviendas muy alto dos tercios de las viviendas construidas en el Unioacuten Europea entre 1999 y 2007 se situacutean en Espantildea

Ademaacutes en los uacuteltimos antildeos la accesibilidad de la vivienda por parte de la sociedad espantildeola se ha reducido notablemente En diciembre de 1997 el precio medio de la vivienda representaba 36 veces la renta disponible bruta media de los hogares mientras que 10 antildeos despueacutes suponiacutea 77 veces esa renta Que esta dificultad quede encubierta en momentos como el actual por unos bajos tipos de intereacutes no cambia las cosas nadie puede imaginar que el Euribor pueda seguir indefinidamente en torno al 1

La actual situacioacuten de crisis ha puesto auacuten maacutes de manifiesto las implicaciones negativas que tienen estas caracteriacutesticas del mercado de la vivienda sobre la economiacutea y la sociedad espantildeolas En primer lugar la debilidad del mercado de alquiler limita la movilidad de los trabajadores que no pueden hallar de forma raacutepida alojamiento en otras provincias en las que podriacutean encontrar empleo o mejores condiciones laborales

Asimismo el mercado de alquiler no ha sido una alternativa eficaz al mercado de la propiedad debido en gran parte a sus caracteriacutesticas institucionales En consecuencia no ha conseguido atraer a las viviendas vaciacuteas ni ha supuesto un colchoacuten frente a los altos incrementos de los precios de la vivienda Aunque es muy difiacutecil saber a ciencia cierta el nuacutemero de viviendas nuevas sin vender una estimacioacuten conservadora lo situacutea en algo maacutes de un milloacuten lo que equivale al nuacutemero de viviendas que se venden normalmente en tres antildeos

A esto se antildeade que muchas personas no encuentran un lugar adecuado para vivir En especial la poblacioacuten joven que intenta acceder a su primera vivienda ha soportado gran parte de la carga generada por los desequilibrios mencionados Maacutes del 65 de los joacutevenes

espantildeoles con edades comprendidas entre 25 y 29 antildeos viven con sus padres frente al 20-22 de Francia Holanda o el Reino Unido

Coinciden por tanto un elevado exceso de oferta con una gran bolsa potencial de demanda por parte de muchos joacutevenes con salarios reducidos y empleos inestables Eacuteste es un signo inequiacutevoco de un mercado que no funciona

Es urgente adoptar medidas para remediar esta situacioacuten Fundamentalmente porque podriacutean ayudar a salir de la crisis al contribuir a eliminar el exceso de viviendas sin vender y a ajustar los precios con mayor rapidez En segunda instancia porque mejorariacutean draacutesticamente la accesibilidad de la vivienda Ademaacutes permitiriacutean aumentar los ingresos de los pequentildeos propietarios y reducir los efectos de la crisis sobre las economiacuteas familiares Y por uacuteltimo contribuiriacutean a reducir el paro

Tales actuaciones pasariacutean por potenciar el mercado de alquiler mediante la liberalizacioacuten de los contratos el aumento de la seguridad juriacutedica de los propietarios y la reduccioacuten de las trabas a los inquilinos El mercado de alquiler en Espantildea estaacute regulado por la Ley de Arrendamientos Urbanos que limita la libertad contractual de las partes de dos maneras distintas Por un lado impone una duracioacuten miacutenima de los contratos de alquiler de cinco antildeos Por otro restringe los aumentos en la renta pagada a la variacioacuten del iacutendice de precios de consumo Ademaacutes este mercado sufre una grave falta de seguridad juriacutedica en gran parte derivada de la lentitud judicial a la que se enfrentan los propietarios ante posibles impagos de la renta Lamentablemente la reforma de los procedimientos civiles en el antildeo 2000 no supuso avances destacables en esta aacuterea

Proponemos reducir la duracioacuten miacutenima obligatoria de los contratos de alquiler y fijarla en un antildeo para aproximarnos a la situacioacuten de otros paiacuteses europeos Para aumentar la seguridad juriacutedica y la rapidez del procedimiento de resolucioacuten del contrato proponemos tambieacuten una reforma legal que permita a los notarios acreditar el incumplimiento en el pago del alquiler y declarar el desahucio del inmueble en el caso de que las partes lo hayan acordado asiacute en el contrato de alquiler El incremento de la seguridad juriacutedica evitariacutea que los propietarios adoptasen medidas de autoproteccioacuten como la exigencia de fianzas elevadas En particular la ley no debe imponer la obligatoriedad de la fianza Otra medida interesante seriacutea suprimir con caraacutecter inmediato todos los incentivos fiscales a la compra de vivienda En la actualidad existe en Espantildea una deduccioacuten en el Impuesto sobre la Renta de las Personas Fiacutesicas (IRPF) por la compra de la primera vivienda habitual que puede alcanzar un maacuteximo de 901518 euros por antildeo Ademaacutes las comunidades autoacutenomas (CCAA) han ido antildeadiendo en los uacuteltimos antildeos otras deducciones a la compra de vivienda

Por el contrario los incentivos fiscales al alquiler de vivienda han sido escasos en ese mismo tiempo los uacutenicos incentivos destacables para el inquilino se introdujeron en 2008 con la aplicacioacuten de la laquorenta baacutesica de emancipacioacutenraquo (210 euros mensuales para la poblacioacuten de 22 a 30 antildeos durante un periodo maacuteximo de cuatro antildeos) y una deduccioacuten por alquiler en el IRPF para contribuyentes con renta inferior a 24020 euros anuales Los incentivos fiscales en Espantildea han beneficiado por tanto a la vivienda en propiedad frente a la vivienda en alquiler Las deducciones ademaacutes de haber incentivado una asuncioacuten de riesgos excesivos han tenido un caraacutecter regresivo al no considerar la renta de los compradores de vivienda Consiguientemente proponemos que se supriman los subsidios a la compra de vivienda y

que se dediquen los recursos asiacute obtenidos a financiar temporalmente una desgravacioacuten para el alquiler de vivienda SUPRIMIR la vivienda de proteccioacuten oficial en propiedad y reorientar la proteccioacuten social hacia el mercado de alquiler es otra disposicioacuten que deberiacutea valorarse La dotacioacuten de vivienda con alguacuten grado de proteccioacuten en Espantildea ha estado orientada tradicionalmente hacia la vivienda en propiedad Asiacute la vivienda puacuteblica en forma de alquiler constituye solo el 1-2 del parque de viviendas muy lejos de Francia o el Reino Unido que tienen tasas superiores al 15 La asignacioacuten de vivienda protegida en propiedad toma la forma de una loteriacutea en que muy pocos beneficiados reciben una subvencioacuten muy elevada Ademaacutes una vez obtenida la vivienda los cambios de la renta del hogar no suponen la peacuterdida o la devolucioacuten de la subvencioacuten disfrutada Este reacutegimen es fuente de numerosos fraudes

Proponemos la supresioacuten de la construccioacuten de nueva vivienda protegida en propiedad especialmente en un contexto de exceso de oferta como el actual para dedicar los recursos disponibles a financiar ayudas al alquiler de vivienda libre para personas con bajos niveles de renta Finalmente consideramos que tambieacuten tendriacutea un impacto positivo la supresioacuten o draacutestica reduccioacuten del impuesto sobre transmisiones patrimoniales en la compraventa de vivienda En un momento en que las transacciones en el mercado de la vivienda estaacuten cayendo considerablemente la medida dinamizariacutea la compraventa de viviendas y por tanto favoreceriacutea la movilidad geograacutefica de los propietarios sin provocar una caiacuteda importante de la recaudacioacuten La peacuterdida de recaudacioacuten por la desaparicioacuten de este impuesto podriacutea compensarse a traveacutes de un aumento del impuesto sobre bienes inmuebles (IBI) que podriacutea tener un tramo autonoacutemico El IBI es un impuesto oacuteptimo desde un punto de vista econoacutemico ya que afecta a un bien como la propiedad inmobiliaria que es completamente inelaacutestico En conclusioacuten pensamos que una reforma en la regulacioacuten del mercado inmobiliario es una condicioacuten necesaria para comenzar un nuevo periacuteodo de crecimiento sostenido Al dinamizar el mercado inmobiliario y favorecer la movilidad geograacutefica tal reforma facilitariacutea los ajustes necesarios para salir de la crisis en la que se encuentra la economiacutea espantildeola y promoveriacutea la adopcioacuten de un nuevo modelo productivo para el largo plazo

Luis Garicano es profesor de la London School of Economics y la Fundacioacuten de Estudios de Economiacutea Aplicada (Fedea) Suscriben esta propuesta Rafael Repullo Pablo Vaacutezquez y 15 firmantes maacutes

httpwwwelmundoesopiniontribuna-libre20091019756824html

Informe de otontildeo

Los institutos econoacutemicos consideran superado el bache de la crisis mundial Los ocho institutos econoacutemicos que asesoran al Gobierno alemaacuten consideran superado el bache de la mayor recesioacuten econoacutemica desde la II Guerra Mundial y que existen muchos indicios de que se ha iniciado una recuperacioacuten coyuntural a nivel global Efe - Berliacuten - 15102009

En su informe para otontildeo presentado hoy en Berliacuten los expertos de los institutos destacan que la situacioacuten en los mercados financieros se ha relajado apreciablemente y que todos los indicadores apuntan hacia arriba

Los encargos aumentan y la produccioacuten se incrementa El comercio mundial en retroceso hasta primavera ha aumentado claramente desde el verano En una serie de paiacuteses emergentes sobre todo en Asia la produccioacuten apuntaba ya hacia arriba en el segundo trimestre destaca el estudio

Los institutos -cinco alemanes dos austriacuteacos y un suizo- calculan que la produccioacuten mundial retrocederaacute este antildeo un 25 de forma global pero que volveraacute a crecer en 2010 un 2 Igualmente estiman que el comercio mundial caeraacute este antildeo de manera draacutestica hasta un 105 pero volveraacute a aumentar en 2010 un 55

Los paiacuteses emergentes relanzaraacuten la economiacutea Los institutos subrayan que los paiacuteses emergentes seraacuten el motor para el relanzamiento de la economiacutea mundial y calculan que los paiacuteses industrializados incrementaraacuten su produccioacuten el antildeo proacuteximo en un 1 tras retroceder en el presente un 35

Sin embargo advierten de que la experiencia de otras fases de debilidad econoacutemica ha demostrado que las recesiones relacionadas con crisis bancarias e inmobiliarias se superan lentamente por lo que cuentan con que la dinaacutemica coyuntural el antildeo proacuteximo sea mediocre a nivel mundial sobre todo teniendo en cuenta que los problemas del sistema financiero mundial auacuten no han sido superados

Crecimiento del 12 en Alemania En cuanto a Alemania sentildealan que registraraacute el antildeo proacuteximo un crecimiento econoacutemico del 12 tras sufrir este antildeo un retroceso de su PIB del 50 seguacuten el informe de otontildeo presentado al gobierno alemaacuten por los principales institutos de estudios econoacutemicos y hecho puacuteblico hoy en Berliacuten

El estudio cuenta para el antildeo proacuteximo con una incipiente recuperacioacuten de la economiacutea alemana debido a que la deacutebil expansioacuten de la economiacutea mundial soacutelo permitiraacute aumentar moderadamente las exportaciones mientras la demanda interior se incrementaraacute muy lentamente

Por ese motivo los ocho institutos que elaboran el informe calculan que el nuacutemero de desempleados en Alemania -actualmente unos 39 millones- aumentaraacute hasta una media anual en 2010 de 41 millones de personas

Los caacutelculos de los expertos consideran que Alemania registraraacute en 2009 un deacuteficit del 32 que aumentaraacute hasta el 52 en 2010 con lo que volveraacute a incumplir los criterios de Maastricht

Asimismo estiman que este paiacutes no conseguiraacute volver a cumplir con dichos criterios antes de 2013 y aconsejan al nuevo Gobierno federal que congele los gastos y ahorre de manera consecuente para consolidar los presupuestos

De ese modo explican los expertos seraacute posible sanear las finanzas sin recurrir a un incremento de los impuestos a la vez que advierten de que reducciones tributarias seriacutean a la larga muy caras si se financian con creacuteditos

Las advertencias de los institutos van dirigidas a los partidos de la Unioacuten (CDUCSU) y los liberales (FDP) que negocian actualmente una nueva coalicioacuten de gobierno y que pretenden cumplir con la promesa electoral de rebajar impuestos

El informe ha sido elaborado por el Instituto de Estudios Econoacutemicos de la Universidad de Muacutenich la Oficina de Estudios Coyunturales de Zuacuterich el Instituto de Economiacutea Mundial de Kiel y el Instituto de Estudios Econoacutemicos de Halle

Tambieacuten han trabajado en el mismo el Instituto de Macroeconomiacutea de la Fundacioacuten Hans Boumlckler de Duumlsseldorf el Instituto de Estudios Econoacutemicos Austriacuteaco de Viena el Instituto de Estudios Econoacutemicos de Renania y Westfalia en Essen y el Instituto de Estudios Superiores de Viena

httpwwwcincodiascomarticuloeconomiainstitutos-economicos-consideran-superado-bache-crisis-mundial20091015cdscdseco_19cdseco

Espantildea uacutenico paiacutes del euro con PIB negativo en 2010 seguacuten los sabios alemanes Los ocho institutos de estudios econoacutemicos que asesoran al Gobierno alemaacuten calculan que Espantildea registraraacute en 2010 un retroceso de su Producto Interior Bruto de probablemente un 03 seguacuten su informe de otontildeo presentado hoy en Berliacuten Efe - Berliacuten - 15102009

Con ello Espantildea es el uacutenico paiacutes de la zona euro del que los institutos esperan para el antildeo proacuteximo un nuevo retroceso de su rendimiento econoacutemico sentildeala el estudio en el que se subraya que la crisis inmobiliaria ha tenido efectos devastadores en el mercado laboral

Agrega que mientras la coyuntura en el espacio del euro vuelve a reanimarse gracias a los impulsos poliacutetico-econoacutemicos y una creciente demanda exterior Espantildea se enfrenta a por lo menos un nuevo antildeo difiacutecil

Los indicadores apuntan a una estabilizacioacuten de la produccioacuten pero la reduccioacuten de la industria de la construccioacuten y la devolucioacuten de la deuda en el sector privado gravaraacuten la coyuntura todaviacutea fuertemente sentildeala el documento

Deterioro de las arcas puacuteblicas Asimismo indica que la situacioacuten de las arcas puacuteblicas en Espantildea ha empeorado dramaacuteticamente como consecuencia de la crisis Si en el antildeo 2007 habiacutea un superaacutevit presupuestario del 22 frente al PIB para este antildeo se calcula que el deacuteficit seraacute del 10

Los institutos asesores del Gobierno alemaacuten sentildealan que la profunda crisis econoacutemica en la que se ve sumida Espantildea tiene su origen en los antildeos previos a la introduccioacuten del euro cuando convergieron los tipos de intereacutes de los distintos paiacuteses miembros de la eurozona Los tipos en Espantildea bajaron claramente e indujeron un apreciable incremento de las inversiones sobre todo en el sector inmobiliario La explosioacuten duroacute hasta 2007 Esto contribuyoacute a un fuerte aumento del deacuteficit de la balanza de pagos por cuenta corriente que el pasado antildeo alcanzoacute un 13 en relacioacuten con el PIB sentildeala el informe

Igualmente explica que fomentado por un nivel real de tipos bajo el ciacuterculo vicioso formado por una creciente actividad constructora demanda de mano de obra inmigracioacuten y mayor demanda inmobiliaria no se detuvo hasta la explosioacuten de la burbuja inmobiliaria

Con la quiebra de la demanda interna como consecuencia de la actual recesioacuten se ha reducido un poco el deacuteficit de la balanza de pagos por cuenta corriente aunque ello no ayudaraacute a resolver los problemas estructurales dice el anaacutelisis

httpwwwcincodiascomarticuloeconomiaEspana-unico-pais-euro-PIB-negativo-2010-sabios-alemanes20091015cdscdseco_16cdseco

Oct 15 2009

US Banks Q3 Earnings Strong Trading Weak Banking Results Among Large Banks Overview According to the FDIC Q2 Quarterly Banking Profile FDIC-insured institutions reported a total net loss of US$37 billion in Q2 2009 following a net income of US$76 billion in Q1 Non-current loans continued to outpace provision levels thus reducing the coverage ratio to about 60 Large players were able to offset weak banking results with strong trading revenues especially in fixed income and underwriting fees Going forward analysts caution that trading revenues come with higher risks and that they are not sustainable at that pace (especially in view of looming regulatory changes down the line) Indeed trading results have been slowing already from the first to the second quarter (see OCC Q2 Bank Trading results)

Results

o Citigroup reports net income for the third quarter 2009 of $101 million and a $027 loss per share (FT Alphaville 101509)

o Goldman Sachs Q3 net income more than tripled to $319 billion or $525 a share in the three months ended Sept 25 from a year ago upon trading revenues(Bloomberg 101509) Does all the right things Compensation down VaR down Charity up Capital up Level 3 assets down taxes up (FT Alphaville)

o DealBook JPMorgan reported $36 billion in third-quarter profit (82 cents a share) investment banking corporate banking and asset management mdash all showed healthy gains in net income over the same time last year But results from its retail operations including consumer banking and card services were dented as the firm added an additional $2 billion to its reserves against future losses (101409) Background

o MarketWatch Richard Bove an analyst at Rochdale Securities says that third-quarter earnings for most banks particularly the regional lenders will be extraordinarily negative He estimates that about 60 of banks will report losses in the period as nonperforming assets continue to grow and charge-offs remain very high Lenders will also have to increase reserves because they didnt bolster them enough during the second quarter Loan growth will likely remain sluggish and net interest margins wont increase much partly because funding costs have already dropped so much that they cant fall much further

Trading Review

o WSJ At the end of September large banks showed an $189 billion unrealized loss on so-called available-for-sale securities At the end of June the unrealized loss was $476

billion This implies a whopping $287 billion gain in the third quarter for large banks That appreciation could partly reflect gains on securities bought when the markets were lower (101209)

o OCC Q2 Bank Trading report US commercial banks reported trading revenues of US$52 billion in the second quarter of 2009 compared to record revenues of US$98 billion in Q1 2009 Credit Suisse analysts write that the surge in trading income in the FICC or fixed-income currencies and commodities division is not sustainable and that revenues are already starting to decline (WSJ 081809)

o Bloomberg via DealBook The four biggest United States banks by assets may have to take write-downs on $55 billion of mortgage collection contracts after marking them up by $11 billion in the second quarter (101209)

Loan losses and commercial real estate

o John Mason Professor at Penn State University (via seekingalpha) Total assets at commercial banks declined by $320 billion over the latest 13-week period with the decline accelerating over the past 5 weeks The big difference between the different size banks comes in the area of real estate loans where the decline in commercial real estate loans at small banks was larger than the decline at large banks It looks as if this problem is finally hitting the banking system and is showing up in the numbers Note that almost all of the 400 problem banks on the FDICs list are small ones This does not bode well for the economic revival at the community level

o InvestorsInsight on IRA Q2 Bank Stress Test results IRA takes the data from the FDIC and crunches it with their own set of risk parameters While the FDIC has a little over 400 banks on its current watch list IRA gives 2256 banks an F They project that over 1000 banks will either fold or be taken over during the current cycle IRA Our overall worst case or maximum probable loss (MPL) for large US banks above $10 billion in assets is $800 billion through the current credit cycle

Long-term outlook

o October 9 IMF paper reviews the G20 policies taken through mid-2009 to address the banking crisis GuerraJohnstonYoussef The policies addressed immediate pressures on bank liquidity through mid-2009 but profitability of large complex financial institutions worsened their tangible common equity (TCE) remained at a critical level and asset quality weakened In addition market confidence remained weak with credit markets highly dependent on official support Since the measures by governments at end-March (including the G-20 meetings) the business environment in which some banks operate has improved but a deterioration in the economic environment could impair the fragile recovery by banks

Oct 15 2009

Renminbi Politics US Starting To Toughen on RMB

o Overview Despite the fact that the US government and the IMF (as well as many economists) believe that the Chinese currency is undervalued given Chinese growth and productivity a more conciliatory tone has prevailed in 2008 and 2009 Yet with the dollar falling against G10 currencies and some EM currencies the tone of the US and G7 may be fixated again on the need for the RMB to appreciate In October the US Treasury warned that continued inflexibility of the RMB could impede the moves towards sustainable growth

o As of the end of September Chinas reserves were US$325 billion higher than they were at the end of 2008 RGEs adjustments for valuation changes suggest that China added an estimated US$285billion in the first three quarters of 2009 with the fastest pace in Q2 (US$140 billion) and Q3 (US$110 billion) Maintaining the RMBs effective dollar peg to maintain currency stability and a competitive currency implies that China will keep adding to reserves including US dollar assets US Government Views

o Simon Derrick of BNY suggested that Dollars comments may reflect the beginning of a change in thinking within the treasury His statement supportive of reserve diversification stands in interesting contrast to Secretary Geithnerrsquos comment in early June (following a meeting in Beijing) that I believe the Chinese expect the USD to be the principal reserve currency for a long period of time as do we It could also be seen as an acknowledgement by the Treasury to China that a long term shift in the USDrsquos role is now under way and that there is little point in fighting it (September 14 2009)

o Treasury Secretary Geithner noted in April 2009 (the previous semi-annual report) noted that No US trading partner manipulated its exchange rate for the purposes of preventing effective balance of payments adjustment or to gain unfair competitive advantage in H2 2008 Although the Treasury believes that the Renminbi is undervalued China has taken steps to enhance exchange rate flexibility and the Chinese currency appreciated by 166

in real effective terms between June 2008 and February 2009 appreciating slightly against the dollar when most other EM and other currencies fell sharply Chinas fiscal stimulus package should help spur domestic demand growth and rebalance the Chinese economy

o Treasury Secretary Timothy Geithners congressional testimony suggested that Obama believes China is ldquomanipulatingrdquo its currency but provided no details of how it might accomplish this Views From the IMF

o China has also suggested that reserve currency issuers like the US receive more scrutiny from the IMF and other institutions given the critical role they play in the global economy Currency Manipulation

o CRS The IMF and WTO approach the issue of currency manipulation differently IMF prohibits countries from manipulating currency to obtain unfair trade advantage but cannot force a country to change is fx policies WTO has narrow policies that do not seem to deal with currency manipulation httpwwwrgemonitorcom

Bailed-Out Banks Raking In Big Profits Goldman Citigroup Make Up Losses On Wall Street By Binyamin Appelbaum Washington Post Staff Writer Friday October 16 2009

The nations largest banks preserved from failure by federal aid and romping in markets revived by federal aid are racking up vast profits even as the broader economy struggles to emerge from recession

While loan losses continue to mount the banks are making it up on Wall Street trading in stocks bonds and other financial instruments and collecting fees for services such as helping companies raise money

Goldman Sachs and Citigroup reported third-quarter profits Thursday joining JP Morgan Chase in outstripping the expectations of financial analysts and solidifying their places as among the banks that have benefited most from the governments massive rescue of the financial industry

Goldman said it earned $319 billion between July and September nearly the most it has ever made in three months a record it set earlier this year Citigroup burdened by massive losses on loans and investments managed a profit of $101 million largely on the strength of its investment bank

The results have undercut conventional wisdom that the prosperity of banks depends on the prosperity of their customers Generally bank profits lag behind economic recoveries as banks wait for people and businesses to start borrowing again But the federal government has reversed that relationship by investing more than $1 trillion in its efforts to prop up financial markets seeking to revive the banks as a means of reviving the economy The banks also are benefiting from a survivor effect There are fewer companies left on Wall Street Lehman Brothers went bankrupt Bear Stearns merged into JP Morgan Merrill Lynch merged into Bank of America Citigroup has been badly weakened

The best environment for Goldman Sachs is very very strong global economic growth and thats not what were in right now But you know our market shares have improved and I think were getting a bigger share of a smaller pie Goldmans chief financial officer David A Viniar said Thursday

The resurgent profitability has become a flashpoint for members of Congress and others concerned that Wall Street firms are plunging back into the high-risk practices that contributed to the financial crisis Goldman for example reported that its value at risk in the third quarter a common measure of risk-taking increased by 27 percent over the same period last year

Critics also are inflamed by the companies plans to pay large bonuses at the end of the year arguing that employees should receive smaller rewards for results achieved with government help Goldman for example took $10 billion from the Treasury Department which the company subsequently repaid It borrowed billions more with the help of the Federal Deposit

Insurance Corp The company also borrowed from the Federal Reserves emergency lending programs although both the company and the Fed have declined to disclose the amount of aid provided But the company said Thursday that it had set aside $535 billion 84 percent more than last year

JP Morgan said Wednesday that it set aside $278 billion to compensate its investment bankers 28 percent more than last year

Financial firms have not come to grips with the fact that things have changed Federal Reserve Governor Daniel K Tarullo said at a Senate hearing on Wednesday

The criticism has produced a change in tone at Goldman Its executives increasingly have tried to underscore that the companys financial success is good for the broader economy

Goldmans third-quarter earnings amounted to $525 a share compared with $845 million or $181 a share during the same period last year On a conference call held to discuss the results Viniar told financial analysts that Goldmans outsized profit in recent quarters reflected the fact that it kept doing business during the worst of the crisis

We made prices when markets were volatile and extended credit when credit was scarce Viniar said We took these actions because we knew we had an important role to play in supporting global capital markets

Goldman and the other investment banks also have strongly defended their pay practices Jamie Dimon JP Morgans chief executive on Wednesday described his companys compensation plans as right and fair

In a modest nod to its critics Goldman devoted a smaller share of revenue to compensation in the third quarter Through the first nine months of 2009 Goldman spent 47 percent of revenue on pay compared with 48 percent last year The public attention on Goldman and other profitable banks has deflected the attention of lawmakers and advocacy groups from the struggles of Citigroup the company that has taken the most federal aid

Citigroup got a total of $45 billion in direct investments from the Treasury Department It has borrowed billions more with help from the Federal Deposit Insurance Corp and it has tapped emergency aid programs operated by the Federal Reserve This summer the company sold a 34 percent stake to the federal government

Citigroup said Thursday that it narrowly achieved its primary goal of remaining in the black for the third straight quarter But Citigroups results amounted to a loss of 27 cents per share of common stock in part because it paid a dividend to preferred shareholders that was larger than its profits The results compared with a loss of $28 billion or 61 cents a share during the same period last year

The company said that the pace of its loan losses abated slightly in the third quarter but analysts said it was too early to conclude the losses had bottomed out

Business

October 15 2009

Lobbyists Mass to Try to Shape Financial Reform By STEPHEN LABATON WASHINGTON mdash Kicking off the latest chapter of this yearrsquos Full Employment Act for K Street Lobbyists representatives from a surfeit of industries descended on an influential Congressional committee on Wednesday as it began writing a law overhauling the nationrsquos regulatory system

In a lobbying season already booming with business from battles over health care firms are also closely monitoring the debate over Washingtonrsquos response to the market crisis The financial services industry has poured more than $220 million into lobbying in 2009 much of it in anticipation of this Congressional effort now beginning As usual for major financial services legislation lawmakers have heard an earful from small community banks and large Wall Street banks as well as from insurance companies credit card companies credit unions mutual funds and hedge funds

But since virtually every imaginable company could be touched by the comprehensive legislation proposed by the Obama administration the surprisingly broad array of lobbyists trooping to Capitol Hill also includes advocates for airlines pawnbrokers real estate developers farmers car dealers manufacturers retailers and energy and telephone companies They want to make sure any new oversight of the financial system does not lead to tighter regulations of their businesses or make it more expensive for them to finance their operations or hedge their risks

Other groups are lobbying over whether the rules should be changed to make it easier to sue corporations and their advisers and whether restrictions should be eased to enable shareholders to have a greater say in the election of directors and the pay of senior executives

ldquoThe legislation proposes to regulate significant aspects of the economy and any time you have that kind of legislation it is bound to draw to Congress the interests of many mdash lawyers labor unions consumer groups and many companiesrdquo said Steven A Elmendorf a former senior aide to the House Democratic leadership who represents several major financial institutions and groups

Mr Elmendorf suggested that the legislation could keep the lobbyists busy for many weeks since it is the subject of deliberations by at least four committees in the House and Senate along with floor action in both chambers and then more meetings to reconcile competing bills

ldquoThere will be a lot of opportunities and ways the bill can changerdquo he said ldquoThis will be a long processrdquo

Gazing across a hearing room jammed Wednesday morning with lobbyists and lawyers Representative Barney Frank Democrat of Massachusetts and the chairman of the House Financial Services Committee made an observation about a proposed amendment that some lobbyists interpreted as a comment about the keen interest of their clients

ldquoWatching sausage being made and watching legislation being made isnrsquot always attractiverdquo Mr Frank said

Even though President Obama vowed to change the culture of corporate influence on Washington the administration has contributed albeit inadvertently to making this a banner year for lobbyists As the White House has awakened the alphabet soup of federal agencies from their deregulatory slumber of the previous eight years lobbying shops have emerged to fight for their clientsrsquo newfound interests

In the case of financial overhaul legislation the corporate interests have particular sway with moderate and conservative Democrats whose votes are essential for the legislation to progress through Congress So far the lobbyists have been moderately successful in influencing the contours of the legislation judging by the ever-growing list of exemptions from tougher oversight of derivatives and from supervision by the proposed consumer financial protection agency

The House Financial Services Committee for instance approved a provision on Wednesday that Mr Frank said would exempt ldquothe great majorityrdquo of businesses that use derivative instruments to hedge their business risks from trading such instruments through exchanges or clearinghouses Senior officials at the Commodity Futures Trading Commission and the Securities and Exchange Commission have been critical of the exemptions saying they would create too large a loophole for financial instruments that were unregulated and played a central role in the economic crisis

On Wednesday the administration announced its support for the exemptions Michael S Barr an assistant Treasury secretary for financial institutions said in a telephone briefing with reporters that while the administration did not propose the exemptions they were ldquoreasonable onesrdquo that would still permit aggressive oversight because the legislation would impose supervision on the dealers of derivatives instruments

The new consumer protection agency has become a particular magnet for lobbying efforts Bankers have waged a multimillion-dollar campaign to kill the agency or at least to substantially weaken the powers the administration would like it to have The United States Chamber of Commerce which claims a membership of more than three million businesses is conducting a $2 million advertising campaign against the agency The campaign has gained enough political traction to prompt President Obama to publicly chastise it as misleading The chamber joined 17 other trade associations including the Financial Services Roundtable and the Business Roundtable in a letter sent this week to House members opposing the agency

The administration has proposed that the new agency protect consumers from abusive or deceptive credit cards mortgages and other loans But responding to the concerns that the agency could try to exert its jurisdiction over an array of other industries that lend money like retailers and car dealers Mr Frank has made clear his intention to exempt many other businesses from oversight as part of his effort to steer the measure through Congress

The political obstacles to the creation of a consumer protection agency are formidable In the last decade banking and other interests that now oppose the agencyrsquos creation contributed more than $77 million to the members of the House Financial Services Committee according to the Center for Responsive Politics a nonpartisan research organization that studies the influence of money on policy

Two of the largest recipients of money from the financial sector over the period have been Mr Frank whose campaigns have received more than $3 million and Representative Spencer Bachus of Alabama the senior Republican on the committee and a leading critic of the administrationrsquos plan

httpwwwnytimescom20091015business15regulatehtmlthampemc=th

15102009

Dancing again

The Dow hits 10000 and the dollar kept falling to over $149 against the euro after the Fed released its latest minutes which only confirms that US interest rates will remain low for a long time The FT reports that the minutes show the Fed increasingly concerned about falling price increases a situation that needed to be monitored carefully The minutes also included a reference of reverse repos which the Fed plans to introduce as a post-slump measure to mop up excess liquidity The Fed also expressed puzzlement about the fall in bond yields given the clearly improved economic outlook

Investors move back into risky assets

This is what a zero interest rate policy does eventually Investors are moving back from overweight cash positions into risky assets which is the reason why global stock markets are rising again The FT has an interesting technical story about a recent fund managersrsquo survey which confirms a big shift in asset allocation Equity markets were the main beneficiary from the shift out of cash

Japan prepares monetary exit Japanrsquos central bank governor Masaaki Shirakawa said the central bank would reconsider all extraordinary policy measures at its forthcoming meeting October 30 while maintaining interest rates would remain at the very low level of 01 Several ministers had recently urged the central bank to wait a while before withdrawing those QE measures There is concern in Japanese financial markets that a withdrawal of QE could damage the liquidity provision

Takenaka criticses Japanrsquos central bank Frankfurter Allgemeine has an interview with Heizo Takenaka who sharply criticises the central bankrsquos decision of ending the purchases of corporate bonds He blamed the central bank for failing to address the problem of deflation as prices in Japan are now falling at 22 He said the central bank should buy more bonds but is afraid to do so as this would expand its own balance sheet Takenaka also said the reason for the Yen overshoot is not dollar weakness but the expectation in financial markets that the central bank will soon tighten monetary policy

Spainrsquos debt to reach 766 of GDP by 2060 Well it wonrsquot but this is what a simulation by the European Commission threw up on the assumption that policies wonrsquot change The Commission says Spain needed big reforms in its social security system to achieve long-term sustainability according to El Pais Apart from Spain the countries with a clearly unsustainable debt trajectory are Ireland Greece Latvia and the UK The article also mentions that the S2 sustainability indicator which measures the correction needed to get the debt trajectory back to long-term stability is 118 of GDP

French banks pay back the state All French banks are now paying back to the state the credit they borrowed under the banking rescue plan By November euro133bn out ofeuro198bn will be reimbursed reports Les Echos The banks want to send a clear signal to the markets that everything is back to normal But with this step they also provoke polemics about their responsibility amid a huge budget deficit and evading tougher banking regulation As a pre-emptive strike the banks decided to offer to honour their commitments (which run until the end of 2009) to raise credits by 3 and to implement new remuneration schemes

Austriarsquos finance minister is full of good intentions Austriarsquos finance minister Joseph Proell spoke to the nation more as a chancellor in waiting than as a budget minister comments Der Standard He advocated a sharper financial supervision authority school reforms more innovation and research and less costs for early retirement No specifics and no details on how Austria is to stage its budget consolidation Proellrsquos well staged speech was more intended to mobilise his own party for a reform process He counts on the media and the public to sideline some of his adversaries in the parties Greek financial needs The government sold a total of 16 billion euros of 26- and 52-week Treasury bills yesterday as it moves to plug a growing fiscal shortfall reports Kathimerini The auction produced a uniform yield of 091 for the 52-week T-bill down from 112 in a previous July 14 auction Dealers attributed the yield drop in the T-bill auction to strong demand by primary dealers amid low interest rates in the euro area Greece has borrowed more than euro50bn so far this year around a fifth of the countryrsquos GDP to cover redemptions and deficits According to some press reports the government will need to borrow an additional euro10bn by the end of the year to cover budgetary needs

Some more details about coalition negotiations Germanyrsquos coalition slowly edged towards agreement on a number of policy areas including surprisingly on Turkish EU membership according to a report by Suddeutsche Zeitung The two parties agreed not to change the previous coalition policy of an open-ended negotiation with Turkey Should the decision be negative Turkey would be offered a privileged partnership There has also been agreement on a minimal set of financial sector reforms which include reform of the bonus system and bank recapitalisation (Note the agreement does not include a new bank bailout package which we believe will be one of the first acts of the new administration)

httpwwweurointelligencecomarticle581+M5347fc591400html

ftcomalphaville

Eurozone rising like lsquoa phoenix from the ashesrsquo Posted by Miles Johnson on Oct 15 0813 Or so think global fund managers according to Wednesdayrsquos Bank of America Merrill Lynch fund managers survey

How things change Earlier this year the eurozone was seen by many as the pits In fact in the eyes of some analysts and investors the region simply was a pit which would devour your money if you were foolish enough to put it there

The bearish arguments were plentiful

bull The eurozone was fiscally diverse but trapped under a one size fits all monetary policy bull The eurozone was politically divided as demonstrated by disparate responses over bank deposit

guarantees bull The eurozone was liable to split apart as stronger economies looked to distance themselves from the

periphery or conversely Portugal Italy and Greece could look to escape from under the yoke of Germany and France

In short the eurozone was the worst region in the world in which to invest Single currency members were unable to competitively devalue and would all be dragged down together by the sloth-like ECB which raised rates at a time it should have lowered them the argument went

This negative view as the BofA Merrill Lynch survey shows has sharply reversed

Optimism about Europe is pronounced in the October survey A net 30 percent of global portfolio managers see eurozone equities as undervalued relative to other regions the highest reading since April 2001 A net 9 percent of panelists want to overweight the region in the next 12 months up from 7 percent last month This contrasts with Japan which a net 20 percent of investors regard as the least attractive region a year ahead

ldquoEurope is emerging phoenix-like from the ashes as confidence in its banks boosts overall confidence in European equitiesrdquo said Gary Baker head of European equity strategy at BofA Merrill Lynch Global Research

That fund managers like Europe is all well and good of course but the important question here is why

For Mr Baker the improving outlook for the continentrsquos banks has helped reassure fund managers that the only way now is up The survey shows fund managers are overweight European banks for the first time since July 2007 - not something one would have expected to hear back in January

But too much love can be a bad thing In fact with the market favouring the euro against the dollar and sterling the export-dependent parts of the eurozone risk having a recovery smothered under the weight of a strong euro

For exporters peripheral eurozone nations and European corporates with significant foreign currency earnings this is very bad news So bad in fact that the ECB is beginning to fret

As the FTrsquos ECB correspondent Ralph Atkins noted on Wednesday

Just when eurozone economic prospects have turned for the better a new policy challenge is facing the European Central Bank an unwelcome appreciation of the euro

Gilles Moec European economist at Deutsche Bank says ldquoThere is a genuine concern within the ECB about the strength of the euro because more than ever the eurozone is dependent on overseas demand to gain tractionrdquo

The fund managers should be hoping the ECBrsquos concern is misplaced

httpftalphavilleftcomblog2009101577786eurozone-rising-like-a-phoenix-from-the-ashes

Economiacutea

Fitch contradice a Moodys y avala la buena salud de la banca espantildeola

La agencia rebaja el riesgo de un mayor deterioro por el desplome inmobiliario A BOLANtildeOS - Madrid - 17102009

Los mismos datos pueden servir para argumentar puntos de vista distintos cuando no opuestos La reflexioacuten viene a cuento de los informes publicados en un intervalo de apenas tres diacuteas por las agencias de calificacioacuten Moodys y Fitch sobre la banca espantildeola a partir de estadiacutesticas similares

Los mismos datos pueden servir para argumentar puntos de vista distintos cuando no opuestos La reflexioacuten viene a cuento de los informes publicados en un intervalo de apenas tres diacuteas por las agencias de calificacioacuten Moodys y Fitch sobre la banca espantildeola a partir de estadiacutesticas similares El pasado martes Moodys llamoacute la atencioacuten de los mercados al afirmar que las entidades estaban retrasando el reconocimiento de activos morosos vinculados al sector inmobiliario lo que se traduciacutea en un agujero oculto de 57000 millones de euros sin provisionar Ayer Fitch rebajoacute el impacto del desplome del ladrillo y anticipoacute que en el caso de las grandes entidades el rendimiento seguiraacute siendo soacutelido a pesar de los retos que plantea la crisis

Si el informe de Moodys provocoacute la airada reaccioacuten del sector -la patronal de las cajas lo tildoacute de catastrofista la bancaria de confuso- el anaacutelisis que hizo puacuteblico ayer Fitch contribuiraacute a calmarlo El sistema bancario espantildeol ha sorteado la crisis financiera con eacutexito hasta ahora sin tener que recurrir a inyecciones de capital del Estado constata Fitch en el proacutelogo de su informe

Buena parte de esta visioacuten maacutes amable se debe a que Fitch centra su anaacutelisis en los cinco grandes (Santander BBVA La Caixa Popular y Caja Madrid) del sector El informe recalca que la concentracioacuten del negocio en la banca tradicional una regulacioacuten prudente y la escasa exposicioacuten a derivados financieros complejos han contribuido a limitar los dantildeos Pero antildeade que el intenso ajuste de la economiacutea espantildeola el pronunciado aumento del paro y la dependencia del sector inmobiliario han tenido efectos nocivos en los ingresos y la calidad de los creacuteditos lo que ya se deja sentir en los resultados del primer semestre

El impacto es variable las grandes entidades han absorbido con facilidad un mayor nivel de costes manteniendo una rentabilidad soacutelida gracias a la diversificacioacuten del negocio explica Carmen Muntildeoz analista de Fitch Pero otras entidades sobre todo cajas de ahorros medianas y pequentildeas han sufrido un notable descenso de sus resultados Y seguiraacuten sufriendo una gran presioacuten por la caiacuteda de los ingresos un mayor nivel de costes y una mayor morosidad

El informe de Fitch resalta que Santander y BBVA afrontan la crisis desde una posicioacuten de fortaleza que deriva de los ingresos que le asegura su presencia en Latinoameacuterica y de una gestioacuten que tiene bajo control los costes y ha reaccionado con prontitud al aumento del riesgo Para las otras tres grandes Fitch dibuja un horizonte algo menos claro dada su mayor dependencia de la economiacutea espantildeola y su significativa exposicioacuten al sector inmobiliario La agencia cree que la capacidad de generacioacuten de ingresos de Banco Popular y La Caixa les coloca en mejor posicioacuten que a Caja Madrid para afrontar el deterioro de la calidad de sus

activos De la entidad madrilentildea tambieacuten sentildeala que su ratio de capital de alta calidad (65 de sus activos con riesgo) es el maacutes bajo entre las cinco grandes

El anaacutelisis de Fitch tambieacuten dedica mencioacuten aparte al impacto del pinchazo inmobiliario en las cuentas de la banca La agencia de calificacioacuten de riesgos da por hecho que el frenazo del mercado inmobiliario y la dificultad creciente para pagar hipotecas por el aumento del paro seguiraacute afectando a la calidad de los creacuteditos (aumentaraacute la porcioacuten de cobro dudoso y los impagos) al menos hasta 2011 Pero tambieacuten que el repunte de la morosidad seraacute a partir de ahora maacutes moderado

Y donde Moodys veiacutea un retraso en el reconocimiento de activos morosos mediante la refinanciacioacuten de deuda a promotores la compra de viviendas a propietarios que no pueden afrontar la hipoteca o la adquisicioacuten de participaciones en inmobiliarias Fitch ve una gestioacuten activa del riesgo El informe publicado ayer cree que si las viviendas intercambiadas por deuda se consideraran creacuteditos de dudoso cobro la morosidad pasariacutea del 49 actual a un maacuteximo del 7 cuando Moodys da por hecho que casi se duplicariacutea Fitch antildeade que es muy difiacutecil incluir en este caacutelculo el efecto de la refinanciacioacuten de creacuteditos a promotores porque no hay datos actualizados A BOLANtildeOS Fitch contradice a Moodys y avala la buena salud de la banca espantildeola17102009

httpwwwelpaiscomarticuloeconomiaFitchcontradiceMoodysavalabuenasaludbancaespanolaelpepueco20091017elpepieco_6Tes

Fitch La gran banca espantildeola mantendraacute buenos resultados pese a los retos La gran banca espantildeola mantendraacute buenos resultados a pesar de los retos que afronta ya que ha absorbido faacutecilmente el deterioro de los creacuteditos y ha sido capaz de mantener una buena rentabilidad operativa gracias a su diversificacioacuten y nichos de actividad

Ep - Madrid - 16102009

Asiacute lo afirma la agencia de calificacioacuten Fitch tras destacar que el sistema bancario espantildeol ha capeado con eacutexito la crisis financiera global hasta la fecha sin necesitar apoyos de capital por parte del Estado gracias a su enfoque sobre la banca minorista la prudente regulacioacuten y su limitada exposicioacuten a los productos estructurados y complejos

Sin embargo la analista Carmen Muntildeoz incide en que el fuerte ajuste que atraviesa la economiacutea espantildeola con la fuerte subida del paro y su elevada exposicioacuten al mercado inmobiliario ha tenido repercusiones sobre los ingresos y la calidad crediticia lo que ha afectado a la rentabilidad de los bancos en el primer semestre de 2009

En este sentido destaca las cajas de ahorros pequentildeas y medianas han sufrido una fuerte caiacuteda en la rentabilidad operativa en los seis primeros meses del antildeo y vaticina que seguiraacuten sufriendo una fuerte presioacuten debido a los menores ingresos y los costes del creacutedito aunque algunas instituciones se mantendraacuten bien

A su parecer el principal reto al que se enfrenta el sector financiero en Espantildea es el acentuado deterioro de la calidad de activos debido a su exposicioacuten al ladrillo aunque tambieacuten podriacutean sufrir la presioacuten del bajo nivel de tipos de intereacutes la necesidad de reequilibrar sus estructuras financieras hacia los depoacutesitos de la clientela y de reforzar los niveles de capital de algunas entidades

Santander y BBVA fuertes

Para Fitch Santander y BBVA afrontan el difiacutecil escenario desde una fuerte posicioacuten Su enfoque en la banca minorista y diversificacioacuten internacional sostienen ingresos recurrentes que junto al control de costes y la gestioacuten del riesgo les han permitido absorber el deterioro de la calidad de activos en Espantildea Ameacuterica Latina y Estados Unidos

Aunque las presiones sobre los resultados persistiraacuten los bancos deberiacutean ser capaces de seguir registrando una buena rentabilidad teniendo en cuenta su masa criacutetica en los mercados principales argumenta la agencia de calificacioacuten crediticia

Por otro lado Fitch destaca que la fuerte correlacioacuten de sus resultados con la evolucioacuten de la economiacutea espantildeola presionaraacute los resultados de La Caixa Caja Madrid y Popular afectados por su exposicioacuten al sector inmobiliario el bajo precio del dinero y la recesioacuten Sin embargo sus reservas geneacutericas y eficiencia ayudaraacute a a aliviar la presioacuten sobre sus resultados considera

Estas opiniones de Fitch llegan varios diacuteas despueacutes Moodys advirtiera a las entidades espantildeolas que deberaacuten provisionar 57000 millones de euros extra para hacer frente a los problemas que ocasione su cartera crediticia

Las entidades espantildeolas han mostrado una resistencia encomiable a estas presiones pero a Moodys le preocupa que muchas entidades no hayan reconocido todaviacutea la auteacutentica dimensioacuten del deterioro de su cartera de activos sentildealaba la casa britaacutenica en una nota

La firma estima que bancos y cajas deberaacuten afrontar por la crisis unas peacuterdidas crediticias de 108000 millones de euros En la primera mitad de 2008 el sector teniacutea provisionados 51000 millones a traveacutes de dotaciones geneacutericas (anticiacuteclicas) y especiacuteficas Quedan pendientes de atender pues unos 57000 millones httpwwwcincodiascomarticuloempresasFitch-gran-banca-espanola-mantendra-buenos-resultados-pese-retos20091016cdscdsemp_18cdsemp

Les Echosfr Avec le Creacutedit Agricole toutes les banques franccedilaises sont en passe de se deacutefaire des aides de lEtat [ 151009 ]

Le Creacutedit Agricole va restituer dans quinze jours les 3 milliards deuros de titres hybrides souscrits par lEtat Deacutebut novembre les banques franccedilaises devraient avoir rembourseacute 133 des 198 milliards deuros precircteacutes par les pouvoirs publics Face aux poleacutemiques que suscite cette eacutemancipation elles promettent de tenir leurs engagements

Il ne leur a fallu quun an pour saffranchir de la puissance publique Les six banques franccedilaises qui avaient beacuteneacuteficieacute apregraves la faillite de Lehman Brothers du plan de soutien au secteur sont deacutesormais toutes en passe de retrouver leur autonomie Le Creacutedit Agricole a fermeacute le ban en indiquant hier quil restituerait dans deux semaines linteacutegraliteacute des 3 milliards deuros de quasi-fonds propres apporteacutes par lEtat BNP Paribas et la Socieacuteteacute Geacuteneacuterale viennent de lancer des augmentations de capital massives pour en faire de mecircme tandis que le Creacutedit Mutuel a deacutejagrave reacutegleacute son chegraveque de 12 milliard deuros

BPCE le groupe issu du rapprochement des Banques Populaires et des Caisses dEpargne procegravede de son cocircteacute agrave une eacutemission obligataire afin de commencer agrave rembourser lEtat Mais il ne pourra le faire que tregraves partiellement il envisagerait selon nos informations de rendre 500 millions deuros sur les 7 milliards deuros reccedilus Deacutebut novembre les banques franccedilaises devraient donc avoir rembourseacute 133 milliards deuros agrave lEtat sur les 198 milliards deuros precircteacutes au total avec plus de 700 millions deuros dinteacuterecircts agrave la clef (voir ci-dessous) La structure de garantie souveraine mise en place pour aider les banques agrave se refinancer a par ailleurs eacuteteacute placeacutee en sommeil en septembre

Nest-ce pas trop tocirct

Ce faisant les banques franccedilaises participent agrave un mouvement plus large en Europe visant tout agrave la fois agrave se deacutefaire des aides publiques et agrave augmenter leurs fonds propres en quantiteacute comme en qualiteacute laquo Avec le rebond des marcheacutes dactions et la reacuteouverture du marcheacute des titres hybrides qui leur eacutetait complegravetement fermeacute il y a un an les banques ont profiteacute de

conditions de marcheacute favorables reacutesume Bernard de Longevialle responsable du secteur bancaire chez Standard amp Poors En substituant des ressources de marcheacute aux ressources publiques elles envoient un signal clair aux investisseurs montrant quelles sont capables de se passer du soutien de lEtat et de tenir sur leurs deux jambes raquo

Mais ce faisant les banques franccedilaises prennent aussi le risque de raviver les poleacutemiques sur les recettes manqueacutees de lEtat ou sur lincapaciteacute des pouvoirs publics agrave les controcircler Afin dy remeacutedier elles ont toutes promis de respecter leurs engagements qui courent jusquagrave la fin de lanneacutee Elles preacutevoient ainsi daugmenter leurs encours de creacutedits de 3 en 2009 Bercy les ayant inciteacutees agrave dynamiser leur offre Elles appliqueront eacutegalement les nouvelles regravegles en matiegravere de reacutemuneacuteration Celles qui proscrivent lattribution de stock-options et dactions gratuites pour les dirigeants et celles qui encadrent les bonus des traders

Reste une question les banques franccedilaises ne se sont-elles pas priveacutees trop tocirct de lappui des pouvoirs publics laquo Il est vrai quil y a encore des incertitudes eacuteconomiques tregraves importantes nous attendons le pic des pertes de creacutedit pour les banques en 2010 estime Bernard de Longevialle Cela dit les sceacutenarios les plus noirs qui eacutetaient envisageacutes en deacutebut danneacutee semblent seacuteloigner Et nous pensons que le plus gros est passeacute pour les pertes financiegraveres lieacutees aux actifs les plus risqueacutes - CDO monoline etc Les banques franccedilaises peuvent donc traverser cette crise avec leurs propres forces raquo

Compte tenu des exigences accrues des reacutegulateurs elles devront certainement continuer de renforcer leurs fonds propres dans les deux ans qui viennent Mais elles devraient pouvoir le faire sans lappui de lEtat

GUILLAUME MAUJEAN Les Echos

httpwwwlesechosfrinfofinance020173314002-avec-le-credit-agricole-toutes-les-banques-francaises-sont-en-passe-de-se-defaire-des-aides-de-l-etathtm

Oct 14 2009

How Healthy are Spanish Banks Overview Daniel Gros in Spain and Ireland construction investment has increased to levels (18-20 of GDP) not seen in any other OECD country except Japan There is evidence of large contruction overhang with serious implications for consumption and financial institutions Edward Hugh estimates 20 of mortgages to be at high risk (August 18 2009) There is a debate underway on whether banks in Spain are hiding their losses given the severity of the economic fallout of the housing bust with unemployment at 18

o Moodys The fundamental credit outlook for the Spanish banking system remains negative reflecting the impact of the ongoing economic recession and severe asset quality deterioration on domestic banksrsquo risk absorption capacity Moodyrsquos remains concerned that many entities appear to be avoiding recognition of the true scale of the asset quality deterioration in their books In its base-case scenario Moodys expects life lifetime loan losses of up to euro108 billion (101409)

o Variant Perception Consider this the value of outstanding loans to Spanish developers has gone from just euro335 billion in 2000 to euro318 billion in 2008 a rise of 850 in 8 years If you add in construction sector debts the overall value of outstanding loans to developers and construction companies rises to euro470 billion Thats almost 50 of Spanish GDP The authors sustain that Spanish banks are extenting non-performing construction loans rather than allowing them to default(August 18 2009)

o Counterparguments by Iberian Equities analyst Intildeigo Vega to Variant Perception (via FT Alphaville) Variant Perceptions report is alarmistic Yes the Bank of Spain changed last July the interpretation of the provisioning rule on some mortgage loans Now the rule is more in line with the rules applied by most EuropeanUS banks (where provisions tend to match the expected loss as opposed to the frequency of losses) However the measure has had zero impact on the systemrsquos PampL hitherto The only listed institution that has applied the rule in 2Q09 (Banco Santander) re-classified the release (euro270m) as an additional specific provision Variant claims however- rdquo the change in rules has allowed Spanish institutions not to lose money this yearrdquo

o John Hepmpton Another possibility Are Spanish banks hiding losses in the US See a detailed breakdown in the reading

o Danske The IMF forecasts that non-performing loans (NPLs) will amount to 63 of the total portfolio by end-2009 and it constructs an alternative housing downturn scenario with an NPL ratio of around 10 The alternative scenario is based on a similar experience to the Scandinavian housing and banking crisis of the early1990s Assuming loss severities of 25 for mortgages 50 for construction and real estate and 45 for other loans Spanish banks are likely to need some recapitalization which could amount to 01-03 of GDP according to the IMF Selected Issues (July 28)

o June 26 2009 Spains finance minister said the government is finalizing a EUR 99 billion bank rescue fund Fondo de Reestructuracioacuten Ordenada Bancaria (Frob) The scheme provides for acquiring vote carrying participatory shares in fundamentally viable savings banks The government would temporarily take over management until the stakes are repaid

o June 11 2009 PWC via FT Bad loan rates for the financial sector as a whole have almost quadrupled in the past year to reach 427 per cent of assets They are expected to double again to 8 per cent by December 2009

o June 16 Moodyrsquos downgrades 30 Spanish banks and savings banks

o June 11 FT PwC the accounting firm said it would be necessary to invest euro25bn ($35bn) to euro70bn ndash or 2-6 of gross domestic product ndash to recapitalize the Spanish financial sector in 2009 Moreover with some 40000 branches Spain is one of the worldrsquos most overbanked countries

o FT Astroc Llanera Colonial--gtheavily indebted business model behind the spectacular rise in Spanish property companies will simply cease to function in the current environment Spanish banks have lent euro292bn ($431bn) to developers according to Bank of Spain

o April 10 Bank of Spain Governor Ordonez the answer to restoring the flow of credit is neither publicly funded policies to purchase ldquotroubledrdquo (impaired or toxic) assets nor global and indiscriminate bank recapitalisation plans I am convinced they are of no use for resolving the problem of credit restrictions The credit-boosting measures best suited to the current situation of the Spanish economy are those aimed at improving the risk profile of both consumer and corporate transactions This effect may be achieved through different means eg loans subsidised by the Official Credit Institute credit insurance or the deferral of social contributions

o March 29 The Spanish government said it will provide as much as 9 billion euros ($12 billion) to Caja Castilla-La Mancha to shore up the regional lenderrsquos finances and protect depositors in the first bank rescue since 1993 Its bad loan ratio climbed to 8 and similar savings institutions are exposed to the same environment

o Jan 28 Alea Spainrsquos banks and cajas are negotiating on a one-to-one basis with the Bank of Spain to ldquofine-tunerdquo their 2008 accounts in order to avoid taking catastrophic write-downs on loans

o February BNP report Spanish banking system is highly exposed to construction and property and property market downswings tend to last While all credit institutions are exposed the savings banks (cajas) areparticularly so--gt see profile of major banks in report

o October 13Spain passed a law guaranteeing bank debt (inter-bank loans) issued up to the end of the year which will be valid for five years The Spanish government also announced that it would not be creating a fund for recapitalising banks since the countryrsquos institutions are liquid but it is authorised to do this if it becomes necessary The government has made 100 billion euro in funding available for the measuresSpain will also increase the guarantee for deposits to 100000 euros increasing an existing guarantee fivefold and going beyond a new measure adopted today by the European Union

o August 28 Unicredit (via Bloomberg) Since the credit squeeze began a year ago Spanish institutions raised their monthly borrowing from the ECB by record margins

o BNP Spanish institutions securitize a considerable part of their loan portfolios They are the first to be affected by seizure in covered bonds and RMBS market amounting to around euro335bn

o EIU August Tett Spanish banks are currently faring better than US and European peers due to 1) no off-balance sheet SIVs 2) countercyclical capital provisioning 3) access to ECB liquidity facilities However bad loans surging fast internationally oriented banks will fare better

o July 15 Martinsa-Fadesa first publicly traded developer to seek bankruptcy protection after failing to secure a loan that banks had demanded as part of a debt refinancing--gt A slump in Spanish home sales combined with rising borrowing costs has made it harder for property companies to pay their debts

o Maharg-Bravo (breakingviews) Catch-22 banks cant afford to lend on generous terms but if they dont they could lose even more money--gt Association of Spanish Savings banks estimates that overall non-performing loans will triple to 3 by 2009

httpwwwrgemonitorcom458Spaincluster_id=6455

Opinion

October 14 2009

OP-ED CONTRIBUTOR

Wall Street Smarts By CALVIN TRILLIN ldquoIF you really want to know why the financial system nearly collapsed in the fall of 2008 I can tell you in one simple sentencerdquo

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar where I was waiting for a friend ldquoBut I have to buy you a drink to hear itrdquo I asked

ldquoAbsolutely notrdquo he said ldquoI can buy my own drinks My 401(k) is intact I got out of the market 8 or 10 years ago when I saw what was happeningrdquo

He did indeed look capable of buying his own drinks mdash one of which a dry martini straight up was on the bar in front of him He was a well-preserved gray-haired man of about retirement age dressed in the same sort of clothes he must have worn on some Ivy League campus in the late rsquo50s or early rsquo60s mdash a tweed jacket gray pants a blue button-down shirt and a club tie that seen from a distance seemed adorned with tiny brussels sprouts

ldquoOKrdquo I said ldquoLetrsquos hear itrdquo

ldquoThe financial system nearly collapsedrdquo he said ldquobecause smart guys had started working on Wall Streetrdquo He took a sip of his martini and stared straight at the row of bottles behind the bar as if the conversation was now over

ldquoBut werenrsquot there smart guys on Wall Street in the first placerdquo I asked

He looked at me the way a mathematics teacher might look at a child who despite heroic efforts by the teacher seemed incapable of learning the most rudimentary principles of long division ldquoYou are either a lot younger than you look or you donrsquot have much of a memoryrdquo he said ldquoOne of the speakers at my 25th reunion said that according to a survey he had done of those attending income was now precisely in inverse proportion to academic standing in the class and that was partly because everyone in the lower third of the class had become a Wall Street millionairerdquo

I reflected on my own college class of roughly the same era The top student had been appointed a federal appeals court judge mdash earning by Wall Street standards tip money A lot of the people with similarly impressive academic records became professors I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101 popularly known as Rocks for Jocks

ldquoThat actually sounds more or less accuraterdquo I said

ldquoOf course itrsquos accuraterdquo he said ldquoDonrsquot get me wrong the guys from the lower third of the class who went to Wall Street had a lot of nice qualities Most of them were pleasant enough They made a good impression And now we realize that by the standards that came later they werenrsquot really greedy They just wanted a nice house in Greenwich and maybe a sailboat A lot of them were from families that had always been on Wall Street so they were accustomed to

nice houses in Greenwich They didnrsquot feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yachtrdquo

ldquoSo what happenedrdquo

ldquoI told you what happened Smart guys started going to Wall Streetrdquo

ldquoWhyrdquo

ldquoI thought yoursquod never askrdquo he said making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini

ldquoTwo things happened One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing At the same time college was getting so expensive that people from reasonably prosperous families were graduating with huge debts So even the smart guys went to Wall Street maybe telling themselves that in a few years theyrsquod have so much money they could then become professors or legal-services lawyers or whatever theyrsquod wanted to be in the first place Thatrsquos when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry Thatrsquos when you started reading about these geniuses from MIT and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage oddsrdquo

ldquoBut you still havenrsquot told me how that brought on the financial crisisrdquo

ldquoDid you ever hear the word lsquoderivativesrsquordquo he said ldquoDo you think our guys could have invented say credit default swaps Give me a break They couldnrsquot have done the mathrdquo

ldquoWhy do I get the feeling that therersquos one more step in this scenariordquo I said

ldquoBecause there isrdquo he said ldquoWhen the smart guys started this business of securitizing things that didnrsquot even exist in the first place who was running the firms they worked for Our guys The lower third of the class Guys who didnrsquot have the foggiest notion of what a credit default swap was All our guys knew was that they were getting disgustingly rich and they had gotten to like that All of that easy money had eaten away at their sense of enoughnessrdquo

ldquoSo having smart guys there almost caused Wall Street to collapserdquo

ldquoYou got itrdquo he said ldquoIt took you awhile but you got itrdquo

The theory sounded too simple to be true but right offhand I couldnrsquot find any flaws in it I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries I saw those industries falling one by one done in by superior intelligence ldquoI think I need a drinkrdquo I said

He nodded at my glass and made another one of those eyebrow gestures to the bartender ldquoPleaserdquo he said ldquoAllow merdquo

Calvin Trillin is the author most recently of ldquoDeciding the Next Decider The 2008 Presidential Race in Rhymerdquo

httpwwwnytimescom20091014opinion14trillinhtml_r=1

14102009

Global central banks are diversifying

Bloomberg has the story hat tip Naked Capitalism that foreign central banks are diversifying into euros and yens as the share of the dollar in new reserve holding has fallen from 63 in 1999 to 37 while the joint new purchases of euros and yen are 63 now Bloomberg does not say how this divides between the two Yves Smith of Naked Capitalism makes the point that this does not mean that central banks are getting out of dollars They are still buyingdollars but at a lower rate At this rate the weight of the euro as a global reserve currency will increase over time but we should not expect some extreme shifts

Pressure on central banks Les Echos writes that central banks come increasingly under pressure to tighten monetary conditions The Australian central bank was the first to raise interest rates and Japan is expected to suspend its extraordinary crisis provisions today But the editorial argues that it is much too early for others to follow While financial markets are stabilised they are still fragile Nor do indicators for inflation and unemployment recommend an early exit But a debate about exit strategies is important to set up a credible time table and to calm down nervous markets It also brings up the question what happens if governments and their central banks exit at different speeds

Getting optimistic for 2010 Germanyrsquos economic institutes have sharply revised their 2010 forecast upwards from close to zero to 13 annual growth which for Germany is almost a V-shaped recovery As FT Deutschland points out this is not the most optimistic assessment of all Allianz is forecast 27 The reason for the new optimistic is however most statistical as the economy is growing strongly in the second half of this year In terms of dynamics 2010 is not going to be a particularly strong year according to the institutes

Tremonti criticises Italian banking sector concentration Giulio Tremonti yesterday pointed out that while 90-95 of the corporate sectorrsquos output is accounted for by small companies the banking sector is massively concentrated with two

banks Intesa Sanpaolo and Unicredit accounting for 30 of the total market share in banking according to a story in Il Sole 24 ore Tremonti is also quoted as saying that the credit supply in Italy is working but not optimally

Banks to contribute euro14bn to Belgian budget Le Soir has a useful summary of 2010 Budget presented yesterday After this plan banks are to contribute euro14bn over three years 2009-2011 Flanders Today writes that this contribution is considered as an insurance premium in return for state guarantees The banks will pay a premium of 15 basis points on its deposits the same measure applies to insurers In exchange for this the banks receive parts of the euro800m back which they had to set aside Other points of the budget are a permanent tax on nuclear energy a reduced VAT tax of 12 for restaurants and reduced staff in army and police

Irish Budget needs another euro4bn Another euro4bn package of tax rises and spending cuts will be needed in the Irish budget just to stop the annual deficit getting even bigger the Irish Independent quotes the Economic and Social Research Institute (ESRI) Even with this budget public debt is to rise to 92 of GDP next year while the deficit remains unchanged at 128

Don Kohnrsquos economic outlook Fed vice chairman Don Kohn is optimistic but not that optimistic He thinks there is a moderate recovery under way but not V-shaped and that inflation risks continue to remain on the downside He said low interest rates would continue to drive savers into riskier assets which should help the reversal in the flight to liquidity But due to credit constraints consumers and small business are feeling the pinch and are therefore likely to not participate in the recovery fully See Calculated Risk for the whole speech

Retroactive application of the CFR So can the Charter of Fundamental Rights be applied retroactively for example in conjunction with the Benes decrees which Klaus pretends that he is concerned about The European ministers of both Hungary and France made the points that the answer is clearly no Gabor Ivan the Hungarian European minister said that he understood what Klaus was getting at but that his concerns lack all basis in fact Jean Quatremer has more The FT has a devasting editorial on Klausrsquo blatant and unconvincing populism

Donrsquot write off the dollar yet Martin Wolf tries to bring in some perspective into the debate on the dollar in his FT column today He too believes that the fall in the dollarrsquos value is desirable because it helps the fight against deflation and because it allows an export-led recovery in the US He sees no big inflationary risks In the long-run it will be desirable to find a different system to replace the dollar as a global international currency But in the meantime the dollar will remain the worldrsquos leading currency for quite some time to come

About Elinor Ostrom Antonio Massaruto takes a closer look at the work of Nobel prize winner Elinor Ostrom in an article in Lavoce in which he said that her main contribution is the finding that an alternative to both the state and the market not only exists but is also stable ndash namely a community system Ostrom for example studied how fishermen managed finite see resources among

each other without rules from the state or the imposition of artificial market rules He says this has some relevance for the financial crisis where the common good is trust of investors Memo to Germanyrsquos new finance minister In his FT Deutschland column Wolfgang Muumlnchau writes his Memo to the New Finance Minister despite the fact that his identity is not yet known Muumlnchau says the most important task is not to consolidate the budget but to ensure that the divergence within the eurozone is minimised It may well that the most stabilising policy requires Germany to go a little slower on budget consolidation if others go faster He urged the finance minister to take a greater interest in European and international policy co-ordination than his predecessor

FRANCOIS VIDAL

Stop ou encore [ 141009 ] La pression monte sur les banques centrales Les signes persistants dune amorce de reprise eacuteconomique et le deacutesordre croissant sur le marcheacute des devises alimentent les interrogations Et pas seulement sur les marcheacutes Au sein mecircme de certains grands instituts deacutemission on commence aussi agrave sinterroger sur le timing dun resserrement des conditions du creacutedit Le moment est-il venu de deacutemonter les eacutechafaudages mis en place il y a un an pour eacuteviter que leacutedifice de la finance mondiale ne seffondre La Banque centrale dAustralie a deacutejagrave reacutepondu par laffirmative en relevant ses taux dun quart de point la semaine derniegravere Celle du Japon pourrait deacutecider aujourdhui de suspendre rapidement les mesures non conventionnelles mises en oeuvre au plus fort de la crise Il faut cependant espeacuterer que ces deux deacutecisions restent isoleacutees pour quelque temps encore Lideacutee dun deacutemontage geacuteneacuteral paraicirct plus que preacutematureacutee Et cela pour plusieurs raisons Si les marcheacutes financiers sont aujourdhui stabiliseacutes leur santeacute est encore bien fragile Rien ne dit quils pourraient supporter la suppression des beacutequilles mises en place ces derniers mois cest-agrave-dire notamment les injections massives de liquiditeacutes Mecircme son de cloche sur le front des taux directeurs Les critegraveres qui commandent habituellement un resserrement moneacutetaire sont absents Ni le niveau de chocircmage dont la hausse se poursuit agrave un rythme soutenu dans les grandes eacuteconomies deacuteveloppeacutees ni celui de linflation toujours aussi bas ne justifient un quelconque relegravevement des taux agrave lhorizon dun an Bien au contraire Le risque est grand quune hausse preacutecipiteacutee ne bride les velleacuteiteacutes de reprise eacuteconomique comme la laisseacute entendre hier Christian Noyer Le Japon en a fait les frais en 2000 lorsque sa banque centrale a mis fin dautoriteacute agrave la politique de taux zeacutero Pour autant le deacutebat est loin decirctre sans inteacuterecirct Il pourrait mecircme se reacuteveacuteler salutaire Dabord pour calmer limpatience des marcheacutes en donnant une ideacutee mecircme approximative du calendrier de deacutemontage Tout plutocirct que lincertitude Ensuite et surtout parce que ce deacutebat permet daborder la deacutelicate question de la strateacutegie agrave adopter pour sortir dans les meilleures conditions possibles de la peacuteriode de convalescence post-crise financiegravere Une question cruciale pour lavenir de leacuteconomie mondiale Par la force des choses les Etats et leurs banques centrales ont lanceacute leur plan de sauvetage au mecircme moment Si ces dispositifs devaient ecirctre deacutemonteacutes en ordre disperseacute il ne fait guegravere de doute que la reprise eacuteconomique qui samorce ny reacutesisterait pas

httpwwwlesechosfrinfoanalyses020171690712-stop-ou-encore-htm

Nouvelle monnaie de reacuteserve mondiale proposition chinoise [ 300309 ]

Proposition Le gouverneur de la banque centrale de Chine Zhou Xiaochuan sest inquieacuteteacute de limpact sur leacuteconomie mondiale de la devise dune seule nation dont les choix politiques et eacuteconomiques pegravesent sur tous les autres pays Pour diluer le poids du dollar il eacutevoque un systegraveme moneacutetaire organiseacute autour des droits de tirage speacuteciaux (DTS) Ces DTS dont la valeur deacutepend dun panier de quatre monnaies (dollar euro yen et livre sterling) sont actuellement utiliseacutes comme uniteacute de compte par des institutions comme le FMI Selon le gouverneur ils pourraient eacutegalement devenir une monnaie de reacuteserve supranationale et servir au commerce international aux investissements agrave la fixation du prix des marchandises ou encore agrave la comptabiliteacute des entreprises La Chine deacutependante du dollar La Chine a placeacute pregraves de la moitieacute de ses 2000 milliards de dollars de reacuteserves de change dans des actifs en dollars et deacutetient notamment 750 milliards de dollars dobligations du Treacutesor ameacutericain Cependant les autoriteacutes de Peacutekin refusent de remettre en cause publiquement leurs investissements dans le dollar par crainte de semer la panique et denclencher la chute de la valeur de leurs propres actifs Paradoxalement donc au moment mecircme ougrave Zhou Xiaochuan a avanceacute la proposition dune nouvelle monnaie de reacuteserve internationale son adjointe agrave la banque centrale et preacutesidente de la Safe (State Administration of Foreign Exchange) Hu Xiaolian deacuteclarait que son pays allait continuer agrave investir dans la dette ameacutericaine

COLUMNISTS Martin Wolf

The rumours of the dollarrsquos death are much exaggerated By Martin Wolf

It is the season of dollar panic These panic-mongers are varied gold bugs fiscal hawks and many others agree that the dollar the dominant currency since the first world war is on its death bed Hyperinflationary collapse is in store Does this make sense No All the same the dollar-based global monetary system is defective It would be good to start building alternative arrangements

We should start with what is not happening In the recent panic the children ran to their mother even though her mistakes did so much to cause the crisis The dollarrsquos value rose As confidence has returned this has reversed The dollar jumped 20 per cent between July 2008 and March of this year Since then it has lost much of its gains Thus the dollarrsquos fall is a symptom of success not of failure

Can we find deeper signs that the world is abandoning the US currency One beloved indicator is the price of gold which has risen four-fold since the early 2000s (see chart) But its price is a dubious indicator of inflation risks its previous peak was in January 1980 just before inflation was crushed

Higher prices of gold reflect fear not fact This fear is not widely shared The US government can borrow at 42 per cent over 30 years and 34 per cent over 10 years During the crisis the inflation expectations implied by the gap in yields between conventional and inflation-protected securities collapsed These have since recovered ndash yet another sign of policy success But they are still below where they were before the crisis The immediate danger given excess capacity in the US and the world is deflation not inflation

The dollarrsquos correction is not just natural it is helpful It will lower the risk of deflation in the US and facilitate the correction of the global ldquoimbalancesrdquo that helped cause the crisis I agree with a forthcoming article by Fred Bergsten of the Peterson Institute for International Economics that ldquohuge inflows of foreign capital to the US facilitated the over-leveraging and underpricing of riskrdquo Even those who are sceptical of this agree that the US needs export-led growth

Finally what can replace the dollar Unless and until China removes exchange controls and develops deep and liquid financial markets ndash probably a generation away ndash the euro is the

dollarrsquos only serious competitor At present 65 per cent of the worldrsquos reserves are in dollars and 25 per cent in euros Yes there could be some shift But it is likely to be slow The eurozone also has high fiscal deficits and debts The dollar will exist 30 years from now the eurorsquos fate is less certain

This view may be too complacent The danger of a collapse of the dollar is small and of its replacement by another currency still smaller But a global monetary system that rests on the currency of a single country is problematic for both issuer and users The risks are also growing particularly since the emergence of ldquoBretton Woods IIrdquo ndash the practice of managing exchange rates against the dollar

In the 1960s Robert Triffin a Belgian-American economist argued that a global monetary system based on the dollar had a flaw the increased liquidity the world sought would require current account deficits in the US But sooner or later the overhang of monetary liabilities would undermine confidence in the key currency This view ndash known as the ldquoTriffin dilemmardquo ndash proved prescient the Bretton Woods system fell in 1971 Strictly speaking reserves could be created if the key-currency country merely borrowed short term and lent long term But in practice the demand for reserves has generated current account deficits in the issuing country In a floating exchange-rate regime reserve accumulations should also be unnecessary But after the financial crises of the 1990s emerging countries decided they needed to pursue export-led growth and insure themselves against crises As a direct result three quarters of the worldrsquos currency reserves have been accumulated just in this decade

Yet this very search for stability risks creating long-run instability Indeed Chinese policymakers are worried about the risk to the value of their vast dollar holdings that on Triffinrsquos logic their own policy exacerbates US policymakers may repeat the ldquostrong dollarrdquo mantra But this is an aspiration without an instrument Relevant policy is made by the Federal Reserve which has no mandate to preserve the dollarrsquos external value The only way Chinarsquos policymakers can preserve the domestic value of external holdings is to support the dollar without limit which compromises Chinarsquos domestic monetary stability and will prove self-defeating in the end At this point the widespread concerns about US monetary stability and the dollarrsquos external role converge A standard recommendation on the former is to preserve both the independence of the Federal Reserve and ensure long-run fiscal solvency If the fear grows that either ndash or worse both ndash is in danger a self-fulfilling crisis might ensue The dollar could tumble and long-term interest rates soar In such a crisis it might well be feared a less-than-independent Federal Reserve would be compelled to buy public debt That would accelerate flight from the dollar

The two key preconditions for long-run stability then are a credibly independent central bank and federal solvency both of which seem to be within US control

Yet this is too simple Most analysts assume that the US fiscal position can be determined independently of decisions taken elsewhere But if the US private sector were to deleverage over a long period (and so spend substantially less than its income) while the rest of the world wanted to accumulate dollar-denominated assets as reserves the US government would naturally emerge as the borrower of last resort A corollary of the Triffin dilemma is that the international role of the dollar could make it hard for the US to manage its fiscal affairs successfully even if it wanted to do so

iexclComo la Espantildea de Felipe II I arrive by a somewhat different route at the same conclusion as Mr Bergsten the global role of the dollar is not in the interests of the US The case for moving to a different system is very strong This is not because the dollarrsquos role is now endangered It is rather because it impairs domestic and global stability The time for alternatives is now

The Dollar and the Deficits Foreign Affairs NovemberDecember 2009

httpwwwftcomcmss09165b8b0-b82a-11de-8ca9-00144feab49ahtml

Currencies

Sterling falls on weak inflation data By Neil Dennis

Sterling endured a volatile session on Tuesday after weak inflation data prompted further speculation that interest rates could be kept on hold at 05 per cent until 2011

UK consumer price growth fell to a five-year low of 11 per cent in September dipping below the marketrsquos estimate of 13 per cent thanks to lower utility bills and moderating food costs

ldquoThe data reinforce the belief that the Bank of England will keep interest rates down at 05 per cent well into 2010rdquo said Howard Archer at IHS Global Insight

The Centre for Economic and Business Research which predicted on Sunday that the UK base rate would be held at 05 per cent into 2011 reiterated its stance ldquoA huge amount of spare capacity remains in the economy and wage cost pressures are weak ndash as such we expect the rate to be on hold through 2010rdquo said Charles Davis

Sterling earlier fell to a new five-month low of $15710 against the dollar and hit a six-month trough against the euro at pound09412

Trade-weighted sterling a measure of the pound versus a basket of other big currencies fell to a six-month low of 768

ldquoThis is bad news for the poundrdquo said Duncan Higgins at Caxton FX

ldquoThe data will weigh heavily on the UK currency and will continue to discourage investment Sterling is now on course to fall to parity with the euro particularly as the eurozone continues to emit positive signsrdquo

But during a volatile afternoon the pound recovered and by late in New York sterling was up 06 per cent against the dollar to $15892 and climbed 02 per cent higher against the euro to pound09332

Early gains for the euro were cut back after investor sentiment in Germany fell After three months of gains the ZEW index dropped back to 56 from 577 in September confounding expectations of a rise to 583

Analysts had expected equity market gains of recent months and the clear victory for the conservative-liberal alliance in last monthrsquos general election to have boosted sentiment

ldquoInstead a soft reading for the ZEW may reflect investorsrsquo cautiousness regarding the strength of the recoveryrdquo said Frederik Ducrozet at Calyon

The euro pared its gains to stand 04 per cent higher against the dollar at $14829 and was 03 higher against the yen at Y13310

Amid the volatile trading conditions the dollar also fell then recovered some of its poise The trade-weighted dollar index fell to a 14-month low of 75738 before creeping up to 75961 late in the day

Japanrsquos yen rose 01 per cent against the dollar to Y8977 while the Canadian dollar lost 01 per cent to C$10361

httpwwwftcomcmss0f1709b4c-b7e1-11de-8ca9-00144feab49ahtml

Editorial COMMENT

Posturing Klaus Published October 13 2009 2159 | Last updated October 13 2009 2159

Vaclav Klaus has taken his provocative brand of self-serving contrarianism too far The Czech presidentrsquos obstruction of the Lisbon treaty has nothing to do with preserving freedom His increasingly erratic views can hardly outweigh those of the Czech government parliament and people not to mention those of the 26 other European Union member states that have ratified the treaty ndash some of which have raised significant difficulties along the way He is about posturing not judgment

This is a man who likens the schemes of the EU to Soviet totalitarianism yet maintains a close friendship with that paladin of liberty Vladimir Putin He was always something of a Vaclav-come-lately in the ranks of Czech dissidents ndash especially compared to his arch-rival and predecessor philosopher-king Vaclav Havel

It is of course easy to paint the Czech president ndash a market fundamentalist who believes the financial crisis was caused by over-regulation ndash as a climate change-denying Eurosceptic populist But that is because he seems so deliberately to make it so easy

His latest pretext for holding up Lisbon is transparently bogus ndash and irresponsibly inflammatory He wants an opt-out from the Charter of Fundamental Rights in the treaty alleging that ethnic Germans expelled under the post-war Benes decrees could otherwise reclaim expropriated property

The incorporation of the charter in the Lisbon treaty is intended to extend its application to European institutions and to individual member states when they are putting EU decisions into effect It cannot be applied retrospectively so it has no relevance to the question of Czech property rights decided by the Benes decrees The Czech Republic furthermore is a long-time signatory to the body its president now claims threatens its sovereignty the European Court of Human Rights which has never shown any interest in this affair

If Mr Klaus had really discerned a genuine vital national interest he would presumably have raised it long ago as other member-states have done He is instead playing games with the Czechsrsquo national pysche and unreal fears of being swamped by Sudeten Germans

Most Czechs are happy with EU membership and can see its benefit Perhaps that is why Mr Klaus has started refining his role of provocateur into saboteur Yet he was re-elected by parliament only last year to a second five-year term and such is his love of the limelight he is not likely to put his job at risk His case is without merit

httpwwwftcomcmss0511e4dda-b82a-11de-8ca9-00144feab49ahtml

La transformacioacuten del sector financiero

Moodys avisa de que la banca espantildeola oculta el deterioro de sus activos El impacto del pinchazo inmobiliario dejaraacute 108000 millones de peacuterdidas

C PEacuteREZ - Madrid - 14102009

La banca espantildeola se mueve entre los elogios por su soacutelida resistencia a los embates del huracaacuten financiero y los peacutesimos augurios ante los efectos de la crisis econoacutemica Tan pronto se califica a los bancos como depredadores por sus compras en EE UU como se advierte de que sus beneficios son ficticios y que corren el peligro de convertirse en entidades zombis

La banca espantildeola se mueve entre los elogios por su soacutelida resistencia a los embates del huracaacuten financiero y los peacutesimos augurios ante los efectos de la crisis econoacutemica Tan pronto se califica a los bancos como depredadores por sus compras en EE UU como se advierte de que sus beneficios son ficticios y que corren el peligro de convertirse en entidades zombis por culpa de la madre de todas las burbujas inmobiliarias Ayer salioacute cruz la agencia de calificacioacuten Moodys lanzoacute un serio aviso al sector al que acusa de no reconocer en sus cuentas la auteacutentica gravedad de la crisis y en particular el reventoacuten inmobiliario que hasta ahora apenas ha hecho mella en los beneficios

Moodys aseguroacute en un duro informe que los bancos y cajas espantildeoles estaacuten retrasando el reconocimiento de activos morosos a traveacutes de acuerdos de reestructuracioacuten de deuda potencialmente dudosa o incluso frenando la morosidad con la adquisicioacuten de viviendas impagadas o de promociones enteras una praacutectica cada vez maacutes frecuente Traduccioacuten libre la banca basa su buena salud actual en varios trucos legales -perfectamente legales- pero que uacutenicamente aparcan el problema que podriacutea estallar maacutes adelante Numerosas entidades parecen evitar la magnitud real del deterioro de los activos en sus cuentas lo que podriacutea provocar que persista la debilidad del sector bancario a menos que se haga frente a ese asunto con mayor decisioacuten destaca la agencia

El impacto de la recesioacuten y el pinchazo inmobiliario en especial del creacutedito a promotores obligan a la banca a hacer provisiones -una suerte de colchoacuten que se dedica a previsibles peacuterdidas futuras- por valor de 57000 millones de euros adicionales para hacer frente a un deterioro de activos de 108000 millones Ese agujero iraacute saliendo a lo largo de una crisis que podriacutea alargarse hasta cinco antildeos seguacuten el anaacutelisis de Moodys En el peor escenario posible las peacuterdidas estimadas se disparan hasta 225000 millones

En el uacuteltimo antildeo la presioacuten sobre los bancos espantildeoles se ha ampliado aseguroacute Maria Cabanyes analista de Moodys Eso supone un deterioro de la calidad crediticia el debilitamiento de los colchones existentes para evitar nuevas peacuterdidas y una situacioacuten complicada en los mercados de financiacioacuten Moodys aventura incluso que un nuacutemero significativo de entidades entraraacute en peacuterdidas en los proacuteximos trimestres

La patronal AEB calificoacute como alarmistas esos nuacutemeros y aseguroacute que los beneficios cosechados en el primer semestre -y muy probablemente en el segundo- permitiraacuten acometer sin graves presiones el previsible deterioro econoacutemico derivado del paro y la morosidad Santiago Carboacute catedraacutetico de la Universidad de Granada y asesor de la patronal de las cajas explicoacute que el sistema bancario no estaacute tan mal como rezuma el informe Pero es cierto

antildeadioacute que las entidades se estaacuten quedando promociones terminadas o pisos cuyos propietarios no pueden con la hipoteca que la morosidad sube y que el creacutedito a promotores y constructores se estaacute refinanciando eso indica que es posible que haya problemas maacutes adelante si persiste la caiacuteda del sector inmobiliario Carboacute afirmoacute que hay bancos que pueden asumir ese escenario pero hay otras entidades que van a tener maacutes dificultades Por eso es tan importante una reestructuracioacuten raacutepida y sin trabas del sector particularmente de las cajas para que no haya entidades zombis y para que vuelva a funcionar el creacutedito y con eacutel la economiacutea

Al igual que Moodys tanto el FMI como el Banco Central Europeo (BCE) consideran que la banca europea apenas ha empezado a limpiar auacuten sus balances En cuanto a las economiacuteas que han sufrido los estragos de una burbuja inmobiliaria Moodys considera que la banca britaacutenica por ejemplo se enfrenta a unas peacuterdidas auacuten mayores que las de la espantildeola unos 140000 millones de euros que podriacutean ascender hasta cerca de 270000 millones en el peor de los escenarios

httpwwwelpaiscomarticuloeconomiaMoodysavisabancaespanolaocultadeterioroactivoselpepueco20091014elpepieco_7Tes

ftcomalphaville Moodyrsquos still negative on Spanish banks

Posted by Stacy-Marie Ishmael on Oct 13 1637

Itrsquos pretty much the done thing these days to question the fundamentals of the Spanish banking system but mdash and it surprises us to say this mdash Moodyrsquos has been ahead of many (though not the FT) in warning about the pain in Spain

In May Lisa Hintz of Moodyrsquos Capital Markets Research Group a separate unit from the main ratings division mdash issued the following warning

As Spain continues to weaken we believe there is a non-trivial possibility of a systemic shock to the Spanish banking market most likely from a large failure of a covered bond issuer Banco Sabadell which is currently trading at a CDS-implied rating of Ba1 and a gap of -7 is a candidate

A week later Moodyrsquos rating unit said it would be reviewing the bank financial strength ratings (BFSRs) of 36 Spanish banks for possible downgrades The actual downgrades followed in June with cuts to the senior unsecured debt and deposit ratings of 25 of Spainrsquos banks and reductions in the BFSRs of 30

And Moodyrsquos continues to keep a close eye on the countryrsquos financial institutions as its latest report mdash published on Tuesday mdash makes clear Emphasis FT Alphavillersquos

The fundamental credit outlook for the Spanish banking system remains negative reflecting the impact of the ongoing economic recession and severe asset quality deterioration on domestic banksrsquo risk absorption capacity

ldquoOver the past 12 months the pressure on Spanish banks has broadened resulting in (i) an accelerated deterioration of asset quality (ii) a further weakening of the existing cushions against losses such as retained earnings generic (anti-cyclical) provisions and unrealised capital gains and (iii) a still challenging wholesale funding market and increased competitive pressure on the retail funding siderdquo says Maria Cabanyes Moodyrsquos lead analyst for the Spanish banking system

On the face of it Spanish banks have so far demonstrated remarkable resilience to these pressures but Moodyrsquos remains concerned that many entities appear to be avoiding recognition of the true scale of the asset quality deterioration in their books which could result in the banking sector remaining weak (and in continuing low standalone ratings) unless this is addressed more decisively

That latter paragraph struck us as particularly interesting not least because of the theories counter-theories and analyses on the small matter of whether Spainrsquos banks are hiding their losses

Itrsquos not all bad news however

the amount targeted by the government to support the banking sector (close to euro100 billion has been made available in a recapitalisation and restructuring fund) should provide sufficient funds to address the capital shortfalls of Spanish banks under Moodyrsquos base scenario thereby supporting the current long-term ratings

Except for this bit

Extrapolating Moodyrsquos estimates of lifetime loan losses for rated banks in Spain to the entire Spanish financial institutions universe results in an approximate figure of EUR108 billion of losses under the rating agencyrsquos base-case scenario as of the end of 2008 Against this estimated loss number system-wide (general and specific) loan loss provisions amounted to EUR51 billion at the end of H1 2009 which means that constituted provisions provide a coverage of expected losses of 47

And this one

This in turn means that Spanish banks still need to fund provisions of EUR57 billion on the basis of Moodyrsquos assumptions regarding the performance of key asset classes earnings and available capital Extrapolating the net loan loss provision cushions that have been built-up over the past six months (EUR63 billion) it would take banks close to five years to fully provision Moodyrsquos estimation of losses This would severely affect the capacity of many Spanish banks to generate profits in the coming years Should the Spanish economy continue to deteriorate significantly the rating agencyrsquos stressed scenario estimates substantially higher losses of up to EUR225 billion

And for completeness some edifying charts

Related links SampP sees lsquomeaningful financial stressrsquo for Spainrsquos banks - euro965bn worth - FT Alphaville Spanish eye contingencies - FT Alphaville Banksrsquo coverage ratio capers cont - FT Alphaville Forget Latvia - what about Spain - FT Alphaville

This entry was posted by Stacy-Marie Ishmael on Tuesday October 13th 2009 at 1637 and is filed under Capital markets Tagged with Spain spanish banks

httpftalphavilleftcomblog2009101377501moodys-still-negative-on-spanish-banks

THE WALL STREET JOURNAL

Moodys Questions Spanish Banks Report Casts Doubt on Reserves for Bad Loans at Least $160 Billion in Losses

OCTOBER 14 2009

By THOMAS CATAN and CHRISTOPHER BJORK MADRID -- Spanish banks are failing to recognize the true scale of their losses during the deep slump in Europes fifth-largest economy -- something that could hamstring the sectors growth for years Moodys Investors Service said Tuesday

In a report the credit-rating firm said Spanish financial institutions werent setting aside enough capital to cover surging bad loans Moodys said the banks set aside less than half the euro108 billion ($160 billion) in loan losses it estimates they will suffer during the course of the downturn At the current rate they are provisioning it would take Spanish banks five years to fully cover those losses it said

We remain concerned that many banks appear to be avoiding recognizing the true scale of the asset quality deterioration in their books which could result in the banking sector remaining weak unless this is addressed more decisively said Mariacutea Cabanyes lead Spanish banking analyst at Moodys

Not Concealing Losses Spanish banks deny they are concealing any losses A spokeswoman for Spains banking association said its members which include Spains listed banks continued to report strong earnings and had moved to bolster their capital She added that the Bank of Spain had performed stress tests on the banks and hadnt detected any irregularities

An official at the Bank of Spain said the Spanish regulator certainly doesnt allow banks to hide any losses and will continue to act with rigor

Spains biggest banks are seen as insulated from the recession at home because of their global reach Here that reach a Santander branch in Brazil

Spanish banks have emerged reasonably intact from the first phase of the crisis largely thanks to tight regulation by the Bank of Spain The Spanish regulator steered them away from toxic financial instruments and forced them to build up big capital cushions to cover losses in a downturn

However an economic downturn in Spain is fast eroding those buffers as highly indebted households and businesses default on their loans in ever-growing numbers Analysts expect Spanish banks to suffer the full impact of a slumping economy and surging joblessness in 2010

At nearly 19 Spain has by far the highest unemployment rate in the 27-nation European Union and economists see no relief in sight The International Monetary Fund projects Spain will be the only major economy to remain in recession next year as it continues to adjust to the collapse of its decadelong housing bubble

The Moodys report stoked an already heated debate among several analysts over whether Spanish banks are concealing losses by restructuring bad loans and buying up housing

developments from insolvent construction companies Analysts at Credit Suisse for example believe Spanish banks have understated their level of bad loans by around 30

The most pessimistic analysts say Spain is facing a Japan-style lost decade as its financial sector buckles under the weight of troubled loans In August the London-based research firm Variant Perception accused Spanish banks of hiding deep losses by rolling over credit to zombie construction companies and not marking their real-estate loans to market

A $370 Billion Loss View Variant estimated that the real-estate losses would exceed euro250 billion or about $370 billion by the end of the downturn -- around a quarter of the countrys gross domestic product Moodys analysts estimate of losses in the Spanish banking system are more modest euro105 billion in their most likely scenario However Moodys cautioned that should the Spanish economy continue to deteriorate losses could swell to euro225 billion

Even under its worst-case scenario however Moodys doesnt expect Spanish banks to become insolvent Spains government set up a restructuring fund that can be used to prop up ailing lenders and avoid systemic risk

Spains biggest banks Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA are diversified internationally helping mitigate the impact of the recession in their home market However many of the countrys unlisted regional savings banks which were heavily exposed to the construction boom are suffering

An official representing the savings banks dismissed the notion that they were hiding losses as an urban myth The official said We have no reason to doubt the figures the banks are giving us

httponlinewsjcomarticleSB125545053140882671html

Mercados Madrid - 13102009

Inversores extranjeros toman el 90 de los bonos corporativos espantildeoles La fuerte acogida que el mercado estaacute dando a las emisiones realizadas por las compantildeiacuteas espantildeolas se debe casi en su totalidad a la demanda de inversores institucionales extranjeros que han tomado cerca del 90 de los de casi 17000 millones de euros lanzados al mercado en este antildeo Tania Juanes

Casi el 90 de las emisiones corporativas realizadas este antildeo por compantildeiacuteas espantildeolas sin incluir las entidades financieras han sido absorbidas por inversores institucionales extranjeros seguacuten los datos de las empresas emisoras y de entidades financieras que han participado en estas operaciones Esto supone que han adquirido del orden los 14900 millones de euros de un total de maacutes de 16500 millones lanzados al mercado La diferencia de recepcioacuten por grupos extranjeros o espantildeoles entre unas emisiones y otras no es en general muy elevada Van por ejemplo de la lanzada por Telefoacutenica en enero que ha sido absorbida en un 85 por institucionales foraacuteneos al 100 de la emitida por Gas Natural a 10 antildeos En las de Iberdrola una de las compantildeiacuteas con una actividad maacutes relevante en este tipo de transacciones la presencia de los grupos del exterior ha estado de media en el 90 Las realizadas por Enagaacutes se han movido entre el 95 en los bonos a tres antildeos al 63 para los de seis antildeos En el caso de las obligaciones colocadas por Abertis el 30 de septiembre los principales tomadores han sido los de Francia Reino Unido y Alemania

Los datos indican ademaacutes que en general las emitidas en euros son adquiridas casi en su totalidad por europeos pero esa tendencia cambia cuando son en doacutelares Esta acogida va acompantildeada con una demanda que es de media maacutes de cinco veces superior a la oferta llegando incluso a diez veces Y se debe en opinioacuten de Harry Koppel de Global Finance Iberia de Barclays Capital a la existencia en la actualidad de un gran apetito por emisiones de deuda corporativa espantildeola particularmente fuera de Espantildea En esta liacutenea sentildeala que en funcioacuten de los datos de las transacciones en las que Barclays Capital ha actuado este antildeo como joint-bookrunner -Iberdrola Gas Natural Telefoacutenica y parte de Enagaacutes- la gran mayoriacutea se ha colocado fuera de Espantildea Desde esa entidad financiera al igual que indican las compantildeiacuteas se espera que el resto del antildeo continuacutee la misma tendencia y que las empresas sigan moviendo su deuda desde el mercado bancario al mercado de capitales como igualmente lo ha hecho Grifols al acudir a colocaciones privadas en Estados Unidos por 600 millones de doacutelares

Este eacutexito se debe baacutesicamente a tres factores seguacuten Koppel En primer lugar a las restricciones de venta y colocacioacuten en el mercado primario dentro de Espantildea que en algunos casos prohiacutebe a los bancos contactar directamente a los inversores para solicitar ofertas Pero asimismo a que las denominaciones miacutenimas de 50000 euros limitan la distribucioacuten posterior de los bonos a inversores minoristas Otro aspecto que es citado por los expertos es que en Espantildea no existe una base inversora de compantildeiacuteas de seguros y fondos de pensiones domeacutesticos que proporcionen una demanda tan fuerte como en Francia Alemania o el Reino Unido Pero este auge no es exclusivo de Espantildea En lo que va de antildeo las compantildeiacuteas estadounidenses han emitido papel por maacutes de 279 billones de doacutelares cifra que ya supera los 273 billones

del conjunto de 2008 Las del tercer trimestre del antildeo han alcanzado el histoacuterico reacutecord de 775000 millones de doacutelares Pero esta tendencia a acudir a ese mercado es posible porque estaacute respaldada por inversores que asumen maacutes riesgo y que encuentran la deuda corporativa maacutes atractiva que la gubernamental por su maacutes elevada rentabilidad El proceso va acompantildeado de una mejora de los ratings de las agencias de calificacioacuten Aunque se sigan produciendo rebajas eacutestas van a menos y se espera que las subidas las superen en 2009

Condiciones La toacutenica general apunta a que las empresas espantildeolas estaacuten consiguiendo en las colocaciones condiciones similares a las de las compantildeiacuteas europeas de su sector El cupoacuten que se ofrece va desde el 32 al 75 y el spread estaacute en el entorno de los 270 puntos baacutesicos

Mejorar el perfil financiero iquestQueacute buscan las compantildeiacuteas al sumarse a esta actividad praacutecticamente parada desde 2007 La respuesta es casi unaacutenime mejorar la estructura financiera y reducir su dependencia de la financiacioacuten puramente bancaria En este contexto desde Iberdrola se pone de manifiesto que esas operaciones y otras medidas similares le han aportado una liquidez de 11000 millones de euros y le permiten tener cubiertas sus necesidades de financiacioacuten para los proacuteximos dos antildeos Ademaacutes ha alargado el plazo medio de vencimiento de su deuda por encima de los seis antildeos El objetivo de Gas Natural con sus bonos en dos tramos a cinco y diez antildeos por un importe global de 2500 millones de euros ha sido tambieacuten la refinanciacioacuten parcial de su endeudamiento bancario y la mejora del perfil de los vencimientos pactados

Por su parte Enagaacutes que logroacute una demanda diez veces superior a la oferta se beneficioacute del apetito por los bonos de empresas de servicios puacuteblicos que cuentan con una regulacioacuten que dan una base soacutelida a sus ingresos Fue otro giro ya que esta compantildeiacutea acude generalmente a los bancos y al Instituto de Creacutedito Oficial (ICO)

httpwwwcincodiascomarticulomercadosInversores-extranjeros-toman-90-bonos-corporativos-espanoles20091013cdscdimer_3cdsmer

Global macroeconomic imbalances G20 leaders must back up their rhetoric with deeds October 13 2009 1003am by FT

By Eswar Prasad

The financial crisis has taught us a painful lesson that global macroeconomic imbalances can wreak enormous damage on the world economy Indeed the centrepiece of the recent G20 Summit in Pittsburgh was agreement on a framework for balanced and sustainable growth to forestall a resurgence of imbalances as the economic recovery gets underway At the recent IMF-World Bank annual meetings G20 leaders gave the IMF a mandate to manage this framework by providing hard-nosed evaluations of their countriesrsquo macroeconomic policies

Experience suggests that grand promises to implement policies that are in the collective global interest canrsquot be taken seriously without an effective enforcement mechanism After all we have seen how quickly these same leadersrsquo firm pledges to forswear trade protectionism bit the dust The IMF has no real levers when it comes to the leading G20 economies especially since they are the major shareholders in the institution Moral suasion and name-to-shame approaches donrsquot work well as the large economies tend to simply brush off external criticism of their policies

There is a simple approach that has real consequences would be straightforward to implement and allows G20 countries to make enforceable policy commitments It involves Special Drawing Rights essentially an artificial currency created at the IMF and distributed to countries in rough proportion to their economic size The total stock of SDRs is now close to $300bn a sizable chunk of money

The scheme would work as follows The G20 in consultation with the IMF develops a simple and transparent set of rules for governments on policies that could contribute to global imbalances - for instance that government budget deficits and current account balances (deficits or surpluses) should be kept below 3 per cent of national GDP Each country posts a commitment bond amounting to a minimum of 25 per cent of its SDR holdings to back up its commitments to those objectives

Since it is not easy even with the best of policies to turn around the factors underlying imbalances within a short period commitments to policy objectives would be made over a five year horizon Intermediate targets could be set over a three year horizon Failure to meet the targets would mean a forfeiture of the bond (or a part of the bond for missing interim targets) The actual cost would not be large China for instance now has an allocation of 7bn SDRs and 25 per cent of that would amount to less than $3bn Still the symbolic effect of being levied an SDR penalty for running bad economic policies would be huge

By posting larger shares of their SDR holdings countries could signal stronger commitments to their policy pledges to the international community This would be a perfect setup for the US to lead by example in bolstering the framework it initiated - by posting a large bond as a commitment to sharply reduce its budget deficit Given the limited and uncertain tenure of some governments such a commitment bond would also be a good way of binding future governments to sound policies

This approach would shift the discussion from contentious arguments about current policies to a focus on outcomes For instance China has consistently maintained that its current account surplus reflects structural problems in its economy and has nothing to do with its exchange rate policy Who could quibble with methods so long as China commits to reducing its current account surplus and succeeds in putting its economy on a trajectory to get it below 3 per cent of GDP in the next 5 years (perhaps with an interim target of 5 per cent of GDP in the next 2-3 years)

What happens to SDRs that get docked if countries donrsquot hit their targets These SDRs would be distributed among low income countries To get incentives right only those low-income countries that meet minimum standards in terms of their macro policies would be eligible for this redistribution This way the IMF could finally offer carrots to poor countries for good policies rather than just sticks for bad policies Any SDR redistributions to small poor economies resulting from this scheme would be morally justified - instability caused by bad policies in the larger and richer economies tends to hurt these vulnerable and innocent bystanders disproportionately

The G20 commitment to tackling global macroeconomic imbalances is laudable G20 leaders must now be willing to back up their rhetoric with deeds and be ready to pay the price for breaking their commitments

Eswar Prasad is a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution

October 13 2009 1003am

httpblogsftcomeconomistsforum200910global-macroeconomic-imbalances-g20-leaders-must-back-up-their-rhetoric-with-deedsmore-2946

Economists View Oct 13 2009 The Bank Lending Channel

Many economists Ben Bernanke foremost among them have argued that monetary policy has effects that are independent of the traditional interest rate channel (where an increase in the money supply lowers the real interest rate and induces more investment and consumption spending) The alternative models include a credit channel for monetary policy which is often further divided into financial accelerator models and bank lending channel models

One class of models within the bank lending channel branch relies upon a difference in the availability of credit for large and small firms If smaller businesses have fewer sources of credit than large firms (who can issue bonds stocks commercial paper etc) then a credit shock induced by policy or some other factor will have an asymmetric negative effect on the activity of large and small firms Since smaller firms have trouble getting credit from non-bank sources a disruption in bank credit can cause them to contract their activities much more than large firms (If all firms have perfect substitutes for bank credit eg borrowing from foreigners on the same terms then monetary policy cannot affect real output through the bank lending channel The point of this research is that some firms do not have close substitutes for bank credit and therefore monetary policy can have real effects) According to this theres some evidence that these effects are operable

Credit Tightens for Small Businesses NY Times Many small and midsize American businesses are still struggling to secure bank loans impeding their expansion plans and constraining overall economic growth

Bankers worry about the extent of losses on credit card businesses as high unemployment sends cardholders into trouble They are also reckoning with anticipated failures in commercial real estate Until the scope of these losses is known many lenders are inclined to hang on to their dollars rather than risk them on loans to businesses in a weak economy

Bankers acknowledge that loans are harder to secure than in years past but they say this attests to the weakness of many borrowers rather than a reluctance to lend

ldquoBanks want to lend moneyrdquo said Raymond P Davis chief executive of Umpqua Bank a regional lender based in Portland Ore ldquoThe problem is the effect that the recession is still having on us Some of these businesses are still trying to come out of it For them to go to a bank if they are showing weak performance it is harder to borrowrdquo

As the financial crisis has largely eased in recent months big companies have found credit increasingly abundant with bond issues sharply higher

But for many smaller companies borrowing remains tough

Recall this graph posted here not too long ago (discussed further at the source)

It may be hard to see at first glance but the graph shows the disproportionate effect the recession has had on very small businesses In 2001 only 9 of the job losses came from small businesses while in the current recession - where credit problems are a much larger factor - small business accounts for 45 of lost jobs Part of the discussion of the graph notes this comment from William Dudley the president of the Federal Reserve Bank of New York

In a speech yesterday he said

For small business borrowers there are three problems First the fundamentals of their businesses have often deteriorated because of the length and severity of the recessionmdashmaking many less creditworthy Second some sources of funding for small businessesmdashcredit card borrowing and home equity loansmdashhave dried up as banks have responded to rising credit losses in these areas by tightening credit standards Third small businesses have few alternative sources of funds They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector

It will take more careful analysis to make the case that the bank lending channel has been important in this recession but it is suggestive

Posted by Mark Thoma on Tuesday October 13 2009 at 0108 AM

httpeconomistsviewtypepadcomeconomistsview200910the-bank-lending-channelhtml

13102009

Disgruntled consumers organise a run on a Dutch bank and win

The Dutch central bank took control of DSB Bank a small mortgages bank which according to NRC Handelsblad is notorious for the way it sold loans to customers The bank collapsed after a consumer association successfully engineered a run on the bank in protest against the reckless mortgages the bank had issued In the eyes of the consumer association bankruptcy was the preferred option for people who took out excessive mortgages The takeover by the Dutch central bank followed a weekend of negotiations to sell the bank to a consortium of the five biggest Dutch banks but these talks failed over concerns about credit losses and potential suites from customers Wouter Bos finance minister said the problem was not the banking crisis but the banksrsquo own irresponsible lending policies

Czech government tries to resolve the Klaus problem The FT reports that the Czech prime minister who only last week assured Barroso and Reinfeldt that they had nothing to worry about obviously misjudged the situation and is now proposing that he would like to find a ldquosolutionrdquo to the problem in discussions with other European leaders Jan Fischer said that he would obviously not accept a solution that required re-ratification of the Lisbon Treaty

Jean Quatremer writes that the Czech constitutional court in a previous ruling has already declared the Charter of Fundamental Rights consistent with the Czech constitution and that the charter could not applied retroactively especially not to reverse the Benes decrees He also concluded that Fischer had no clue how to get out of this situation

In a separate article the FT writes that Mr Klausrsquo decision to link his signature to the insertion of a new clause to prevent Germans using the legal procedure to reclaim properties in the Czech republic would strike a chord with the Czech people and the article in great detail why such an overt anti-German position would benefit him politically

(It will be an incredibly hard nut to crack to meet Mr Klaus even half-way because what he is seeking is a watertight legal assurance which cannot be provided by a simple political

declaration It is also not clear to us how a clause similar to that of Poland and the UK has any effect one way or the other on the legality of the Benes decrees It seems to us that the whole point is to give to rise to a delay of the process)

Fed governor admits inflation risks are higher than people believe St Louis Fed President James Bullard warned that US inflation risks might be higher than some people think The Wall Street Journal reports that Bullard expressed concerned about ldquoa popular narrative in use todayrdquo which is that the output gap must be very large due to the deep recession as a result of which the inflation risks must be negligible He says this narrative overplays the output gap story Measuring the output gap was difficult and he said that the traditional measure might fail during times of bubbles and bursts

Oil rises to $73pb The price of oil is creeping up and while we are still a long way away from the dizzy heights the oil price reached in the summer of last year the most recent price of $73pb is not to be scoffed at consider the still weak global demand as industrial production is still running at levels of 20 per cent below last year Austriarsquos Der Standard reports that the rise in the oil price is due to market assessments about the economic recovery and the increase in the forecast of oil demand by the International Energy Agency The euro continued to rise against the dollar and peaked at $14813

Ackermann warns about credit losses Josef Ackermann yesterday gave a deeply pessimistic outlook for the European banking sector which he said would lose competitiveness as Americans an Asians have used the crisis to create stronger banks He said European banks would suffer very large credit losss the worst of which has yet to come and while he welcomed the standardisation of securitisation products it would also mean lower profit margins as Der Spiegel reports

German coalition negotiations We are not reporting on the day-to-day developments of the German coalition negotiations because most of the reporting is simply noise ndash mostly some balloons that some politicians are launching to test the public reaction The theme of the German press is that the tax cuts will not be as a big as promised because of the desolate fiscal position The FDP recognises this problem but still holds out for meaningful tax cut not necessarily in 2010 but at some point during the coalition term The CDU has now stipulated that it sees a maximum leeway for tax cuts in the order of euro15bn as Der Spiegel reports which is less than 1 of GDP much less than the euro35bn sought by the FDP (Coalition negotiations are a very complicated affair We would not at this point want to jump to any conclusions )

Economics Nobel ndash Who are these guys The Nobel Prize for Economics went to two political scientists who are mostly unknown by traditional economists ndash a fact that has led to some soul searching among the fratinity who are fear that their profession might have the end of the rope See for example this anguished comment by Steven Levitt in Economistrsquos View who concluded that the prize will be ldquounpopular among my peersrdquo The FT has a nice editorial in which it praised the two winners Elinor Ostrom who has researched how common pool resources such as fish stock are being managed by the private sector and Oliver Willamson who has found that high transaction costs

in an exchange economy are the main reason for the establishment of firms ndash an insight with implications for competition policy and finance

Le Monde on the dollar This is a really gloomy article on the dollar in Le Monde by Edward Hadas who argues that the fall in the dollar is a disaster for the whole planet as the world remains totally dependent on the devaluing greenback He writes the Americans have no strategy to reverse the increase in their debt and the rest of the world has no alternative but to prop the dollar and thus refinance Americarsquos binge borrowing for conditions that are extremely unattractive

William Buiter on external representation A good comment by Willem Buiter on Europersquos external representation at the various Gs and he concludes that no single European country matters in those organisation any more in a world which has one economic superpower the US and two medium-sized powers Japan and China The obvious solution is joint representation not at EU level but at eurozone level a level that at least has a central bank that is on par with the Fed The big problem is the lack of policy co-ordination within the eurozone but Buiter remarks that joint external representation might produce an incentive for more co-ordination

httpwwweurointelligencecomarticle581+M5957f664c0e0html

Le point de vue de lagence eacuteconomique et financiegravere Breakingviewscom

La deacutebacirccle du dollar serait un deacutesastre pour la planegravete

LE MONDE | 121009 | 17h20 bull Mis agrave jour le 121009 | 17h21 arack Obama le preacutesident ameacutericain sest vu attribuer le prix Nobel de la paix en reacutecompense de ses efforts dans le domaine de la diplomatie internationale En revanche

la politique de relance massive quil pratique assiducircment dans son propre pays expose le monde entier agrave une distorsion du marcheacute des devises extrecircmement dangereuse

La chute reacutecente du dollar a eacuteteacute tregraves brutale Depuis mars il a perdu 15 de sa valeur en taux de change effectif mecircme sil reste supeacuterieur de 7 agrave leacutetiage atteint en avril 2008 Si les mots avaient le pouvoir de soutenir le cours des devises il ny aurait pas agrave sinquieacuteter les patrons du Treacutesor ameacutericain comme de la Reacuteserve feacutedeacuterale (Fed) ont rappeleacute publiquement la neacutecessiteacute dun dollar fort

Or si les courtiers en devises eacutecoutent attentivement les discours ils se fient surtout aux actes En ce moment si les speacuteculateurs peuvent tirer avantage de taux dinteacuterecirct de base quasi nuls le deacuteficit budgeacutetaire ameacutericain - il repreacutesentera probablement 10 du produit inteacuterieur brut (PIB) cette anneacutee doit aussi les faire reacutefleacutechir

Quand une devise est bon marcheacute il devient inteacuteressant de sen servir pour emprunter des capitaux que lon investira ensuite dans une monnaie plus lucrative Cest cette pratique du

carry trade qui tire le billet vert vers le bas

Le deacuteficit budgeacutetaire ameacutericain est gigantesque et aucune strateacutegie na eacuteteacute clairement deacutefinie pour le reacuteduire les courtiers ont donc toutes les raisons de redouter les effets inflationnistes de laffaiblissement du dollar car les responsables politiques pourraient trouver cette solution bien plus confortable que daugmenter la pression fiscale

Si les Etats-Unis neacutetaient pas les champions mondiaux des eacutechanges commerciaux et de lendettement et si le dollar neacutetait pas la monnaie de reacuteserve de reacutefeacuterence on se soucierait assez peu agrave leacutetranger des meacutethodes radicales expeacuterimenteacutees par le gouvernement ameacutericain Mais ce nest pas le cas le monde entier est deacutependant du billet vert Il ny a donc rien deacutetonnant agrave ce que les banques centrales se soient mobiliseacutees pour lempecirccher de deacutevisser trop violemment

Un pari perdant Et tant que les opeacuterations sur les devises ne feront pas lobjet de controcircles la seule maniegravere efficace dempecirccher le dollar de deacutegringoler est den acheter Comme la balance commerciale ameacutericaine est deacuteficitaire depuis de nombreuses anneacutees les banques centrales deacutetiennent dores et deacutejagrave plus de billets verts quil nest raisonnable dun point de vue eacuteconomique Elles pourraient bien se lasser un jour de ce pari visiblement perdant qui consiste agrave miser sur une devise peu reacutemuneacuteratrice eacutemise par un Etat qui emprunte sans compter

Ceux qui oeuvrent agrave la paix savent bien que la menace de la destruction ne dissuade pas toujours de sengager dans la guerre La deacutebacirccle du dollar serait un deacutesastre eacuteconomique pour la planegravete tout entiegravere et pourtant rien ne nous garantit quelle ne se produira pas

httpwwwlemondefreconomiearticle20091012la-debacle-du-dollar-serait-un-desastre-pour-la-planete_1252730_3234htmlxtor=RSS-3232

ftcommaverecon

Who speaks for Europe in the G-whatever October 11 2009 1137pm

The G-7 (USA Japan Germany UK France Italy Canada) was taken off life support at the IMF - World Bank Annual Meetings So was the G-8 (the G-7 plus Russia) although even fewer observers noticed or cared Since international organisations are never formally killed off the G-7 and G-8 will simply be allowed to fade away They reflected the economic and geopolitical distribution of power in the immediate aftermath of World War II When reality changes even international organisations eventually catch on and up Germany the UK France and Italy are global bit players at best now They only matter if they act jointly The way to do this is through the EU - but with a twist

For global economic and financial governance the G-20 is supposed to take over from the G-78 It consists of the ministers of finance and central bank governors of the G-8 plus Argentina Australia Brazil China India Indonesia Mexico Saudi-Arabia South Africa South Korea and Turkey The tally is completed by the European Union represented by the rotating Council presidency and the European Central Bank President The Managing Director of the International Monetary Fund and the President of the World Bank plus the chairs of

the International Monetary and Financial Committee (IMFC) and Development Committee of the IMF and World Bank also participate in G-20 meetings on an ex-officio basis

In addition a few countries have managed to elbow their way into the G-20 meetings for specific issues where they view themselves as playing a globally significant role As far as I can tell they achieved this by throwing their toys out of the pram andor threatening to hold their breath and making a scene The Netherlands fall into this category They base their claim to be invited (which was effective on three occasions thus far) on the countryrsquos generosity as development aid donors obviously not heeding the Talmudic view that giving charity and boasting about it is actually a sin

The G-20 (which as noted has 24 ex-officio member states entities or bodies plus assorted ad-hoc charity-members) has two obviously features that limit its effectiveness First is is too large Second it does not have a permanent staff or secretariat so there is no institutional memory and their meetings and deliberations are invariably badly prepared and a shambles The lack of permanent staff can be remedied by making the IMF and the BIS responsible for administrative support

As regards size there is no alternative to serious pruning When the 19 national ministers of finance the 19 national central bankers the two EU representatives and the four representatives from the Bretton Woods organisations and committees are all present there are 44 ex-officio participants not counting Dutch or other minor league interlopers Fortunately it is easy to wield Occamrsquo razor After shedding the unofficial intruders the first to go are Argentina Australia and Canada South Korea also goes until it unifies with North Korea Europe (excluding Russia) gets one minister of finance and one central banker How these are to be selected will be discussed below This brings us down to a G-13 (not counting the 4 persons representing the Bretton Woods organisations given the new G-20G13 members the chairs of the IMFC and of the Development Committee of the IMF and World Bank can also be removed as G-20G-13 members The new G-20G-13 could indeed double uptreble up as IMFC and Development Committee

Such a G-13 is still too large for serious discussions on economic and financial matters When urgent action is required a subset of the G-13 the G-4 will have to take over This would consist of the USA Japan China and lsquoEuropersquo If India or some other country (Brazil) continues to grow and Japan continues to stagnate as regards GDP and to shrink as regards population such a newcomer could replace Japan in due course

But how would the European representatives for the G-13 and the G-4 be chosen I believe there is only one sensible solution No European nation state can fulfill that role The only conceivable candidate Germany cannot deliver a central bank head who matters because Germany is part of the Eurosystem France the UK and Italy are medium-sized European countries of no global economic significance Before someone objects that the UK is the sixth largest economy in the world (using GDP at market exchange rates or world trade share as the size metric) let me point out that you can be sixth largest and still be small In fact you could be the largest and still be small As the Table below based on IMF data for 2008 makes clear at the moment there is one large national economy the US and there are two medium-sized national economies Japan and China The rest with the possible exception of Germany are tiddlers and Germany as noted before does not have a central bank that makes monetary policy

httpblogsftcommaverecon200910who-speaks-for-europe-in-the-g-whatever

On Nouriel Roubinis Global EconoMonitor Nouriel discusses the rally of the markets which he believes is occurring too fast and too soon and is diverging from the underlying economic fundamentals Recognizing the frothy markets and the fact that it is not the time for the Fed to raise rates Nouriel offers regulation as another tool to prevent an asset bubble (RGE Monitors Newsletter 16102009 901)

Nouriel Roubini| Oct 12 2009 httpwwwrgemonitorcomroubini-monitor

BBC -- World financial crisis not over The real economy still looks very weak

By Michelle Fleury Business reporter BBC News New York

The US economist widely credited with having predicted the financial crisis has warned we are already planting the seeds of the next crisis Nouriel Roubini told the BBC that he is concerned about the growing gap between the bubbly and frothy stock markets and the real economy

Over the last six months the Dow Jones Industrial Average has risen about 45

But Mr Roubini says he sees an economy where consumers are shopped out and debt burdened

Crisis not over Based on the run up in share prices in recent months investors appear to be betting that good times are around the corner A view not shared by Mr Roubini

The crisis is not yet over the New York University professor said

I see an economy where the consumers are shopped out debt burdened they have to cut back consumption and save more The financial system is damaged and for the corporate sector I dont see a lot of capital spending because there is a glut of capacity

Mr Roubini believes US house prices have further to fall straining Americas fragile recovery

Frothy markets Property prices have already declined sharply According to the National Association of Realtors the national median has dropped almost 13 from a year ago to $177700 (pound110100)

Many believe the crises in the residential market could spread to the commercial real estate market causing more headaches for the banks

So where does the froth in the markets come from

Mr Roubini - like many other economists - believes it is engineered by the Federal Reserve and the government which has been pumping cash into the economy to dampen the pain of the recession There is a wall of liquidity chasing assets he said But I think that there is a growing gap between what is the asset prices and the real economy Although he thinks there will be a correction he believes some of the mistakes of the past can be avoided if reforms are implemented httpwwwrgemonitorcomroubini-monitor257809bbc_video_interview

The Baseline Scenario

What happened to the global economy and what we can do about it

Who Needs Big Banks Written by James Kwak October 12 2009 at 730 am

At a panel discussion at the Pew Charitable Trusts (captured for posterity by Planet Money) Alice Rivlin floated the idea of breaking up big banks Luckily for us Scott Talbott of the Financial Services Roundtable (a lobbying group for big banks) was there to slap that idea down

Talbott ldquoWe need big companies and they can be managed and they are being managed helliprdquo

Alex Blumberg (Planet Money) ldquoBut why why do we need big companiesrdquo

Talbott ldquoThey provide a number of benefits across the globe We have a global economy and these institutions can handle the finances of the world They can also handle the finances of large non-bank institutions like General Electric or Johnson amp Johnson They need these institutions [that] can handle the complex transactions Simply breaking them up hellip then yoursquore discouraging a company from achieving the American Dream working hard earning money producing products and getting biggerrdquo

There are two things I object to strongly The second is easy The American Dream is for people not companies And people dream of working hard being successful making money and having an impact on the world The American Dream does not imply any particular company size There are situations in which your products are just so much better than anyone elsersquos that your company becomes big as a result Google comes to mind But Citigroup is the product of no onersquos American Dream When Talbott says ldquoAmerican Dreamrdquo what he really means is ldquoAmerican Bank CEOrsquos Dreamrdquo mdash because as we all know CEO compensation in the financial sector is extremely correlated with assets

The first is this ldquowe need big banks to serve global corporationsrdquo line Irsquove heard this before and I donrsquot buy it for a number of reasons

First (sorry I have this habit of embedding numbered lists inside numbered lists) how global is Bank of America Until it bought Merrill Lynch it was pretty much a midget overseas compared to say Morgan Stanley which was a small fraction of its size How global is Wells Fargo Yet those are two of our four biggest banks

Second the argument doesnrsquot pass the test of basic business logic My company did (and does) business in many countries around the world We had different alliances and different service providers in each one There were overlaps mdash we worked with some consulting firms in multiple countries mdash but we made the decisions independently in each country because every country is different And in each country you want the people who are the best in that country Sometimes that will be a division of an American multinational often it wonrsquot If Irsquom ldquoGeneral Electricrdquo or ldquoJohnson amp Johnsonrdquo Irsquom not going to do all my banking with Citigroup out of some misplaced customer loyalty

Third what global services is Talbott talking about Sure as an individual it would be nice if my bank had offices in every country I might ever travel to But thatrsquos because Irsquom an

individual and I donrsquot want to have more than a few bank accounts I would guess that General Electric has oh thousands of bank accounts around the world with dozens if not hundreds of banks The ldquoone-stop shoprdquo idea applies mdash barely mdash to people like me who would like the convenience of doing all of our financial stuff with one company but generally figure out that itrsquos impossible because my bank offers crappy investment products and crappy insurance products and hellip you get the idea Itrsquos laughable for a big company which has hundreds of PampLs each of which is different and has different objectives and preferences

Fourth letrsquos take a big global transaction mdash say a debt offering Here arguably it might be good to have a single bank with global scale since you want to sell bonds in as many markets as possible in order to get the broadest possible pool of investors In 2008 JampJ issued $16 billion (face value) of bonds Who got the deal Goldman JPMorgan Citi Deutsche Bank Bank of America Morgan Stanley Williams Capital Group BNP Paribas HSBC Mitsubishi UFJ and RBS Greenwich Capital Eleven investment banks based in five countries including five US-based banks (In 2007 JampJ issued 500 million pounds of debt using thirteen underwriters mdash six of whom were not involved in the 2008 offering two out of three book-running managers were European banks) So when push comes to shove our beloved mega-banks are nowhere near up to the task What this tells me is that itrsquos the big companies that call the shots and they like parceling out business to lots of banks This is another basic principle of business itrsquos better to have multiple suppliers than one supplier so you can keep them in competition

This whole argument that global companies need massive banks is one of those things that sound plausible until you actually start thinking about them Is there something big that Irsquom missing here

By James Kwak

httpbaselinescenariocom20091012who-needs-big-banksmore-5216

Global Economic

Trend Analysis

Thoughts on the Economy Problems and Solutions Posted by Michael Shedlock Tuesday October 13 2009 at 1236 John Mauldin has proposed some interesting solutions for fixing the economy in his weekly E-Letter Killing The Goose Lets take a look first at the problem then at various solutions

Long-time readers know that I think the Fed has been able to get away with its rather large monetization program because of the massive deflationary forces let loose in the world by the credit crisis which is forcing a monster deleveraging regime all over the world

And this brings us to our conundrum You cannot continue to run deficits significantly larger than nominal GDP for too long without risking the demise of the economic system But we are in a deflationary environment so the Fed can monetize the debt far more than any of us suppose without risking immediate and spiraling inflation

How long can we go before there is an upheaval I dont know The markets can remain irrational or complacent for a lot longer than most of us think It could be years Or not

Some of my most knowledgeable friends argue for the inflation side and others take the deflation side I tend to think the Fed will fight deflation until we get inflation but the consequences will not be pleasant There is no benign path

How can we avoid such an upheaval The only way is to make some very difficult choices There have to be some adults making the choices as the teenagers now in control clearly cannot make them

It is not a matter of pain or no pain it is just deciding when and how bad it will be The longer we wait the worse the consequences

First we must acknowledge the deficit is out of control and spending must be cut If we raise taxes by as much as the Obama administration now wants to we will most assuredly put the country back into a deep recession in 2011 Think what raising taxes in 1937 did to a nascent recovery A $3-trillion-dollar budget is 20 of the US economy That is just simply too much

The most credible studies show that government expenditures exert no multiplier effect on the economy Actually they show them to be very slightly negative This is not just in the US However the tax effect has a multiplier of 3 If we raise taxes by $300 billion in 2011 that will slam the economy in the face Further we will collect less taxes than projected as economic activity will fall

You cannot cure a too much debt problem with more debt We cannot borrow our way into prosperity Every crisis of the past decades has been a result of too much debt and leverage and we seem to want to repeat the past mistakes hoping that this time it will be different It wont

Mauldin summarizes the problem very well What cannot last forever by definition wont Unfortunately the only options are to pay the piper sometime soon or have a major global monetary collapse later There is no realistic middle ground

Lets now take a look at his suggestions one by one I will comment on each one individually and add some things that he missed

Mauldin We should start with a 5 across-the-board cut in spending in all programs Federal employees except for military personnel should see a 5 cut in pay as part of that program The average federal worker makes $75419 a year while the average in the private sector is $39751 The rest of us are taking pay cuts in the form of higher taxes No cost of living increases etc We are on an austerity program and need to do what it takes If a program is deemed too important to be cut then another program has to be cut more

Then the next year another 25 cut across the board And then an absolute freeze on the overall budget size until the deficit is 2 or less of GDP

Mish The goal must be a balance budget not deficits of 2 of GDP Public sector wages are indeed way out of line In addition there are entire departments that are redundant or unneeded We can start by getting rid of HUD the FHA the department of Education the Department of Energy Homeland Security and numerous other unnecessary departments Should someone think there are critical functions in those departments then just cut the budgets by 60-80

After cutting the waste we might not need to cut wages but should do so anyway to keep government jobs inline with pay in the private sector

Mauldin Social Security must be fixed now We all know that it is going to have to be done so why not just do it Means testing should be a part of the mix As an idea for every $10000 in income a retiree has he gets $1000 less in SS payments And increase the retirement age down the road When SS was launched retirement age was 65 But the average life span was 65 There are other things we can do but whatever our poison of choice is we need to take it Mish Ideally we should find a way to phase out social security completely Politically that will never fly As a practical matter raising the retirement age and placing means tests are about the best we can hope for Given that the Maximum Social Security Benefit is around $25400 (an amount that does not go all that far) penalizing people immediately for every $10000 in income is excessive For the sake of argument I propose a starting point at $50000 then a $1000 reduction in SS benefits for every $10000 in income between $50000 and $100000 with a $2000 reduction in SS benefits for every $10000 in income above $100000

Mauldin Medicare must be revised with real health-care reform The national debt is $56 trillion if we count unfunded liabilities much of which is Medicare It will become a nightmare around the middle of the next decade Adding more expenses now without cutting elsewhere makes no sense If we kill the goose no one will get anything except very empty promises There actually is a lot of waste in the system Software should be written that analyzes every patient and procedure and produces an outcomes-based analysis of what is reasonable rather than throwing every test at every patient And the government should make sure even if it has to spend the money that the updated system is in place in every hospital and clinic in the country And doctors should be given access to it so they can decide what type of care is appropriate to prescribe And health-care reform means tort reform

Mish The key problem is there is an unlimited demand for free services Nearly everyone is concerned about rationing I am concerned there will not be rationing Beyond a certain age or likelihood of success of a procedure services should be denied unless one has private insurance on top of Medicare A huge percentage of health care money is spent in the last two years of someones life typically only prolonging the agony This needs to stop

Mauldin Each year we allow almost 1 million immigrants into the US mostly family of people already here I suggest that for the next two years we stop that Instead let anyone who can buy a home passes basic screening and can demonstrate the ability to pay for health insurance immigrate to the US and get a temporary green card If they behave then the card becomes permanent after four years

We almost immediately put a floor on the housing market absorb the excess homes and within a year the housing-construction market along with the jobs that are now gone will be back That is stimulus that costs the taxpayers nothing

Mish Mauldin is optimistic here How many immigrants have enough income to pay for a home healthcare insurance etc Enough to matter Besides where will that income come from Where are the jobs This may not cost much but it may not gain much either

Moreover should the goal be to put a floor on home prices Calculated Risk offers his opinion in A Policy Supporting House Prices I side 100 with calculated risk However if someone does have enough money to support themselves pay for healthcare etc by all means let them buy homes as many as they want

In the meantime $8000 tax credits for homes 3 FHA down payments and borrowed down payments are all making matters worse These ill-advised housing programs are making matters worse

Mauldin While I cant believe I am writing this taxes are going to have to rise if for no other reason than this Congress is hell bent on raising taxes But rescinding the entire Bush tax cuts plus adding a 10 surcharge as Congress wants to do in one fell swoop is an absolute guarantee of a recession So do it gradually over (say) 4 years and then reinstitute the cuts when the deficit is under 2 of GDP Remember the negative tax-multiplier effect of raising taxes And the definitive work on that was done by Obamas chairman of the Council of Economic Advisors Christina Romer

We should consider a VAT tax and a major cutreorganization of the corporate tax We need to encourage corporations to hire more and you do that by taxing less Lets make our corporations more competitive not less Our taxes are much higher than those of any of our major competitors And please forget that insane carbon tax If you want to cut emissions do it straightforwardly by raising taxes significantly on gasoline Dont back-door it on consumers (And I am NOT advocating such a policy)

Mish I am in favor of elimination of corporate income taxes Right now we have a peculiar situation whereby corporate profits held outside the US are tax deferred but inside the US they are not Talk about a perverse policy of encouraging capital flight Why not turn that around and require corporate taxes on money held outside the US and no taxes on profits held in the US

Mauldin is correct that the carbon tax is ridiculous As for the VAT my big fear would be that in practice it would become a monster unleashed In theory however some combination of a flat income tax with no deductions and a small VAT to encourage saving vs spending is reasonable The VAT should not apply to medical expenses and food (explicitly food purchased at grocery stores) The flat income tax should truly be flat with no deductions even for housing

If we cut enough military and other spending (easily doable as noted below) we need not raise taxes at all and in fact can probably lower them

Mauldin An aggressive tax benefit for new venture-capital money that is invested in new technologies will result in new industries The only way we can grow our way out of this

mess is to create whole new industries like we did in the late 70s and 80s (Think computers and the internet and telecom)

Mish Our tax code is perverted enough We do not need tax incentives if we eliminate corporate taxes as suggested We should get rid of all tax incentives They are part of the problem Government has no business picking winners and losers It needs to get out of the way

Mauldin Unemployment is likely to continue to rise and last longer than ever before We have to take care of the basic needs of those who want work but cant find it Unemployment insurance should be extended to those who are still looking for work past the time for benefits to expire and some program of local volunteer service should be instituted as the price for getting continued benefits after the primary benefits time period runs out Not only will this help the community but it will get the person out into the world where he is more likely to meet someone who can give him a job But the costs of this program should be revenue-neutral Something else has to be cut

Mish Can we deal with 15 million volunteers Somehow I doubt it

Mauldin We have to re-think our military costs (I cant believe I am writing this) We now spend almost 50 of the worlds total military budget Maybe we need to understand that we cant fight two wars and support hundreds of bases around the world If we kill the goose our ability to fight even one medium-sized war will be diminished The harsh reality is that everything has to be re-evaluated As an example do we really need to be in Korea If so why cant Korea pay for much of the cost They are now a rich nation There are budgetary fiscal limits to being the policeman for the world

Mish Bingo We can easily slash our military budget by 70 and still be the most powerful nation in the world Moreover it is time to declare the war in Iraq and Afghanistan over pack our bags and leave Gradually over the next 5-8 years we should bring home all our troops from literally every county they are stationed This chart shows the absurdity of our spending

Chart courtesy of Global Issues - World Military Spending

By the way that chart does not include the latest increase in the US military budget Please consider US lawmakers pass 680-billion-dollar defense budget bill

The US House of Representatives passed a 680-billion-dollar defense authorization bill on Thursday that includes funds to train Afghan security forces and more mine-resistant troop carriers

Lawmakers defied President Barack Obamas veto threat and approved 560 million dollars to continue work on an alternative engine for the F-35 fighter jet built by General Electric and British manufacturer Rolls-Royce

The compromise legislation would also raise military pay by 34 percent -- half a percentage point higher than Pentagon recommendations -- and assign 67 billion dollars for mine-resistant armored vehicles known as MRAPs which is 12 billion dollars more than the administration had proposed

Nearly $700 billion dollars of defense spending The amount needed for actual defense is 20 of that at most and more likely 5 Balancing the budget is easy if you start here

Mauldin Glass-Steagall or some form of it should be brought back Banks which are subject to taxpayer bailouts should not be in the investment banking and derivatives-creating business Derivatives especially credit default swaps should be on an exchange and too big to fail must go Banks have enough risk just making loans Leverage should be dialed down and hedge funds selling what amounts to naked call options in any form derivative or otherwise should be regulated

Mish What we need to do is get rid of the Fed FDIC and fractional reserve lending Regulation has failed every step of the way Regulation created Fannie Mae Freddie Mac and the Fed Regulation by the SEC anointed Moodys Fitch and the SampP as debt rating companies We do not need more regulation we need less regulation a sound currency and no Fed Regulation is clearly the problem yet the cries for still more regulation come from nearly every corner save the Austrian economists

Mauldin Let me see is there any group I have not offended yet But something like I am suggesting is going to have to be done at some point There is no way we can continue forever on the current path At some point we will hit the wall The fight between the bug and the windshield always ends in favor of the windshield The bond market is going to have to see a credible effort to get back to a reasonable deficit or we risk a very difficult economic environment The longer we wait the worse it will be

Mish Is there any group I have not offended yet Yes You failed to offend those on public pension plans Not to fear I did that myself in Five Major Pension Problems - One Simple Solution Unsolvable Problems bull Expecting 8 returns in a 4 world When 30 year treasury bonds are yielding 4 the

dividend yield of the SampP 500 is 2 and the SampP 500 PE is 140 (26 if you use operating earnings) 8 returns are from Fantasyland

bull Pension benefits start too early People are living longer bull Private employees do not receive these kind of benefits Public employees should not

either especially at taxpayer expense bull Indeed continuing to chase high-yield in a low-yield world is a guarantee those plans will

blow up again down the road

bull Pension plans are so underfunded that it is virtually impossible to catch up no matter what risks the plan managers undertake When asked how long it would now take for its investments to put the fund back on track Ohio officials simply said Infinity

There is a solution of course its just not one that anyone wants to hear The correct plan is to kill all unnecessary services fire all the government workers and privatize everything remaining

That is a choice the Washington Post failed to mention Moreover its the only thing that reasonably works

Mauldin It is not going to be easy to persuade a majority of Americans that we need to do something now More realistically we are going to probably have to begin to experience a crisis of some type to get politicians motivated to do something

We are not going back to normal although it is likely we will see some form of Statistical Recovery But we cannot get complacent Somewhere out there is the real potential for another crisis which will dwarf the last one You will not want to be long much of anything when it happens except hedged or liquid investments Though admittedly this could go on for a long time

Mish Obama Geithner Congress Bernanke the Fed central bankers in general and foreign governments are all in the process of rearranging the chairs on the deck of the Titanic right now Their solution is printing money

Dont Mistake Printing For A Sustainable Recovery The plan to date is called Competitive Currency Debasement with the US China and Japan as the key players

As noted in Gold And The Watched Pot Theory Every country wants to grow by ramping up exports in a world of decreasing consumer demand To achieve that end every country wants its currency to be weaker against every other currency Of course that is logically impossible Besides the US consumer is tapped out European consumers are tapped out as well And tapped out or not the Japanese consumer just does not want to buy Neither the G-20 nor G-7 did anything to address the massive global imbalances Something critical is going to blow sky high when and what remains to be seen

Mike Mish Shedlock

httpglobaleconomicanalysisblogspotcom

httpglobaleconomicanalysisblogspotcom200910thoughts-on-ecomomy-problems-andhtml

12102009

Klaus wants opt-out from Charter of Fundamental Rights

President Vaclav Klaus has now clarified what two sentences he wants added to the Lisbon Treaty He wants the Czech Republic to receive a protocol as the UK and Poland did to ensure that the Charter of Fundamental Rights does not apply to domestic law According to EU observer Klaus said ldquothe opt-out is needed he added in order to make sure that German families expelled from the Czech Republic 65 years ago cannot use EU courts to claim backtheir propertyrdquo

( There are zillions of question marks over this request whether he is legally entitled to make it whether the Czech government will support it whether an amended treaty would require re-ratification and if so whether this could open the process to further legal challenges whether his interpretation of the legal ramifications of the German property rights issues is correct how Angela Merkel will deal with the reasons he gave politically and how the others will be dealing with such an overt blackmail attempt )

Are Germanyrsquos Green abandoning the Left An interesting political development has occurred in Germanyrsquos Saar region The regional Green Party yesterday voted to enter into a coalition with the Christian Democrats and the Free Democrats rather than opt for a coalition with the SPD and the Left Party This is interesting for two reasons It stabilises the new governmentrsquos majority in the Bundesrat and perhaps more importantly it might set a precedent for an opening of the Green Party in other states and at Federal level Frankfurter Allgemeine reports that it was Oskar Lafontainersquos political return to the Saar his home region which propelled the Greens to move to the right

US house prices have further to fall Calculated Risk our favorite source for the discussion on US real estate one of the main drivers of this crisis believes that US house prices have further to fall House prices might have bottom in same long end bubble regions where foreclosures were particularly strong at the end of 2008 and which have since seen small price increases but this is likely to reverse again as banks are preparing for another round of foreclosures So these prices are likely to decline again even if the US administration renews the first-time buyer tax credit

How the states are lining up on the EU council presidency Jean Quatremer reports that after Benelux countries now Austria has declared its opposition

to Tony Blair as president of the European Council The Austrian chancellor Werner Faymann is quoted as saying that Europe needed a president who is for Obama not for Bush Quatremer speculates whether the joint Austrian and Luxembourg opposition to Blair might have the tacit support of Angela Merkel and notes that Paris looks increasingly isolated (Under the Lisbon Treaty the successful candidate requires a qualified majority The opposition of the four countries does not constitute a blocking minority but Blair will need an awful lot of support from the others given that he faces such firm opposition from several countries)

Banks to pay euro500m in euro33bn budget gap The Belgian government is in its final negotiations to find euro33bn for the 2010 budget Le Soirreports that the banks are to contribute to this effort with a minimum of euro500m Banks should pay for the crisis they caused said the socialist Vice prime minister Laurette Onkelinx Similiar comments came from the liberal development minister Charles Michel

Good crisis for Europe In an interview with Der Standard Kenneth Rogoff said that it was a good crisis for the euro area the euro did not collapse and there was no government default Policy reactions prevented the worst The euro area is likely to recover more slowly than the US as their stimulus was smaller but not less forceful The single currency helped especially vulnerable countries like Austria In the end it was a short term drama Rogoff calls for an independent global financial supervision and says the G20 is too big of a forum to take real decisions and to live up to the expectations

When will the Fed start to exit Invoking a version of the Taylor rule Paul Krugman calculates that the appropriate interest rate for the US would currently be minus 56 Now he is making some questionable assumptions for example that the Nairu is still at 48 and that the potential growth rate is 25 When should the Fed tighten On his assumptions when unemployment hits 7 or should core inflation fall to 1 the Fed should not tighten until the unemployment rate falls to 625

On exchange rates The fear of the dollar fall

Jean Marc Vittori writes in Les Echosrsquo blog about Europersquos fear of a continued dollar fall It is first of all a threat to the European recovery based on exports And an increase in volatility as a downslide of the dollar could send the exchange rates to unknown heights as 180$ or even 2$ per euro We enter unchartered territory here There has never been in history a time of balanced monetary powers

Altman

Roger Altman also writing in the FT is less sanguine about a fall in the dollar He wants the US adminstration and Congress to create a debt reduction process that involves lower spending and higher taxes for otherwise public debt would get out of control and the foreign exchange markets would start to devalue the dollar He said this is excactly what happened during the Carter administration when the market believes that the US was indifferent to the level of the dollar and when inflation was allowed to rise

Muumlnchau

In his FT column Wolfgang Muumlnchau says a weak dollar is a good idea both for the US and the rest of the world He says a lower dollar would help the US get the rid kind of economic recovery ndash and export led covery rather than a consumption-based recovery And for the rest of the world a lower dollar would mean a more balanced position What favours a weaker dollar in the medium-term is an increase in US inflation A lower dollar would also be welcomed by the ECB in the face of the severe poilcy constraints it faces given the weakness of the banking sector The ECB might not be able to raise rates sufficiently fast and a stronger euro would constitute a welcome tightening

httpwwweurointelligencecomarticle581+M5d4d89731b20html

COLUMNISTS

Making the case for a weaker dollar By Wolfgang Muumlnchau Published October 11 2009 1706 Imagine a world with a small current account deficit in the US a somewhat larger deficit in the eurozone and a not too excessive Asian surplus In such a world economic commentators would no longer bang on about global imbalances and would have to find a different subject

In the long run such a world would require significant reform of the international monetary system In the short term a fall in the dollarrsquos exchange rate would help get us there And I note with some satisfaction that it is happening

A lower dollar is desirable because it would help America achieve the right kind of recovery The US economy is severely constrained by household and financial sector deleveraging and possibly by a permanent fall in potential growth In the absence of another housing bubble and consumer boom an export-led recovery is the best growth strategy the US could employ

I do not buy the strong-dollar pledges by Tim Geithner Treasury secretary and Larry Summers director of the National Economic Council They have to say that It is the official policy line The bond markets would go crazy otherwise But a strong dollar is the last thing the US economy needs right now

There are two further factors that support a weaker dollar The first is of course the double-digit public sector deficit which has already unnerved investors and which is not going to come down with any haste The second is monetary policy

There is little risk of inflation in the short run but a very significant inflation risk beyond the crisis I doubt the Federal Reserve will set itself a target of a 6 per cent inflation rate as some US economists are now proposing But I suspect the Fed will not lean too heavily against the wind should inflationary pressures emerge

The latest published comments from Bill Dudley president of the New York Fed confirmed my suspicion about the Fedrsquos asymmetric bias when he said he was more concerned about deflation than inflation and that interest rates would stay low for a long time This is 2003 and 2004 all over again except this time the chances are higher that it will end in inflation rather than in a housing and credit bubble

What about the rest of the world Would the Europeans for example not fight tooth and nail

against a weakening dollar Not necessarily Just look at the situation from the perspective of the European Central Bank Ideally it would like to exit early by withdrawing liquidity support and raising interest rates but it is severely constrained because many European banks are still dependent on low interest rates and ECB life support operations for their survival

Fiscal policy is also extremely loose and likely to remain so From the ECBrsquos point of view a strong euro is probably the most effective insurance against resurgent inflation at a time when interest rate policy remains constrained

A strong euro would nicely take care of Germanyrsquos persistent current account surplus The surplus countries will never adopt policies to get rid of their surpluses The exchange rate will have to do the job for them Last weekrsquos announcement of a surprise fall in German exports during August tells me that the hopes of another export-led recovery as in 2006 are unrealistic I expect a much reduced current account surplus for Germany in the next few years and for the eurozone a sizeable probably not excessive current account deficit

The sensible goal of a more balanced world economy is entirely consistent with a weaker dollar and a stronger euro I am not trying to make a short-term prediction Foreign exchange markets are crazy and I have been wrong too many times But what persuades me that the dollar has further to devalue is the observation that for once politics and economics are pushing in the same direction

Exchange rates cannot solve the problem of global imbalances They did not in the past Reform of the global monetary system is necessary for sustained balance I agree with the views of Fred Bergsten director of the Peterson Institute for International Economics in Washington that the world will ultimately have to move to maximum targets for current account imbalances

In a forthcoming article in Foreign Policy he proposes a current account deficit ceiling of 3 per cent of gross domestic product for the US He also argues that a reduced international role for the dollar would be in the best strategic interests of the US as continued imbalances would end up producing intolerable instability no matter whether they are financed or not

Several proposals are floating around for how this could be achieved for example the creation of special reserve baskets or the use of the International Monetary Fundrsquos special drawing rights I expect we will see neither but are moving towards a dual system in which the dollar and the euro act as the worldrsquos de facto reserve currencies

The rise in the eurorsquos international role which is already formidable is not a reflection of the strength of the eurozone economy but of the liquidity of its bond markets and the need of foreign investors to diversify

It is important not to confuse the international role of a currency and its exchange rate at any particular time But in the case of the dollar there is a link A fall in the dollarrsquos exchange rate would be a very useful contribution to global balance A reform of the global monetary system is needed to ensure that imbalances do not return We are not there yet not even close But some of the parameters are slowly falling into place

httpwwwftcomcmss07a6b599c-b679-11de-8a28-00144feab49ahtml

httpwwweurointelligencecomarticle581+M5e34fe8f2270html

Economists View Oct 12 2009 Will Stimulating Nominal Aggregate Demand Solve our Problems There has been a bit of a pushback both implicit and explicit to calls to implement policies to accelerate hiring For example Jim Hamilton recently noted an old theory of his where some types of unemployment cannot be overcome through standard stimulative policies (this was in response to a question about whether Arnold Klings recalculation model can explain asymmetric adjustment but I am focusing on the technological and physical constraints present in both Hamilton and Klings model not whether the asymmetries can be explained)

Will stimulating nominal aggregate demand solve our problems by Jim Hamilton [I]n 1988 I presented a model in which unemployment arises from a drop in the demand for the output of a particular sector The unemployed workers could consider trying to retrain or relocate or might instead decide to wait it out in hopes that the demand for their specialized skills will come back [T]he key kind of unemployment that I think this sort of model describes-- waiting for an opening in the particular area in which youve specialized-- is caused by drops in demand

Insofar as the frictions in that model are of a physical technological nature increasing the money supply would simply cause inflation and not do anything to get people back to work I should emphasize that I built that monetary neutrality into the model not because I think it is the best description of reality but in order to illustrate more clearly that there is a type of cyclical unemployment that stimulating nominal aggregate nominal demand is useless for preventing

My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder The key empirical test in my opinion is at what point inflationary pressures begin to pick up If Krugman is correct we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation If the sectoral imbalances story is correct it would be possible for inflation to accelerate even while unemployment remains quite high

Thus according to this view some part of the sectoral imblances in of a physical technological nature and standard demand side policy does not help Policy may be able to induce people to stop sticking around for jobs that will never materialize and move on but those typically arent the kinds of policies typically associated with stimulating employment eg tax credits to encourage hiring

A new colleague of mine Nick Sly emails that it is not always optimal from a long-run economic growth point of view to provide incentives for firms to hire workers how those incentives are structured is crucial

There is a paper on my website called Intraindustry Trade and the Composition of Labor Market Turnover (It is a heavily revised version with more of a trade focus) The highlights of the paper are

1 Because of constant turnover in labor markets hiring costs are persistent for all firms

2 Turnover and Hiring occur both because firms update their workforce (job creation costs) and to replace workers who leave for reasons unrelated to the firm (worker hiring costs) These phenomena are distinct 3 (KEY) I show (theoretically and confirm empirically) that each source of turnover has the opposite effect on the incentives of firms to adopt state-of-the-art production techniques As a consequence industries with different compositions of labor mobility have varying degrees of engagement of foreign markets

The relevance

The act of hiring workers could be the result of demand side (firms creating new jobs) or supply side (workers need to be replaced) incentives We may not want to jump to quickly to put people back to work if it means employing less productive production methods The short term gains can be lost as poor matching of workers and adoption of weak production methods alter the recovery path

I believe that the timing of the hiring tax credits and the sort of hiring it promotes (ie creating new vacancies versus filling previously existing positions) will determine the long-run consequences of such a policy

Let me try to express the main point a different way When firms hire workers as they are constantly doing they have a choice between using old or new technology and the way in which hiring incentives are structured can affect this choice As we think about putting programs to induce firms to hire workers in place we need to be sure that we are not giving firms the incentive to use old rather than new technology so that economic growth is maximized and we also need to be sure that we dont distort the choice firms make toward labor intensive rather than growth maximizing change

Our economy faces lots of adjustments as it recovers from the recession far more than in some past recessions when we could return pretty much to what we were doing before the shock hit But not this time We have adjustments in the auto finance and housing sectors just for openers and there are other underlying adjustments that are in progress as well (eg in the manufacturing sector) As these adjustments occur its important that we dont impede the necessary change or induce firms to make suboptimal choices as we attempt to induce them to hire more workers

But if we give firms the time they need to make the changes that are needed there will be excess labor during these adjustment periods both from sectoral reallocations and from technological change The question is what we are going to do to help people who lose their jobs or are otherwise negatively affected by these transitions

One choice is to induce firms to house the excess labor during this time period through tax or other inducements but the danger is that in doing so you distort the choices of firms away from the optimal trajectory Another choice is for the public sector to absorb much of the burden by providing jobs to the unemployed and providing the aid needed to carry workers through the adjustment period (and we can also provide incentives for workers to relocate in areas where they have a better chance of finding employment)

Even better though is to structure the incentives so that the technological change is encouraged by the hiring of new workers For example Nick Sly suggests that the hiring credit be only for new jobs offered by firms somehow defined because this gives firms an incentive to both hire new workers and to employ the latest technology Thus the best choice of all is to provide incentives to employ workers that have as a byproduct and inducement to maximize technology and economic growth and then use public employment (eg infrastructure) or aid to help those who remain unemployed

No matter what we do however there will be those who cannot find employment during these time periods and we need to do a better job than we do in helping those who through no fault of their own are caught up in the tumultuous change that sometimes occurs in modern economies

Posted by Mark Thoma on Monday October 12 2009 at 0259 PM

httpeconomistsviewtypepadcomeconomistsview200910will-stimulating-nominal-aggregate-demand-solve-our-problemshtml

Paul Romer 12 October 2009|

Skyhooks versus Cranes The Nobel Prize for Elinor Ostrom Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles In fact they almost always invoke a skyhook some unexplained result without which the entire structure collapses Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up building a crane that can support the full range of economic behavior When I started studying economics in graduate school the standard operating procedure was to introduce both technology and rules as skyhooks If we assumed a particular set of rules and technologies as though they descended from the sky then we economists could describe what people would do Sometimes we compared different sets of rules that a ldquosocial plannerrdquo might impose but we never said anything about how actual rules were adopted Crucially we never even bothered to check that people would actually follow the rules we imposed

A typical conclusion was that rules that assign property rights and rules that let people trade lead to good outcomes Whatrsquos the skyhook That people will follow the rules Why would they respect the property rights of someone else We had no idea We might have had in mind something like this police officers will arrest people who donrsquot follow the rules But this is just another skyhook Who are these police officers Why do they follow rules This is not an idle concern Elinor showed that there are lots of important cases where people follow rules about ownership without police officers One of the central challenges in understanding failures of economic development is that in many places police officers donrsquot follow the rules they are meant to enforce Elinorrsquos fieldwork followed up by her experimental work pointed us in exactly the right direction To understand BOTH why we donrsquot need police officers in some cases AND why police officers donrsquot follow the rules in other cases we have to expand models of human preferences to include a contingent taste for punishing others In reaching this conclusion she arrived at a point similar to that reached by Avner Greif (whom the Nobel committee correctly cites) They more than anyone else in the profession spelled out the program that economists should follow To make the rules that people follow emerge as an equilibrium outcome instead of a skyhook economists must extend our models of preferences and gather field and experimental evidence on the nature of these preferences

Economists who have become addicted to skyhooks who think that they are doing deep theory but are really just assuming their conclusions find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry If we fail to explore rules in greater depth economists will have little to say about the most pressing issues facing humans today ndash how to improve the quality of bad rules that cause needless waste harm and suffering Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics Bravo to the political scientist who showed that she was a better economist than the economic imperialists who canrsquot tell the difference between assuming and understanding

httpchartercitiesorgblog72skyhooks-versus-cranes-the-nobel-prize-for-elinor-ostrom

A second Great Depression is still possible October 11 2009 437pm

By Thomas Palley

Over the past year the global economy has experienced a massive contraction the deepest since the Great Depression of the 1930s But this spring economists started talking of ldquogreen shootsrdquo of recovery and that optimistic assessment quickly spread to Wall Street More recently on the anniversary of the Lehman Brothers crash Ben Bernanke Federal Reserve chairman officially blessed this consensus by declaring the recession is ldquovery likely overrdquo

The future is fundamentally uncertain which always makes prediction a rash enterprise That said there is a good chance the new consensus is wrong Instead there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the ldquocash-for-clunkersrdquo programme

That rosy scenario thinking has returned to Wall Street should be no surprise Wall Street profits from rising asset prices on which it charges a management fee from deal-making on which it earns advisory fees and from encouraging retail investors to buy stock which boosts transaction fees Such earnings are far larger when stock markets are rising which explains Wall Streetrsquos genetic propensity to pump the economy

As for mainstream economists their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the models According to mainstream theory it is assumed that full employment is a gravity point to which the economy is pulled back

Empirical econometric models are equally questionable They too predict gradual recovery but that is driven by patterns of reversion to trends found in past data The problem as investment professionals say is that ldquopast performance is no guide to future performancerdquo The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years That paradigm was based on consumption fuelled by indebtedness and asset price inflation and it is done

There is a simple logic to why the economy will experience a second dip That logic rests on the economics of deleveraging which inevitably produces a two-step correction The first step has been worked through and it triggered a financial crisis that caused the worst recession since the Great Depression The second step has only just begun

Deleveraging can be understood through a metaphor in which a car symbolises the economy Borrowing is like stepping on the gas and accelerates economic activity When borrowing stops the foot comes off the pedal and the car slows down However the carrsquos trunk is now weighed down by accumulated debt so economic activity slows below its initial level

With deleveraging households increase saving and re-pay debt This is the second step and it is like stepping on the brake which causes the economy to slow further in a motion akin to a double dip Rapid deleveraging as is happening now is the equivalent of hitting the brakes

hard The only positive is it reduces debt which is like removing weight from the trunk That helps stabilise activity at a new lower level but it does not speed up the car as economists claim

Unfortunately the car metaphor only partially captures current conditions as it assumes the braking process is smooth Yet there has already been a financial crisis and the real economy is now infected by a multiplier process causing lower spending massive job loss and business failures That plus deleveraging creates the possibility of a downward spiral which would constitute a depression

Such a spiral is captured by the metaphor of the Titanic which was thought to be unsinkable owing to its sequentially structured bulkheads However those bulkheads had no ceilings and when the Titanic hit an iceberg that gashed its side the front bulkheads filled with water and pulled down the bow Water then rippled into the aft bulkheads causing the ship to sink

The US economy has hit a debt iceberg The resulting gash threatens to flood the economyrsquos stabilising mechanisms which the economist Hyman Minsky termed ldquothwarting institutionsrdquo

Unemployment insurance is not up to the scale of the problem and is expiring for many workers That promises to further reduce spending and aggravate the foreclosure problem

States are bound by balanced budget requirements and they are cutting spending and jobs Consequently the public sector is joining the private sector in contraction

The destruction of household wealth means many households have near-zero or even negative net worth That increases pressure to save and blocks access to borrowing that might jump-start a recovery Moreover both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit

Lastly the US continues to bleed through the triple haemorrhage of the trade deficit that drains spending via imports off-shoring of jobs and off-shoring of new investment This haemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign brands Consequently even enormous fiscal stimulus will be of diminished effect

The financial crisis created an adverse feedback loop in financial markets Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy That is a loop which is far harder to reverse which is why a second Great Depression remains a real possibility

Thomas Palley is former chief economist of the US-China Economic and Security Review Commission and is currently Schwartz Economic Growth Fellow at the New America Foundation

October 11 2009 437pm

httpblogsftcomeconomistsforum200910a-second-great-depression-is-still-possible

Rosenberg Sees Low-To-No-Growth as Kantor Vows Vigorous Economy By Michael McKee Last Updated October 11 2009 1901 EDT

Oct 12 (Bloomberg) -- David Rosenberg says buy bonds or seek dividends because this isnrsquot a normal recovery Larry Kantor says it is and there is still room for stocks to rise

Rosenberg the chief economist and strategist for Toronto- based Gluskin Sheff + Associates Inc was among the first to warn of impending recession in 2006

ldquoRight now the economy is being held together by very strong tape and glue provided by the Fed Treasury and Congressrdquo he says Rosenberg sees gross domestic product stalling in the current quarter growing at an annual rate of no more than 1 percent in the first three months of 2010 and no more than 2 percent for all of 2010

Kantor head of research at Barclays Capital Inc in New York was one of the first economists to call the end of the recession in March Barclays sees GDP expanding at a 4 percent rate now 5 percent in the first quarter and 36 percent for 2010

Thatrsquos higher than the median forecasts of economists surveyed by Bloomberg News released Oct 9 for growth of 24 percent in the fourth quarter 25 percent in January-March and 24 percent in all of 2010

ldquoWe think the recovery will be sustainedrdquo Kantor says ldquoPeople talk about double-dips the economyrsquos on life support and once itrsquos withdrawn everything is going to fall apart again Business cycles typically donrsquot work that wayrdquo

The two analysts are on different sides of a key question facing investors and the Federal Reserve Can the US economy stand on its own without government help

Cash-for-Clunkers US sales of new cars and light-duty trucks dropped 409 percent in September from the previous month after the governmentrsquos Cash-for-Clunkers program ended Aug 24 according to data from Woodcliff Lake New Jersey-based Autodata Corp Tax credits for first-time home buyers -- which helped boost sales of existing single-family houses 135 percent since January -- will expire Nov 30 The Fed will end a $300 billion program to buy Treasury bonds at the end of this month and wind down purchases of $15 trillion in agency and mortgage-backed securities in the first quarter

Take that stimulus away and therersquos little to boost growth out of the recession that began in December 2007 Rosenberg says The recovery will resemble the so-called jobless recovery of 2002 when the economy grew just 18 percent

Kantor a former Fed economist says the parallel is closer to 1992 when the economy expanded 34 percent coming out of recession or 1983 when it grew 45 percent

Bond Rally Therersquos no clear consensus on Wall Street Stocks have revived after dropping for almost 18 months with the Standard amp Poorrsquos 500 Index up 58 percent to 107149 from its March 9 low of 67653 The yield on the benchmark 10-year Treasury note has fallen 57 basis points to 338 percent since reaching an 18- month high of 395 percent on June 10

Rosenberg 48 who was chief economist at Merrill Lynch amp Co in New York from 2002 until May of this year argues the fixed-income case

The current economy wonrsquot resemble previous V-shaped recoveries he says ldquoItrsquos going to look like this whole string of lowercase Ws for the next five yearsrdquo with periods of growth followed by periods of contraction That means ldquoyou want to maintain strategies aimed at income generationrdquo Rosenberg says ldquoTherersquos a shortage of income on the household balance sheetrdquo with home prices still sliding and Americans paying down debt instead of spending US homeowners owed $139 trillion in the third quarter of 2008 compared with an average of $85 trillion in the 57 years the Fed has kept records

Falling Wages

Wages for US workers fell for eight months in a row dropping 56 percent from October 2008 to June 2009 according to Commerce Department data House prices were down 492 percent through July from a peak in June 2006 the SampPCase-Shiller US Home Price index showed

ldquoThe US is going to be grappling with a consumer whorsquos going to be downsizingrdquo for quite some time says Rosenberg a former economist at the Bank of Canada The savings rate -- 3 percent in August according to the Commerce Department -- will rise to 10 to 12 percent during the next few years he predicts

Even if there is a recovery under way banks arenrsquot joining in he notes Lending has fallen for five consecutive months with the Fed reporting $675 trillion of loans and leases outstanding to businesses and households as of Sept 23 compared with a record $732 trillion in October 2008

The Fedrsquos second-quarter survey of senior loan officers released Aug 17 showed US banks tightened standards on all types of loans and said they expect to maintain strict criteria until at least the second half of 2010

lsquoAll-Clear Signalrsquo

ldquoThe stock market is telling you therersquos an all-clear signalrdquo Rosenberg says ldquoWhy are banks not buying into that If they were they would be expanding their balance sheetsrdquo

Their reluctance stems from the economyrsquos dependence on federal largesse he says Car and truck sales dropped to a 92 million seasonally adjusted annual selling rate in September after soaring to 14 million in August when the government was offering incentives for trade-ins The Fed has purchased $905 billion in mortgage bonds so far this year more than the $623 billion in single-family mortgages originated according to the Washington-based Mortgage Bankers Association

ldquoThere is an unprecedented amount of government stimulus holding the real economy and the financial system togetherrdquo Rosenberg says ldquoMy sense is barring another round of fiscal stimulus wersquoll have some sort of growth relapse in the fourth quarterrdquo

Market Strategist

Kantor formerly chief market strategist at Normandy Asset Management in New York and chief European economist at New York- based JPMorgan Chase amp Co says that isnrsquot what the numbers show

Companies pare inventories as demand falls during a recession That subtracts from growth as does a drop in housing and business investment Those trends are ending Kantor says adding to growth and profits

Factory inventories contracted 08 percent in August less than the 09 percent drop in July and 11 percent fall in June according to Census Bureau figures

ldquoIn our forecast we have inventories adding on average 2 percentage points to GDP for the next three quartersrdquo he says ldquoThatrsquos a lotrdquo

Home Sales Sales of existing single-family homes reached a 51 million annual rate in August compared with Januaryrsquos low of 449 million according to the National Association of Realtors Nondefense capital-goods orders excluding aircraft a proxy for business investment were at an 182 percent annual rate in June-August compared with a 306 percent drop for February- April

ldquoYou look at whatrsquos happened during recessions and you look at whatrsquos happening now these items are really swinging higher from where they were beforerdquo Kantor says ldquoYou can get 4 percent GDP even if real consumer spending only rises 1 or 2 percentrdquo

While Septemberrsquos greater-than-expected loss of 263000 jobs was a ldquodisappointmentrdquo that might crimp spending if it repeats the trend is for an improvement in employment he says The loss was only about a third of the January peak of 741000 and Kantor forecasts that means job growth in 2010

On top of that financial markets are healing and the economy hasnrsquot felt the full effect of the Fedrsquos cut in the nationrsquos benchmark interest rate to almost zero from 525 percent he says Most of the money from President Barack Obamarsquos $787 billion stimulus package wonrsquot be spent until 2010

lsquoPositive Feedback Looprsquo

That means ldquowersquore in a positive feedback loop the last six monthsrdquo Kantor says ldquoTypically it takes something bad to happen to break that cycle You need some exogenous shock to get everything going down againrdquo

While Barclays sees stocks ldquoroughly at fair valuerdquo a better-than-expected recovery will bring stronger growth and higher profits which means ldquomarkets still have some upside hererdquo Kantor said in a Sept 29 radio interview on ldquoBloomberg Surveillancerdquo

Kantor and Rosenberg do agree on one thing Investors and economists shouldnrsquot confuse percentage changes with levels ldquoEven the Barclays forecast which is above consensus by a considerable amount would be about the weakest recovery ever relative to the amount of growth we lost and jobs we lostrdquo Kantor says httpwwwbloombergcomappsnewspid=20601103ampsid=axnCbWZ33aEU

Opinion

October 12 2009

OP-ED COLUMNIST

Misguided Monetary Mentalities By PAUL KRUGMAN

One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas And some of the bad ideas that helped cause the Depression have alas proved all too durable in modified form they continue to influence economic debate today

What ideas am I talking about The economic historian Peter Temin has argued that a key cause of the Depression was what he calls the ldquogold-standard mentalityrdquo By this he means not just belief in the sacred importance of maintaining the gold value of onersquos currency but a set of associated attitudes obsessive fear of inflation even in the face of deflation opposition to easy credit even when the economy desperately needs it on the grounds that it would be somehow corrupting assertions that even if the government can create jobs it shouldnrsquot because this would only be an ldquoartificialrdquo recovery

In the early 1930s this mentality led governments to raise interest rates and slash spending despite mass unemployment in an attempt to defend their gold reserves And even when countries went off gold the prevailing mentality made them reluctant to cut rates and create jobs

But wersquore past all that now Or are we

America isnrsquot about to go back on the gold standard But a modern version of the gold standard mentality is nonetheless exerting a growing influence on our economic discourse And this new version of a bad old idea could undermine our chances for full recovery

Consider first the current uproar over the declining international value of the dollar

The truth is that the falling dollar is good news For one thing itrsquos mainly the result of rising confidence the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America and itrsquos falling again now that the fear is subsiding And a lower dollar is good for US exporters helping us make the transition away from huge trade deficits to a more sustainable international position

But if you get your opinions from say The Wall Street Journalrsquos editorial page yoursquore told that the falling dollar is a terrible thing a sign that the world is losing faith in America (and especially of course in President Obama) Something you believe must be done to stop the dollarrsquos slide And in practice the dollarrsquos decline has become a stick with which conservative members of Congress beat the Federal Reserve pressuring the Fed to scale back its efforts to support the economy

We can only hope that the Fed stands up to this pressure But there are worrying signs of a misguided monetary mentality within the Federal Reserve system itself

In recent weeks there have been a number of statements from Fed officials mainly but not only presidents of regional Federal Reserve banks calling for an early return to tighter money including higher interest rates Now people in the Federal Reserve system are normally extremely circumspect when making statements about future monetary policy so as not to step on the efforts of the Fedrsquos Open Market Committee which actually sets those rates to shape expectations So itrsquos extraordinary to see all these officials suddenly breaking the implicit rules in effect lecturing the Open Market Committee about what it should do

Whatrsquos even more extraordinary however is the idea that raising rates would make sense any time soon After all the unemployment rate is a horrifying 98 percent and still rising while inflation is running well below the Fedrsquos long-term target This suggests that the Fed should be in no hurry to tighten mdash in fact standard policy rules of thumb suggest that interest rates should be left on hold for the next two years or more or until the unemployment rate has fallen to around 7 percent

Yet some Fed officials want to pull the trigger on rates much sooner To avoid a ldquoGreat Inflationrdquo says Charles Plosser of the Philadelphia Fed ldquowe will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levelsrdquo Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if ldquothe unemployment rate hasnrsquot started falling yetrdquo

I donrsquot know what analysis lies behind these itchy trigger fingers But it probably isnrsquot about analysis anyway mdash itrsquos about mentality the sense that central banks are supposed to act tough not provide easy credit

And itrsquos crucial that we donrsquot let this mentality guide policy We do seem to have avoided a second Great Depression But giving in to a modern version of our grandfathersrsquo prejudices would be a very good way to ensure the next worst thing a prolonged era of sluggish growth and very high unemployment

Seoul feud Interesting lineup Wednesday morning at the World Knowledge Forum

Ben ldquoChaunceyrdquo Bernanke Stan Collender notes that people read deep meaning into statements by Ben Bernanke that are in fact almost content-free and compares the estimable chairman to Chauncey Gardiner in Being There

But the resemblance is much much closer than Stan seems to realize

April 10 2009 359 PM ET

Fed Chairman Chauncey Gardiner You Must Believe In Spring The combination of signs that the economy may have begun to recover and the arrival of spring has led to the overuse of a metaphor that could use a little pruning Wersquore talking about those ldquogreen shootsrdquo (sometimes ldquoshoots of greenrdquo) that keep showing up in policymakersrsquo speeches economistsrsquo notes and unfortunately reportersrsquo stories

The following exchange should serve as a reminder to everyone involved that itrsquos all been said before and so much better

BENJAMIN RAND hellipThere is no longer any margin for inflation it has gone as far as it can Yoursquove reached your limits on taxation dependence on foreign energy is at a point of crisis and from where I see it Mr President the so-called Free Enterprise System could be at the breaking point

PRESIDENT You donrsquot think I should take that chance huh

RAND Absolutely not

PRESIDENT Do you agree with Ben Mr Gardiner Or do you think we can stimulate growth through temporary incentives

CHANCE As long as the roots are not severed all is well and all will be well in the garden

PRESIDENT hellipIn the garden

CHANCE That is correct In a garden growth has its season There is spring and summer but there is also fall and winter And then spring and summer againhellip

PRESIDENT hellipSpring and summerhellip Yes I seehellipFall and winter Yes indeed

RAND I think what my most insightful friend is building up to Mr President is that we welcome the inevitable seasons of nature yet we are upset by the seasons of our economy

CHANCE Yes That is correct There will be growth in the spring

The source of course is Being There the 1979 movie (based on the Jerzy Kosinski book of the same name) where Peter Sellers plays a feeble-minded gardener named Chance Sometimes life imitates art ndash and we wish it didnrsquot

httpblogswsjcomeconomics20090410fed-chairman-cauncey-gardiner-you-must-believe-in-spring

An institutional economics prize Congratulations to Elinor Ostrom and Oliver Williamson What a day for them

The way to think about this prize is that itrsquos an award for institutional economics or maybe more specifically New Institutional Economics

Neoclassical economics basically assumes that the units of economic decision-making are a given and focuses on how they interact in markets Itrsquos not much good at explaining the creation of these units mdash at explaining in particular why some activities are carried out by large corporations while others arenrsquot Thatrsquos obviously an interesting question and in many cases an important one For example in my own home field of international trade the basic models donrsquot assign any particular role to multinational corporations how do we get them into the story and what difference do they make

There was an old tradition of economics that focused on the origins and nature of economic institutions This tradition was very influential before World War II

But it proved not at all helpful during the Great Depression My caricature version is that when the Depression hit institutional economics asked for advice about what to do replied that well itrsquos all very complicated and has deep historical roots and hellip Meanwhile Keynesian economists using very simple mathematical models basically said ldquoPush this button mdash we need more Grdquo

And this had a somewhat perverse effect The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular) and in the end the equations crowded out institutional economics even as Keynes fell into disfavor

But the questions didnrsquot go away And institutional economics has been making a quiet comeback for the past several decades

Oliver Williamsonrsquos work underlies a tremendous amount of modern economic thinking I know it because of the attempts to model multinational corporations almost all of which rely to some degree on his ideas I wasnrsquot familiar with Ostromrsquos work but even a quick scan shows why she shared the prize if the goal is to understand the creation of economic institutions itrsquos crucial to be aware that there is more variety in institutions a wider range of strategies that work than simply the binary divide between individuals and firms

The prize is also of course a happy reminder that most of the profession is not caught up in the macro wars

Add Donrsquot tell Senator Coburn but the NSF Political Science program has supported a lot of Elinor Ostromrsquos research

When should the Fed raise rates (even more wonkish) Some back-of-the-envelope scribblings

Let me start with a rounded version of the Rudebusch version of the Taylor rule

Fed funds target = 2 + 15 x inflation - 2 x excess unemployment

where inflation is measured by the change in the core PCE deflator over the past four quarters (currently 16) and excess unemployment is the different between the CBO estimate of the NAIRU (currently 48) and the actual unemployment rate (currently 98)

Right now this rule says that the Fed funds rate should be -56 So wersquore hard up against the zero bound

Suppose that core inflation stays at 16 (although in fact itrsquos almost sure to go lower) Then we can back out the unemployment rate at which the target would cross zero suggesting that tightening should begin itrsquos an excess unemployment rate of 22 implying an actual rate of 7 percent Thatrsquos a long way from here If inflation drops to say 1 percent the Fed shouldnrsquot tighten until unemployment drops to 625

What would it take to get to that range of unemployment Okunrsquos Law suggests that it takes 2 points of GDP growth in excess of potential to reduce unemployment by 1 point Potential growth is probably around 25 So say we have 5 percent growth for the next 2 years mdash which would be hailed as a stunning boom Even so unemployment should fall only 25 points to

73 In other words even with a really strong recovery (which almost nobody expects) the Fed should keep rates on hold for at least two years

Bear in mind that Irsquom using entirely standard conventional analysis here Itrsquos the people saying that the Fed should start tightening in the near future who are inventing some kind of new unspecified framework to justify their views

Peter Temin corrects my history An email regarding my post on goldbugism

Germany went off gold before the UK in 1931 in July and August that is before late September when the UK devalued The story however is a bit complex because Germany went off gold by eliminating the free flow of gold They kept the value of the mark steady all through the Nazi period (see Adam Toozersquos good book) but they controlled the flow of foreign exchange The reason that this does not show up on your graph is that the German chancellor in 1931 (Bruening) followed the dictates of the gold standard in 1931 keeping interest rates high and deflating the economy This is what I called the gold-standard mentality in Lessons from the Great Depression (1989)

Nothing like getting it from the man who really knows Now Irsquove got Marshall McLuhan right here behind the sign hellip

October 10 2009 1152 am

The madness of the monetary hawks (wonkish) Irsquove been writing about the worrying signs of hawkishness at the Fed mdash quite a few Fed presidents seem to be itching to tighten monetary policy even though the economy remains deeply depressed But just how far are we from the point at which monetary policy should start tightening

Well letrsquos use the Taylor rule estimated by Glenn Rudebusch at the San Francisco Fed (Yes I know that John Taylor himself likes a different rule mdash but like Brad DeLong I find Taylorrsquos argument more or less incomprehensible) The Rudebusch version of the rule is

Target fed funds rate = 207 + 128 x inflation - 195 x excess unemployment

where inflation is measured by the four-quarter change in the core PCE deflator and excess unemployment is the difference between the actual unemployment rate and the CBO estimate of the NAIRU which is currently 48 percent This rule describes past Fed policy quite well

Applied to current data the rule says that the Fed funds rate should be mdash drum roll mdash minus 56 percent You canrsquot do that of course so wersquore very hard up against the zero lower bound And if you think the Taylor rule was a good guide to policy in the past the Fed shouldnrsquot start to raise rates until the rule starts you know yielding a positive number

So when will that happen Will it happen any time soon

Not if you believe conventional forecasts Predictions from the Survey of Professional Forecasters say that unemployment late next year will still be only marginally lower than it is

now and core inflation will have fallen the implied target rate for fourth quarter 2010 is around minus 55 barely changed from the current situation

By late 2011 the forecast calls for modest reductions in unemployment mdash but I still get a target Fed funds rate well below zero

So wherersquos the case for monetary tightening For some reason many Fed officials seem to view it as inherently unsound to stay at a zero rate for several years running mdash but Irsquom at a loss to understand what model or even conceptual framework leads them to that conclusion Reading the quotes collected by Tim Duy one gets the impression of officials who have decided that they want to tighten and are making up new conceptual frameworks on the fly to justify their desires

All this is very familiar the same thing happened in Japan back in 2000 It seems to be really hard for central bankers to accept the need for prolonged easy money even if all the data say thatrsquos what is needed

Beware the dollar hawks Although I poked fun at the WSJ in my last post the buzz about the dollar mdash the growing clamor to do something about its decline mdash is coming from a number of people And it has me worried because itrsquos part of the groundswell of demands that we begin an exit strategy from loose monetary policy now now now even though nothing in the actual economic situation warrants such action

Ed Andrewsrsquos article on dissension at the Fed was deeply disturbing when you bear in mind that Fed presidents historically never air such disputes in the open The fact that theyrsquore doing so now is an indication that many of our central bankers are so eager to start tightening that theyrsquore throwing the normal rules aside

This is really bad Bear in mind that with core inflation below the Fedrsquos target of 2 percent (which I think is too low but thatrsquos another story) and huge excess capacity in the economy the Taylor rule says that interest rates should be negative and since they canrsquot they should stay zero for a long time

But the hawks are on the march thumping their chests because well just because

And the declining dollar will Irsquom sure be used as yet another justification for bizarrely premature Fed hawkishness A repeat of 1937 here we come

Modified goldbugism at the WSJ So I was peacefully drinking my coffee this morning and was accosted by someone waving the latest WSJ editorial on the dollar in my face demanding my reaction Um this is not cool Also with apologies to Brad DeLong when reading WSJ editorials you need to bear two things in mind

1 The WSJ editorial page is wrong about everything 2 If you think the WSJ editorial page is right about something see rule 1

After all herersquos what you would have believed if you listened to that page over the years Clintonrsquos tax hike will destroy the economy you really should check out those people suggesting that Clinton was a drug smuggler Dow 36000 the Bush tax cuts will bring surging prosperity Saddam is backing Al Qaeda and has WMD there isnrsquot any housing bubble US households have a high savings rate if you measure it right Irsquom sure I missed another couple of dozen high points

Todayrsquos editorial was in the grand tradition A few months ago falling stock prices showed Obamarsquos failure mdash never mind we meant the falling dollar And just to provide extra spice the editorial cited David Malpass as the wise expert on all this

But more specifically you need to see the Journalrsquos fear of a weak dollar in terms of its long-term gold-bug position The Journal has always maintained that changes in exchange rates play no useful role that stable exchange rates mdash preferably enforced by some barbarous relic like the gold standard mdash are the essence of sound policy

I explained why this is all wrong a long time ago But itrsquos especially important to understand the wrongness of this view right now If therersquos one overwhelming lesson from the Great Depression it is that putting a higher priority on stabilizing your currency than on domestic recovery is utterly disastrous Barry Eichengreen pointed out years ago that major economies went off gold in the following order Japan Britain Germany US France [screwed it up in the first draft the correlation between going off gold and recovery is in fact perfect] And herersquos what happened to their industrial output

All that glitters went off gold

The WSJ may not realize it but it wants us to be France in the 1930s Letrsquos not

J Bradford DeLongs Grasping Reality with All Eight Tentacles 25 July 2009

Glenn Rudebusch vs John Taylor on the Right Value for the Interest Rate Glenn Rudebusch is making sense John Taylor is not

Calculated Risk sends us to Jan Hatzius

Calculated Risk The Taylor Rule Debate [S]everal highly respected voices have weighed in on this debate with arguments that imply a smaller need for Fed balance sheet expansion than suggested by our calculations The first challenge came from Professor John Taylormdashfather of the eponymous rulemdashat an Atlanta Fed conference (see ldquoSystemic Risk and the Role of Governmentrdquo May 12 2009) Taylor argued that his rule implies a fed funds rate of +05 He specifically attacked a reported Fed staff estimate of an ldquooptimalrdquo Taylor rate of -5 as having both the sign and the decimal point wrongrdquo

Whatrsquos going on The answer can be seen in a note published by Glenn Rudebusch of the San Francisco Fed [in May] it justifies the Fedrsquos -5 figure and reads like a direct reaction to Taylorrsquos criticism even though it does not reference his speech (see ldquoThe Fedrsquos Monetary Policy Response to the Current Crisisrdquo FRBSF Economic Letter 2009-17 May 22 2009) The difference is fully explained by two choices First Taylor uses his ldquooriginalrdquo rule with an assumed (but not econometrically estimated) coefficient of 05 on both the output gap and the inflation gap while the Fed uses an estimated rule with a bigger coefficient on the output gap Second Taylor uses current values for both gaps while the Fedrsquos estimate of a -5 rate refers to a projection for the end of 2009 assuming a further rise in the output gap and a decline in core inflation

httpdelongtypepadcomsdj200907glenn-rudebusch-vs-john-taylor-on-the-right-value-for-the-interest-ratehtml

FRBSF Economic Letter

2009-17 May 22 2009

The Feds Monetary Policy Response to the Current Crisis Glenn D Rudebusch

Senior Vice President and Associate Director of Research bull Interest rate actions and enhanced communications bull Feds balance sheet actions bull Summary bull References

The global financial market turmoil that started in August 2007 has been followed by a severe economic downturn Indeed the US economic recession is on track to be the longest and deepest of the postwar period This Economic Letter describes the Federal Reserves monetary policy response to this financial and economic crisis A key element of this response has been a reduction of the federal funds ratemdashthe Feds usual monetary policy instrumentmdashessentially to its lower bound of zero Still with the economy continuing to slump additional stimulus appears warranted and the Federal Open Market Committee (FOMC 2009) has promised to employ all available tools to promote economic recovery and to preserve price stability Therefore the Fed has eased financial conditions by employing a variety of unconventional

monetary policy tools that alter the size and composition of its balance sheet It has also communicated more explicitly its expectations for the course of monetary policy and the economy in order to help guide households and businesses during these uncertain times

Interest rate actions and enhanced communications As shown in Figure 1 over the past two decades the Fed has set the federal funds rate a key gauge of the stance of monetary policy in a fairly consistent fashion relative to various economic indicators such as unemployment and inflation (Figure 1 shows the quarterly average funds rate and unemployment rate and the four-quarter inflation rate for prices of core personal consumption expenditures See the related data file) During the current and two previous recessionsmdasharound 1991 2001 and 2008mdashthe Fed responded to large jumps in unemployment with aggressive cuts in the funds rate In addition episodes of lower inflation also were generally associated with a lower funds rate

A rough guideline for setting the federal funds rate that captures the Feds behavior over the past two decades is provided by a simple equation that relates the funds rate to the inflation andunemployment rates This equation is obtained by a statistical regression of the funds rate on the inflation rate and on the gap between the unemployment rate and the Congressional Budget Offices estimate of the natural or normal rate of unemployment The resulting empirical policy rule of thumbmdasha so-called Taylor rulemdashrecommends lowering the funds rate by 13 percentage points if core inflation falls by one percentage point and by almost two percentage points if the unemployment rate rises by one percentage point As shown in Figure 2 this simple rule of thumb captures the broad contours of policy over the past two decades Differences between the recommended target rate from the estimated policy rule (the thin line) and the Feds actual target funds rate (the thick line) are fairly small Exceptions occurred during the mid-1990s and mid-2000s when the funds rate was set somewhat higher or lower than the policy rule recommended During 2007 and 2008 by this rudimentary empirical metric the Feds lowering of the funds rate by over five percentage points was roughly in line with its historical behavior

The estimated Taylor rule can also be used in conjunction with economic forecasts to provide a rough benchmark for calibrating the appropriate stance of monetary policy going forward The dashed lines in Figure 1 show the latest forecasts for unemployment and inflation provided by FOMC participantsmdashthe Federal Reserve presidents and governors (The dashed lines are quarterly linear interpolations of the median forecasts in FOMC 2009) Like many private forecasters FOMC participants foresee persistently high unemployment and low inflation as the most likely outcome over the next few years The recommended future policy setting of the funds rate based on the estimated historical policy rule and these economic forecasts is given as the dashed line in Figure 2 This dashed line shows that in order to deliver a degree of future monetary stimulus that is consistent with its past behavior the FOMC would have to reduce the funds rate to -5 by the end of this yearmdashwell below its lower bound of zero Alternative specifications of empirical Taylor rules described in Rudebusch (2006) also generally recommend a negative funds rate

The shaded area in Figure 2 is the difference between the current zero-constrained level of the funds rate and the level recommended by the policy rule It represents a monetary policy funds rate shortfall that is the desired amount of monetary policy stimulus from a lower funds ratethat is unavailable because nominal interest rates cant go below zero This policy shortfall is sizable Indeed the Fed has been able to ease the funds rate only about half as much as the policy rule recommends It is also persistent According to the historical policy rule and FOMC economic forecasts the funds rate should be near its zero lower bound not just for the next six or nine months but for several years The policy shortfall persists even though the economy is expected to start to grow later this year Given the severe depth of the current recession it will

require several years of strong economic growth before most of the slack in the economy is eliminated and the recommended funds rate turns positive

Economic theory suggests that it is useful for the Fed to communicate the likely duration of any policy shortfall Monetary policy is in large part a process of shaping private-sector expectations about the future path of short-term interest rates which affect long-term interest rates and other asset prices in order to achieve various macroeconomic objectives (McGough Rudebusch and Williams 2005) In the current situation the FOMC (2009) has noted that it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period Other central banks have been even more explicit about the duration of low rates For example the central bank of Sweden has recently stated explicitly that it expects to keep its policy rate at a low level until the beginning of 2011 Rudebusch and Williams (2008) describe how such revelation of central bank interest rate projections may help a central bank achieve its policy goals

Last February FOMC participants also started to publish their long-run projections for output growth unemployment and inflationmdashin keeping with a trend toward greater transparency (Rudebusch 2008) Such long-run projections can help illuminate the FOMCs policy strategies and goals and these revealed that most FOMC participants would like to see an annual inflation rate of about 2 in the longer run Such an expression of a positive inflation objective may help prevent inflationary expectations from falling too low and forestall any excessive decline in inflation

Feds balance sheet actions The size of the monetary policy funds rate shortfall has also caused the Fed to expand its use of unconventional policy tools that change the size and composition of its balance sheet The Fed started to employ these balance sheet tools in late 2007 as unusual strains and dislocations in financial markets clogged the flow of credit Typically changes in the funds rate affect other interest rates and asset prices quite quickly However the economic stimulus from the Feds cuts in the funds rate was blunted by credit market dysfunction and illiquidity and higher risk spreads Accordingly the Fed started to lend directly to a broader range of counterparties and against a broader set of collateral in order to enhance liquidity in critical financial markets improve the flow of credit to the economy and restore the full effect of the monetary policy interest rate easing

Toward the end of 2008 the recession deepened with the prospect of a substantial monetary policy funds rate shortfall In response the Fed expanded its balance sheet policies in order to lower the cost and improve the availability of credit to households and businesses One key element of this expansion involves buying long-term securities in the open market The idea is that even if the funds rate and other short-term interest rates fall to the zero lower bound there may be considerable scope to lower long-term interest rates The FOMC has approved the purchase of longer-term Treasury securities and the debt and mortgage-backed securities issued by government-sponsored enterprises These initiatives have helped reduce the cost of long-term borrowing for households and businesses especially by lowering mortgage rates for home purchases and refinancing

In terms of overall size the Feds balance sheet has more than doubled to just over $2 trillion However this increase has likely only partially offset the funds rate shortfall and the FOMC has committed to further balance sheet expansion by the end of this year Looking ahead even further over the next few years the size and persistence of the monetary policy shortfall suggest that the Feds balance sheet will only slowly return to its pre-crisis level This gradual transition should be fairly straightforward as most new assets acquired by the Fed are either marketable

securities or loans with maturities of 90 days or less Still any economic forecast is subject to considerable uncertainty Some outside forecasters have warned of a deeper and more protracted recession in which case the monetary policy funds rate shortfall and the balance sheet expansion would be even larger and more persistent In contrast other analysts have argued that the Feds growing balance sheet will lead to a resurgence of inflation (despite Japans recent historical experience to the contrary of an increasing central bank balance sheet and falling inflation) With much higher inflation the policy shortfall would be reduced and the Fed would need to shrink the size of its balance sheet and raise the funds rate earlier than suggested by Figure 2 Still the Feds short-term loans can be unwound quickly and its portfolio of securities can be readily sold into the open market so there should be ample time to normalize monetary policy when needed Finally some economists have cautioned about reading too much into policy shortfall projections (and negative funds rate recommendations) that rely on uncertain estimates of the degree of economic slack Such considerations are always important for real-time policymaking (Rudebusch 2001 2006) but the degree of uncertainty regarding estimates of the natural or normal rate of unemployment over the past two decades pales in size relative to the depth of the ongoing recession

Summary The Federal Reserve is employing all available tools to promote economic recovery and price stability by lowering borrowing costs and boosting credit availability In particular after lowering the federal funds rate to essentially zero the Fed has turned to unconventional policy tools to help accomplish its goals Eventually as the economy recovers it will be appropriate for the Fed to reduce the size of its balance sheet toward pre-crisis levels and to raise the funds rate and the Fed has both the means and the determination to do so

References [URLs accessed May 2009]

Federal Open Market Committee 2009 Minutes of the Federal Open Market CommitteeApril 28-29

McGough Bruce Glenn D Rudebusch and John C Williams 2005 Using a Long-Term Interest Rate as the Monetary Policy Instrument Journal of Monetary Economics 52 pp 855-879

Rudebusch Glenn D 2001 Is the Fed Too Timid Monetary Policy in an Uncertain World Review of Economics and Statistics 83(2) (May) pp 203-217

Rudebusch Glenn D 2006 Monetary Policy Inertia Fact or Fiction International Journal of Central Banking 2(4) December pp 85-135

Rudebusch Glenn D 2008 Publishing FOMC Economic Forecasts FRBSF Economic Letter 2008-01 (January 18)

Rudebusch Glenn D and John C Williams 2008 Revealing the Secrets of the Temple The Value of Publishing Central Bank Interest Rate Projections In Monetary Policy and Asset Prices ed John Campbell Chicago University of Chicago Press pp 247-284

httpwwwfrbsforgpublicationseconomicsletter2009el2009-17html

Derivative Dribble Charles Davigrave Asset Bubbles and Economic Activity October 11 2009 at 105 pm

Also published on the Atlantic Monthlyrsquos Business Channel

The internet economic debate du jour is summed up nicely by economist Paul Krugman as follows here

why [doesnt] a housing boom mdash which requires shifting resources into housing mdash hellip produce the same kind of unemployment as a housing bust that shifts resources out of housing

And here

why hellip isnrsquot [ there ] mass unemployment when bubbles are growing as well as shrinking mdash why didnrsquot we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business

His point is on balance both booms and busts involve the reallocation of resources yet only busts seem to produce mass unemployment While Krugman and Arnold Kling are wrapped up in a debate about how the question influences our understanding of government stimulus Irsquod like to simply offer up an answer

For any fixed amount of capital available for investment an increase in the amount of capital allocated to one area implies that the amount of capital allocated to some other area must have decreased In short capital allocation with a fixed amount of capital is a zero sum game The same is true of societyrsquos capital If the pie doesnrsquot grow but stays fixed and society shifts more of its capital into one area of economic activity it necessarily implies that we have taken capital away from some other activity

Asset bubbles however are according to my theory of the world able to temporarily increase the amount of capital society has available for investment because of the effect that asset bubbles have on the marketrsquos expectation of incurring losses on investments tied to the bubble-asset Some of the capital that society has available for investment is held back by the market in cash or cash-like investments such as short term Treasuries in order to cover potential losses that might arise from investments Some entities such as banks and insurers are subject to regulations that dictate how much capital must be set aside to cover these potential losses Other entities are free to estimate the amount of capital that needs to be held back in order to cover these losses So if we took a snap shot of all of societyrsquos capital available for investment at a given point in time some portion of that would be withheld as a loss reserve in cash or cash like investments That means some portion of the capital available for investment isnrsquot really being allocated to ldquoinvestmentsrdquo but being withheld to cover potential losses on bona fide investments

Asset bubbles create value out of thin air Price trends develop that deviate sharply from historical norms and eventually a new albeit temporary norm is established As a result asset bubbles make the bubble-asset look like a much better investment than it will eventually turn out to be in the long term As such asset bubbles create capital available for investment out of thin air because they cause the market to underestimate the amount of capital that has

to be set aside to cover potential losses arising from investments tied to the bubble-asset This means that the effective pie the portion that actually gets invested in non-cash assets can be temporarily expanded removing the zero sum accounting restriction simply because less of societyrsquos resources are used to cover losses

When homes across the US all started increasing in value more or less in tandem home owners felt and in fact were richer than they were the day before They could access the newly found equity in their home to purchase other goods or double-down and purchase yet another home As this process escalates and apparent price trends develop banks feel more confident in making loans tied to housing and begin to compete for those loans Mortgage lending which was traditionally considered a ldquosaferdquo lending business got even more ldquosaferdquo since the value of the collateral would surely continue to increase over the life of the loan So even if the borrower lost his job or his legs he could always sell the house to cover the loan there will surely be plenty of equity between the face value of the loan and the price of the home upon sale And so as lendersrsquo expectations of an upward trend in price becomes more entrenched lenders become willing to lend greater amounts of money tied to real estate and can do so without subtracting from other lending activities by simply reserving less capital for losses on their real estate lending

So what happens when bubbles pop Once losses exceed expectations the market is forced to reallocate its capital to cover those losses or face insolvency If the price of the bubble-asset drops far enough this could force fire sales outside the bubble-asset market as firms scramble to cover their liabilities Once this happens economic actors have less access to capital than they did before the bubble got started leading to a sharp contraction in economic activity and concomitant upticks in unemployment

One thing that still puzzles me is why bubbles pop when the bubble-asset isnrsquot usually expected to produce a cash flow For example capital invested in internet companies (eg internet stocks) should at some point generate the return that everyone was expecting When internet startups donrsquot generate positive cash flows those returns fail to materialize en mass and thatrsquos a clear signal to the market that its expectations were off And so the bubble pops But what sort of return were people expecting from housing What was the signal that caused the bubble to pop Clearly defaults on bonds backed by real estate were the signal to the capital markets but what caused the price plateau in the underlying housing market that got the defaults rolling Was it that credit was extended to the maximum extent possible and so no further appreciation was possible Or was the cause psychological a sort of vertigo price point at which both lenders and borrowers lose their nerve

Arnold Kling has proposed an alternate explanation involving the timing of bubbles arguing that bubbles are gradual while busts are sudden and thatrsquos the cause While shocks to expectations are generally bad for markets I think that this explanation is intellectually unsatisfying because (i) it doesnrsquot explain why busts are sudden and (ii) it tacitly assumes that sudden changes create unemployment which is probably true but is merely descriptive and not explanatory

httpderivativedribblewordpresscom20091011asset-bubbles-and-economic-activity

Economists View Oct 10 2009

Global Imbalances and the Financial Crisis Products of Common Causes Maurice Obstfeld and Kenneth Rogoff attempt to sort out the role that global imbalances played in the financial crisis This is the introduction to their paper

Global Imbalances and the Financial Crisis Products of Common Causes by Maurice Obstfeld and Kenneth Rogoff October 2009 (Conference Draft) In my view hellip it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s --Ben S Bernanke1

Introduction Until the outbreak of financial crisis in August 2007 the mid-2000s was a period of strong economic performance throughout the world Economic growth was generally robust inflation generally low international trade and especially financial flows expanded and the emerging and developing world experienced widespread progress and a notable absence of crises

This apparently favorable equilibrium was underpinned however by three trends that appeared increasingly unsustainable as time went by First real estate values were rising at a high rate in many countries including the worldrsquos largest economy the United States Second a number of countries were simultaneously running high and rising current account deficits including the worldrsquos largest economy the United States Third leverage had built up to extraordinary levels in many sectors across the globe notably among consumers in the United States and Europe and financial entities in many countries Indeed we ourselves began pointing to the potential risks of the ldquoglobal imbalancesrdquo in a series of papers beginning in 20012 As we will argue the global imbalances did not cause the leverage and housing bubbles but they were a critically important codeterminant

In addition to being the worldrsquos largest economy the United States had the worldrsquos highest rate of private homeownership and the worldrsquos deepest most dynamic financial markets And those markets having been progressively deregulated since the 1970s were confronted by a particularly fragmented and ineffective system of government prudential oversight This mix of ingredients as we now know was deadly

Controversy remains about the precise connection between global imbalances and the global financial meltdown Some commentators argue that external imbalances had little or nothing to do with the crisis which instead was the result of financial regulatory failures and policy errors mainly on the part of the US Others put forward various mechanisms through which global imbalances are claimed to have played a prime role in causing the financial collapse Former US Treasury Secretary Henry Paulson argued for example that the high savings of China oil exporters and other surplus countries depressed global real interest rates leading investors to scramble for yield and underprice risk3

We too believe that the global imbalances and the financial crisis are intimately connected but we take a more nuanced stance on the nature of the connections In our view both of these phenomena have their origins primarily in economic policies

followed in a number of countries in the 2000s (including the United States) and in distortions that influenced the transmission of these policies through financial markets The United Statesrsquo ability to finance macroeconomic imbalances through easy foreign borrowing allowed it to postpone tough policy choices (something that was of course true in many other deficit countries as well) Not only was the US able to borrow in dollars at nominal interest rates kept low by a loose monetary policy Also until around the autumn of 2008 exchange-rate and other asset-price movements kept US net foreign liabilities growing at a rate far below the cumulative US current account deficit On the lending side Chinarsquos ability to sterilize the immense reserve purchases it placed in US markets allowed it to maintain an undervalued currency and postpone rebalancing its own economy Had seemingly easy postponement options not been available the subsequent crisis might well have been mitigated if not contained4

We certainly do not agree with the many commentators and scholars who argued that the global imbalances were an essentially benign phenomenon a natural and inevitable corollary of backward financial development in emerging markets These commentators including Cooper (2007) and Dooley Folkerts-Landau and Garber (2005) as well as Caballero Farhi and Gourinchas (2008) and Mendoza Quadrini and Rios-Rull (2007) advanced frameworks in which the global imbalances were essentially a ldquowin-winrdquo phenomenon with developing countriesrsquo residents (including governments) enjoying safety and liquidity for their savings while rich countries (especially the dollarissuing United States) benefited from easier borrowing terms The fundamental flaw in these analyses of course was the assumption that advanced-country capital markets especially those of the United States were fundamentally perfect and so able to take on ever-increasing leverage risklessly In our 2001 paper we ourselves underscored this point identifying the rapid evolution of financial markets as posing new untested hazards that might be triggered by a rapid change in the underlying equilibrium5

Bini Smaghirsquos (2008) assessment thus seems exactly right to us

[E]xternal imbalances are often a reflection and even a prediction of internal imbalances [E]conomic policies hellip should not ignore external imbalances and just assume that they will sort themselves out6

In this paper we describe our view of how the global imbalances of the 2000s both reflected and magnified the ultimate causal factors behind the recent financial crisis At the end we identify policy lessons learned In effect the global imbalances posed stress tests for weaknesses in the United States British and other advanced-country financial and political systems ndash tests that those countries did not pass

See also Why are we in a recession The Financial Crisis is the Symptom not the Disease [open link] The paper argues that the huge increase in the labor supply available to developed countries is the primary force behind our current troubles Here are parts of the introduction and conclusion

The impact of globalization is a sharp increase in the developed worldrsquos labor supply Labor in developing countries ndash countries with vast pool of grossly underemployed people ndash can now compete with labor in the developed world without having to relocate in ways not possible earlier [W]e argue that this huge and rapid increase in developed worldrsquos labor supply triggered by geo-political events and technological innovations is the major underlying force that is affecting world events today2 The inability of existing financial and legal institutions in the US and abroad to cope with the events set off by this force is the reason for the current great recession The

inability of emerging economies to absorb savings through domestic investment and consumption caused by inadequate national financial markets and difficulties in enforcing financial contracts through the legal system the currency controls motivated by immediate national objectives the inability of the US economy to adjust to the perverse incentives caused by huge moneys inflow leading to a break down of checks and balances at various financial institutions set the stage for the great recession The financial crisis was the first symptom

10 The Way Forward The common wisdom is that cheap money and lax supervision of financial institutions led to this financial crisis and solving that crisis will take us out of the recession In our view the financial crisis is just the symptom The fundamental cause of the crisis is the huge labor supply shock the world has experienced not the glut in liquidity in money supply

Recovery will only occur when structural imbalances in global capital flows are corrected in part through higher saving in developed nations and in part through greater capital flows into developing nations

It may be tempting for those in power to close the door to outsourcing of manufacturing and other activities While that may provide some immediate relief it will accentuate other problems

When millions of World War II soldiers returned home that increased the US labor force of about 60 million workers by almost 25 within a very short period of time At that time the Department of labor which certainly had no cause to accentuate the negative predicted that 12 to 15 million workers would be unemployed28 That did not happen We managed that problem well leading to prosperity instead of doom thanks in no small part to the GI Bill and other governmental fiscal intervention We can manage this one as well For that to happen the first step is to recognize the problem for what it is A solution may well require actions similar in scope to the GI Bill and require a national debate

While there is plenty of blame to go around for mistakes the macro forces triggered by the labor shock is like a tidal wave that needed to wash ashore no matter what History might have taken an entirely different path with better risk management controls in place in the US but then again financial innovation might just have found a different way of getting highly leveraged deals done off-shore or through creative accounting29 The root cause of the excess liquidity in the global financial system must be addressed otherwise we are just squeezing the proverbial balloon only to see it bulge out somewhere else However this does not negate the need for the development of improved risk management in the broadest sense in order to ensure financial stability and prosperity going forward

China and India will continue to need to bring tens of millions of rural laborers into the productive workforce in the coming decades and the world economy must find a sustainable way of dealing with this influx Clearly Chinarsquos export led growth strategy of the past cannot continue indefinitely and domestic consumption must be allowed to grow as a share of GDP At the same time Western economies must adjust to a new equilibrium in which commodities are scarcer and households will face stiffer competition for jobs

Global Imbalances and the Financial Crisis Products of Common Causes Oct 10 2009 httpeconomistsviewtypepadcomeconomistsview200910global-imbalances-and-the-financial-crisis-products-of-common-causeshtml

Energy amp Environment

October 10 2009

New Way to Tap Gas May Expand Global Supplies By CLIFFORD KRAUSS

OKLAHOMA CITY mdash A new technique that tapped previously inaccessible supplies of natural gas in the United States is spreading to the rest of the world raising hopes of a huge expansion in global reserves of the cleanest fossil fuel

Italian and Norwegian oil engineers and geologists have arrived in Texas Oklahoma and Pennsylvania to learn how to extract gas from layers of a black rock called shale Companies are leasing huge tracts of land across Europe for exploration And oil executives are gathering rocks and scrutinizing Asian and North African geological maps in search of other fields

The global drilling rush is still in its early stages But energy analysts are already predicting that shale could reduce Europersquos dependence on Russian natural gas They said they believed that gas reserves in many countries could increase over the next two decades comparable with the 40 percent increase in the United States in recent years

ldquoItrsquos a breakout play that is going to identify gigantic resources around the worldrdquo said Amy Myers Jaffe an energy expert at Rice University ldquoThat will change the geopolitics of natural gasrdquo

More extensive use of natural gas could aid in reducing global warming because gas produces fewer emissions of greenhouse gases than either oil or coal China and India which have growing economies that rely heavily on coal for electricity appear to have large potential for production of shale gas Larger gas reserves would encourage developing countries to convert more of their transportation fleets to use natural gas rather than gasoline

Shale is a sedimentary rock rich in organic material that is found in many parts of the world It was of little use as a source of gas until about a decade ago when American companies developed new techniques to fracture the rock and drill horizontally

Because so little drilling has been done in shale fields outside of the United States and Canada gas analysts have made a wide array of estimates for how much shale gas could be tapped globally Even the most conservative estimates are enormous projecting at least a 20 percent increase in the worldrsquos known reserves of natural gas

One recent study by IHS Cambridge Energy Research Associates a consulting group calculated that the recoverable shale gas outside of North America could turn out to be equivalent to 211 yearsrsquo worth of natural gas consumption in the United States at the present level of demand and maybe as much as 690 years The low figure would represent a 50 percent increase in the worldrsquos known gas reserves and the high figure a 160 percent increase

The projections suggest that the new method of producing gas ldquois the biggest energy innovation of the decaderdquo said Daniel Yergin chairman of the Cambridge consulting group ldquoAnd the amazing thing is there was no grand opening ceremony for it It just snuck uprdquo

Over the last five years production of gas from shale has spread across wide swaths of Texas Louisiana and Pennsylvania All the new production has produced a glut of gas in the United States helping to drive down gas prices and utility costs

Now American companies are looking abroad for lucrative shale fields in countries hungry for more energy They are focusing particularly on Europe where gas prices are sometimes twice what they are in the United States and large shale beds are located close to some cities

Exxon Mobil has drilled a few exploratory wells in Germany in recent months Devon Energy is teaming up with Total the French oil company seeking approval to drill in France ConocoPhillips announced recently that it had signed an agreement with a subsidiary of a small British firm to explore a million acres in the Baltic Basin of Poland

Early estimates of recoverable European shale gas resources range up to 400 trillion cubic feet less than half the industryrsquos estimates of what is recoverable in the United States But European energy executives say they are excited about the prospects because the Continentrsquos conventional gas reserves are too small to meet demand

ldquoIt is obvious to everybody that it has huge potentialrdquo said Oivind Reinertsen president of StatoilHydro USA and Mexico a Norwegian company with growing shale interests ldquoYou see a lot of land-grabbing by different companies in Europe potentially spreading to the Far East China and Indiardquo

Donald I Hertzmark a consultant who advises multinational oil companies on gas projects said that in a decade or so the new shale gas resources would improve Europersquos ability to withstand any future reduction in Russian pipeline shipments In 2006 and again last winter Russia cut off natural gas deliveries shipped through Ukraine because of disputes between the two countries causing shortages around Europe

European companies are buying large interests in shale fields in the United States partly to supply the American market but also to learn the specialized mapping and drilling techniques required for shale gas

Several of the European companies have entered into partnerships with smaller American companies ENI of Italy paid $280 million in May for a stake in a 13000-acre gas field north of Fort Worth operated by Quicksilver Resources ENI has a crew of four engineers a geologist and a geophysicist in Texas to learn from Quicksilver personnel

One of the biggest marriages is between Chesapeake Energy of Oklahoma City and its strategic partner StatoilHydro

Seeking cash Chesapeake agreed to sell Statoil a large stake in its Marcellus shale holdings centered in Pennsylvania for $39 billion last November The two companies are looking at shale fields in China India Australia and other countries Seven Statoil employees are working in Oklahoma and Pennsylvania learning to map and fracture shale and calculate shale gas pressures and more are coming

ldquoWe know the shale is out thererdquo said Lars Erik Oino a Statoil geologist working at Chesapeake headquarters here as he rubbed hydrochloric acid on a shale sample to test its mineral makeup ldquoThis could have a huge impact on the European energy situationrdquo

httpwwwnytimescom20091010businessenergy-environment10gashtml_r=1ampthampemc=th

Tort Reform Could Save $54 Billion CBO Says By Lori Montgomery Washington Post Staff Writer Saturday October 10 2009 Congressional budget analysts said Friday that lawmakers could save as much as $54 billion over the next decade by imposing an array of new limits on medical malpractice lawsuits -- 10 times more than previously estimated

New research shows that legal reforms would not only lower malpractice insurance premiums for medical providers but also would spur providers to save money by ordering fewer tests and procedures aimed primarily at defending their decisions in court Douglas W Elmendorf director of the nonpartisan Congressional Budget Office wrote in a letter to Sen Orrin G Hatch (R-Utah)

The CBO report lends credence to Republican arguments that substantive limits on malpractice lawsuits will reduce health-care costs However President Obama opposes one of the chief proposed changes the CBO studied caps on jury awards and analysts give the measures little chance of passage

These numbers show that this problem deserves more than lip service from policy-makers Hatch said in a statement Unfortunately up to now that has been all the President and his Democratic allies in Congress have been willing to provide

The letter comes in response to questions Hatch raised during the Senate Finance Committees recent debate over health-care reform

Elmendorf wrote that newly available research prompted CBO to update its analysis of the effects of tort reform The agencys conclusion A package of reforms that included a $250000 cap on damages for pain and suffering and a $500000 cap on punitive damages would reduce total national health care spending by about 05 percent

The federal government would reap a substantial portion of those savings the CBO said primarily through reduced Medicare costs

httpwwwwashingtonpostcomwp-dyncontentarticle20091009AR2009100904271_pfhtml

Economy

October 10 2009

Crisis Leaves Europe in Slow Lane By NELSON D SCHWARTZ and MATTHEW SALTMARSH

PARIS mdash Two years ago Europe was growing more rapidly than the United States and the Old Continent finally seemed prepared to tackle longstanding economic challenges like rigid labor markets runaway government spending and a rapidly aging population

But as Asia and the United States emerge from the global economic crisis Europe appears likely to be the worldrsquos laggard threatening a return to the dark days of ldquoEurosclerosisrdquo Leaders who once spoke optimistically of fundamental changes aimed at enhancing productivity have turned to the more prosaic tasks of protecting jobs and avoiding painful political choices

ldquoItrsquos worse than being back to Square 1rdquo said Gilles Moeumlc a senior economist in London for Deutsche Bank

And just when it is needed most the political will to address Europersquos bigger economic problems seems absent according to many experts across the region and around the world

When he was elected president of France in 2007 Nicolas Sarkozy spoke of the need for a ldquorupturerdquo including the loosening of a highly regulated labor market to better compete in the global economy

But now ldquoPresident Sarkozy has gone if not 180 degrees then at least 90 degrees in the opposite directionrdquo said Charles Wyplosz director of the International Center for Monetary and Banking Studies in Geneva ldquoThe things he talked about then still need to be done if we want to have growth but the crisis has slowed some of the impetus for changerdquo

In Germany Angela Merkel who was elected last month to a second term as chancellor has also avoided taking on the countryrsquos powerful unions and its regional banks She has embraced the ldquosocial market economyrdquo and has insisted there is no alternative to relying on exports rather than consumers to drive growth

In addition her government has come under withering attack from elsewhere in Europe for providing billions of euros in aid to keep the automaker Opel at the possible expense of workers in Belgium Britain and Spain

With Europe plagued by huge manufacturing overcapacity other automakers are likely to suffer further losses After surging this year on cash-for-clunkers incentives in many countries car sales in Western Europe are expected to drop 5 to 6 percent next year according to Credit Suisse

In Germany where the automobile industry is as much a symbol as beer at Oktoberfest Credit Suisse projects that sales to individual buyers will fall 21 percent in contrast with an expected 18 percent increase in the United States

It is not just the auto sector that is threatened analysts also contend that recent stress tests applied to the Continentrsquos banks were not as effective as those used in the United States

Despite losses on both American subprime debt and local loans in boom-to-bust economies in Spain Ireland and the Baltics ldquothe banking system has not really been restructuredrdquo said

Nicolas Veacuteron a research fellow at Bruegel a policy center in Brussels As a result Europe runs the risk of repeating Japanrsquos ldquolost decaderdquo in the 1990s when huge losses clogged bank balance sheets and inhibited new lending

The slowdown is an abrupt reversal from the period leading up to the crisis Irelandrsquos economy grew 5 percent a year from 1999 to 2007 and became known as the Celtic Tiger while unemployment fell during sustained growth in Europersquos biggest economies Germany and France

Underscoring the new pessimism new statistics released Wednesday showed a 02 percent contraction in the euro zone in the second quarter worse than forecast

ldquoThe Europeans are losing outrdquo said Simon Johnson a professor at the Sloan School of Management at the Massachusetts Institute of Technology ldquoThe Europeans are the biggest losers of the economic crisis even though the home of subprime madness was the USrdquo

To be sure the American economy is not out of the woods yet either with unemployment still on the rise homeowners still burdened by mortgage debts and Washington offering few details about how it will cure its own huge government deficits

But the eurorsquos recent surge against the dollar mostly reflects higher interest rates on the Continent rather than optimism about Europersquos prospects and the stronger currency actually makes European exports less competitive globally

Already the euro zonersquos share of world trade has slipped to 28 percent in 2008 from 31 percent in 2004 according to the World Trade Organization

Economies in Spain Ireland and Greece are all expected to keep shrinking in 2010 while the regionrsquos economic powerhouse Germany ekes out a 03 percent gain according to a bleak new outlook from the International Monetary Fund

And there are signs that Europersquos anemic economic performance will translate into less political power European countries had an outsize voice in the Group of 7 the worldrsquos principal economic forum since the mid-1970s But late last month world leaders said that elite club would soon be eclipsed by the Group of 20 a much more global assembly that includes emerging economic giants like Brazil China and India

Though symbolic the shift from the G-7 to the G-20 crystallized fears that the world economy would actually be steered by what C Fred Bergsten director of the Peterson Institute for International Economics calls the G-2 mdash the United States and China ldquoIdeally it would be the G-3 but Europe doesnrsquot speak with a single voice and they canrsquot coordinate and function the same way the US and China canrdquo Mr Bergsten said

What is more the economic crisis has also paralyzed European efforts to come to grips with longer-term factors inhibiting growth like an aging work force and slowing population growth in many countries

Over the next 25 years Western Europersquos population is expected to increase just 07 percent to 1898 million from its current 1885 million compared with a 20 percent increase in the United States over the same period according to the United Nations At the same time the overall population is getting older across the region from the Russian border to the Atlantic

The best way to compensate for an aging population mdash and therefore fewer workers mdash is higher productivity But that indicator too has been moving in the wrong direction After rising smartly in the 1970s and 1980s productivity in the last decade and a half has inched up 09 percent annually in Europe compared to 17 percent in the United States Mr Moeumlc said

ldquoProductivity growth in the US has not been spectacular lately but itrsquos been much better than Europe and the US doesnrsquot have this massive demographic problemrdquo he said ldquoUntil now we thought of the demographic issue as theoretical but itrsquos starting to biterdquo

Over the long term that is likely to require workers to rethink the generous social benefits long vacations and early retirement plans they once took for granted

Louise Richardson 65 had planned to retire now as chief executive of the Older Womenrsquos Network a charity based in Dublin She will now have to delay that at least two years because of the toll the financial crisis has taken on her retirement savings

ldquoI canrsquot retire I canrsquot afford tordquo said Ms Richardson a widow whose savings have dropped to 80000 euros or $118000 from 240000 euros over the last decade ldquoMy pensionrsquos been completely knocked off its trolley The money was just swallowed uprdquo

httpwwwnytimescom20091010businesseconomy10eurohtmlthampemc=th

Oct 9 2009

Exit Strategies for the Fed Testing Reverse Repurchases Overview The Feds aggressive monetary easing has led to a sharp rise in money supply This has sparked concerns of high inflation should the Fed fail to roll back easing once an economic recovery is underway The Fed may be afraid to tighten monetary policy too early and kill the recovery In the medium-term deflationary pressures will most likely outweigh inflationary pressures But in the longer-term will the Fed be able to exit from balance sheet expansion in time to avoid breeding high inflation particularly asset bubbles

Timing the Rollback o In October 2009 the Fed began conducting reverse repurchases in the tri-party market to

test its effectiveness in tightening the money supply Using the tri-party market will allow the Fed to extend its cash-draining operations beyond the usual primary dealers to the rest of the financial system particularly money market mutual funds

o Deborah Blumberg of Wall Street Journal reports that The Fed is expected to do about $500 billion in total in reverse repos during 2010 The Fed likely has to drain a total of around $1 trillion from the market (October 9 2009)

o MarketWatchs Chief Economist Irwin Kellner noted that measures of the money supply M2 and MZM have already begun to contract since the middle of June The Fed may be more afraid of inflation than it admits publicly (August 25 2009)

o TALF for ABS and legacy CMBS were extended to March 31 2010 and for newly-issued CMBS to June 30 2010 TALF was previously scheduled to expire on December 31 2009

o AMLF CPFF TSLF PDCF and the swap lines with foreign central banks were extended to February 1 2010

o MMIFF will not be extended past October 30 2009

o Effective September 2009 the size of TAF auctions are to be reduced for the third time in 2009 from US$100 billion to US$75 billion due to demand undershooting offered amount

o Effective July 1 2009 TSLF Schedule 1 auctions and TSLF Options Program auctions are suspended due to weak demand

o Effective with maturity of outstanding June TOP options the frequency of Schedule 2 TSLF auctions was reduced to one every four weeks and the offered amount was reduced to US$75 billion

Exit Strategies o 1) Set up a term deposit facility to encourage depository institutions to make deposits at the

Fed for a term longer than overnight These deposits will not count towards reserve requirements though

o 2) Wait for demand to wane Many Fed lending programs extend credit primarily on a short-term basis and thus could be wound down relatively quickly In addition since the lending rates in these programs are typically set above the rates that prevail in normal market conditions these facilities should shrink automatically as demand for them wanes (Bernanke)

o 3) Reverse repo or sale of securities The Fed can conduct reverse repurchase agreements against its long-term securities holdings to drain bank reserves or if necessary it could choose to sell some of its securities Of course for any given level of the federal funds rate an unwinding of lending facilities or a sale of securities would constitute a de facto tightening of policy and so would have to be carefully considered in that light by the FOMC (Bernanke)

o 4) Supplemental financing from Treasury Some reserves can be soaked up by the Treasurys Supplementary Financing Program However the Treasury announced in September 2009 that it would wind down its program to repay maturing debt and avoid hitting the debt ceiling

o 5) Raise interest rate on reserves Raising the interest rate paid on excess reserves will encourage depository institutions to hold excess reserves with the Fed rather than lending them into the federal funds market at a rate below the rate paid on reserves Thus the interest rate paid on reserves will tend to set a floor on the federal funds rate according to Bernanke The problem with this strategy is that it raises the reserve tax on the banking system as well as the amount of money taxpayers pay to banks

o 6) Time commitment The Fed needs to issue a pronouncement to assure the public that there is no need for concern about inflation after the recovery and to reaffirm its historical commitment to stable and low inflation (WoodwardHall)

o 7) Raise reserve ratio The Fed could increase liquidity requirements up to the point where excess reserves are fully sterilized Once this is done the money supply can be expanded as much as needed to reactivate the economy via open market purchases or by allowing financial institutions controlled access to the rediscount window (CottaniCavallo)

o 8) Issue debt The Economist suggested The Fed could issue its own bills as other central banks do It could rely on a wider variety of investors not just primary dealers to manage its balance sheet It would restrict the maturity of such bills to less than 30 days to avoid interfering with Treasurys longer-dated issuance The hitch is that Congress has to authorize it

o 9) Wait for asset markets to correct themselves Risky assets - such as commodities corporate bonds and equities - rallied this year on green shoots but may correct their overshoots when it becomes clear that the economic rebounds around the world were inventory-driven and a recovery in global demand growth has not yet begun

Exit Strategies for the Fed Testing Reverse Repurchases Oct 9 2009 httpwwwrgemonitorcom168Global_Monetary_Policycluster_id=13683

Oct 9 2009

World Economic Forums 2009 Financial Development Report UK Comes First The worldrsquos biggest economies took the largest hit in the World Economic Forumrsquos second annual Financial Development Report Global financial centres continue to top the reportrsquos Index yet financial instability affected them adversely pulling down their scores relative to the 2008 report The United Kingdom aided by the relative strength of its banking and non-banking financial activities claimed the Indexrsquos top spot from the United States which fell to third position following Australiaon account of lower financial stability scores and a weakened banking sector

o On October 8 the World Economic Forum launched its second Financial Development Index a rigorous comprehensive analysis of financial systems and capital markets in 55 countries that analyzes key drivers of financial system development and economic growth in developing and developed countries This research was led by Dr Nouriel Roubini

o World Economic Forum The rankings are based on over 120 variables spanning institutional and business environments financial stability and size and depth of capital markets among other factors The worldrsquos largest economies exhibited the largestdrop in absolute scores as compared with last year The size and global nature of these economies may have led to greater exposure to the current financial turmoil as captured in some of the more recentdata in this yearrsquos report

o Dr Nouriel Roubini The change in scores in 2009 relative to 2008 demonstrates implications of the downturn on our assessment of the long-term development of financial systems The change in scores this year compared to 2008 demonstrates the implications of the downturn on our assessment of the long-term development of financial systems

o Reuters While most of the 55 countries covered by the report saw a significant drop in their financial scores emerging economies fared comparatively better in the ranking Developed nations still lead the ranking but in the past 12 months they have performed so much worse than emerging countries that their lead narrowed significantly

o Following the top three advanced economies were Singapore Hong Kong Canada Switzerland Netherlands Japan and Denmark For emerging Markets Malaysia (ranked 25) was a top performer Within the financial stability pillar Brazil Chile and Malaysia achieved relatively strong scores

o In 2008 the US and the UK came out as joint leaders of the index followed by Germany Japan Canada and FranceVenezuela was at the bottom of the index just below Ukraine and Nigeria httpwwwrgemonitorcom66Capital_Market_Intermediariescluster_id=12897

Last Updated October 9 2009 0000 EDT

lsquoSellrsquo for Research Renegades Becomes Business Off Wall Street By Edward Robinson

Oct 9 (Bloomberg) -- When Credit Suisse Group analyst Ivy Zelman refused to turn bullish on homebuilding stocks during a rally in the fourth quarter of 2006 the blowback was intense

She says investors told her that some housing industry executives were ridiculing her analysis as a ldquojihadrdquo and several of the bankrsquos sales representatives pressed her to upgrade ldquoholdrdquo ratings to ldquobuysrdquo on companies to appease bullish institutional-investor clients One sales manager even sent her an e-mail warning that analysts who stayed bearish too long often lost their jobs

Zelman was furious Shersquod spent 16 years dissecting the home construction business and wasnrsquot about to ditch her analysis and join the bullsrsquo party On Dec 7 2006 she slapped a ldquosellrdquo call on the entire group and during the next 12 months the Standard amp Poorrsquos Supercomposite Homebuilding Index plunged 53 percent as the real estate market collapsed

Stefano Natella Credit Suissersquos global head of equity research says that while debate between the sales team and research staff over their calls is normal and healthy the e- mail from the manager crossed the line and he was reprimanded Even though Zelman had Natellarsquos support she grew fed up with a culture that prized irrational exuberance over sober analysis

ldquoIt was no fun being the bearrdquo Zelman 43 says ldquoIrsquod come home from work and just be so upset So I started thinking lsquoIf I believe in my work why not do it on my ownrsquordquo

Going Solo In May 2007 she resigned from Credit Suisse After weighing whether to start a hedge fund a buyout boutique or a research firm she settled on the latter and opened Zelman amp Associates in Cleveland and New York five months later

Zelman is one of a rising number of equity analysts whorsquove quit large banks and gone solo Theyrsquore joining a wave of investment bankers and traders whorsquove moved off Wall Street to set up mergers and acquisitions advisory firms and work at midsize brokerages as the financial world reconstitutes after the credit crackup

Independent research firms are popping up in New York Silicon Valley and London where Stuart Graham the former head of Merrill Lynch amp Corsquos European banking stocks team unveiled Autonomous Research LLP in July with the motto ldquoFree from external control and constraintrdquo The

number of independent research firms in the US has soared to 2667 from 1012 in 2006 according to Integrity Research Associates LLC a New York-based consulting firm

Outflanking Wall Street Zelman and her fellow independents are taking aim at Wall Street banks by selling research to institutional investors ranging from PNC Capital Advisors Inc an investment firm in Philadelphia to hedge fund firms such as Passport Capital LLC in San Francisco and Vardon Capital Management LLC in New York

Independent shops will have a hard time outflanking resurgent securities firms which possess huge advantages Their underwriting and allocation of equity offerings motivates money managers to preserve their relationships with brokerages says Jay Bennett a consultant with Greenwich Associates a Stamford Connecticut-based firm that advises institutional investors

Today Bank of America Corp JPMorgan Chase amp Co and other giant securities firms receive almost 70 percent of the commissions institutional investors dole out for research That compares with 3 percent for independents and the rest for midsize firms according to Greenwich

ldquoThere is a symbiotic relationship between the bulge- bracket bank and the typical institutional investor and I canrsquot see that being displacedrdquo Bennett says

Analysts Marginalized In 2002 then-New York Attorney General Eliot Spitzer and the Securities and Exchange Commission began investigating the research industry in the midst of conflict of interest scandals that erupted after the dot-com bubble imploded in 2000 Rock star analysts like Jack Grubman the telecom specialist at Citigroup Inc who earned $67 million from 1999 to 2002 and Henry Blodget Merrill Lynchrsquos dot-com guru had issued glowing recommendations of companies to win investment banking business according to lawsuits filed by the SEC

In 2003 the SEC prohibited the analysts for life from associating with a broker-dealer or investment adviser Grubman and Blodget didnrsquot admit or deny wrongdoing in their settlements

In 2003 Spitzer and the SEC struck a settlement with Goldman Sachs Group Inc Merrill and eight other major banks that permanently barred them from using investment banking revenue to compensate research staffs and fund their work Analysts became marginalized on Wall Street losing thousands of jobs and their seven-figure salaries Annual pay for top performers fell to about $600000 by 2008 from a peak of $25 million in 2000 says Alan Johnson president of Johnson Associates Inc a New York-based compensation consultant

Curbing Excesses ldquoThe analysts that were good stock pickers all went to hedge fundsrdquo says Steven Purvis a money manager at Fort Worth Texas-based Luther King Capital Management Inc which oversees $6 billion

The settlement did curb many of the excesses of the Internet era says Robert Olstein chairman of Olstein Capital Management LP a mutual fund firm in Purchase New York Money managers continue to plumb Wall Street research for valuable information on companies and markets their own internal analysts may lack says A Michael Lipper a director at the New York Society of Security Analysts a professional organization

Rare lsquoSellrsquo Calls

In the fourth quarter of 2008 Betsy Graseck at Morgan Stanley recommended investors sell shares in Bank of America after concluding its credit card business and takeover of Countrywide Financial Corp would saddle it with huge losses Nineteen of the 21 analysts who covered Bank of America at that time had ldquobuyrdquo and ldquoholdrdquo calls on its stock which nose-dived 80 percent from Sept 30 2008 to March 31 according to data compiled by Bloomberg

ldquoSome money managers may deride the research but I know demand for it at institutions is highrdquo says Lipper the founder of Lipper Advisory Services Inc a Summit New Jersey-based firm that consults for foundations and pension funds

Calls like Graseckrsquos are not common in a Wall Street research system that continues to promote rampant bullishness according to studies by Jill Fisch a business law professor at the University of Pennsylvania in Philadelphia In October 2008 as the global financial system teetered on the brink of collapse ldquosellrdquo calls in US markets constituted 6 percent of the total recommendations by analysts with ldquobuysrdquo comprising 36 percent and ldquoholdsrdquo 58 percent according to Bloomberg data

lsquoConflict-Free Researchrsquo Almost a year later amid a stock market rally the percentage of ldquobuyrdquo calls dropped They made up 32 percent with ldquoholdsrdquo comprising 63 percent and ldquosellsrdquo 5 percent as of Oct 8

Money managers are concerned that proprietary trading desks at the largest securities firms are benefiting from research reports at the expense of clients On Aug 25 William Galvin Massachusettsrsquos top financial regulator subpoenaed Goldman Sachs for information on possible weekly ldquotrading huddlesrdquo between its analysts traders and investors

Galvin wants to know whether Goldmanrsquos analysts previewed imminent changes in their stock recommendations for select clients and whether Goldman traded on these tips for its own account before disseminating the information

ldquoWe donrsquot like hearing stories about possible front-running or preferential treatment of some clients over othersrdquo says Jonathan Boersma director of practice standards at the CFA Centre for Financial Market Integrity in Charlottesville Virginia ldquoInvestors want conflict-free researchrdquo

Break From the Pack Goldman spokesman Ed Canaday says the bank doesnrsquot comment on regulatory matters Authorities havenrsquot accused Goldman of wrongdoing

Independent analysts are trying to win clients with calls that break from the pack In January Dana Telsey founder of Telsey Advisory Group in New York and the former head of retail apparel and luxury goods research at Bear Stearns amp Co made J Crew Group Inc a top pick for the year Telsey was one of 3 analysts out of 20 who cover the New York-based retailer to favor the stock at that time By Oct 8 it had skyrocketed 208 percent

On March 23 Keith McCullough founder and chief executive officer of Research Edge LLC in New Haven Connecticut urged clients to buy San Rafael California-based software maker Autodesk Inc Only 4 of the 17 analysts who cover Autodesk had ldquobuysrdquo on the shares which spiked 64 percent through Oct 8

Independents Misfire

ldquoIndependent research is much cleanerrdquo says Douglas Famigletti a money manager at New York-based Griffin Asset Management Inc which oversees $415 million ldquoThey arenrsquot conflicted and they can write whatever they want about a stock Of course that means nothing if their ideas arenrsquot any goodrdquo

The independents do misfire On April 8 Zelman downgraded DR Horton Inc a Fort Worth-based homebuilder to ldquosellrdquo after seeing it trade at 160 times its adjusted book value compared with the industryrsquos median valuation of 132 DR Horton rallied 18 percent through Oct 8 on renewed momentum in homebuilding stocks

And McCullough a macroeconomic analyst who covers stocks commodities and emerging markets got stung in May by advising investors to short the India Fund which includes equities traded on the Bombay Stock Exchange The ruling Congress Partyrsquos landslide victory in elections that concluded on May 13 triggered a 43 percent surge in the fundrsquos shares that month In a short sale an investor borrows and sells a security in the hope its price will drop before he has to buy it back

Main Street Left Behind Hedge funds are spurring much of the demand for independent research says Sanford Bragg president of Integrity Research Associates After a record 1471 hedge funds closed in 2008 the survivors in the $14 trillion industry are under pressure to deliver gains to their clients and thatrsquos stoking demand for innovative analysis

ldquoThere is a flourishing alternative research marketplace but itrsquos driven by hedge fundsrdquo Bragg says ldquoItrsquos invisible to retail investorsrdquo

Main street is being left behind The Spitzer settlement tried to spur an independent research industry for retail investors by requiring the 10 participating banks to spend a total of $4325 million on alternative analysis and offer it to their clients for free In the next six years Bragg says the banks found very few takers for the independent research because most investors continued to trust their brokers or didnrsquot know it was available

No Exclusivity ldquoItrsquos hard to argue the settlement had any lasting impactrdquo Bragg says

Independent research appeals to hedge funds partly because of its limited distribution Stock research is widely disseminated through e-mails Web sites and published reports Gabe Birdsall a portfolio manager at Brasada Capital Management a Houston hedge fund firm says hersquos inundated with more than 400 e-mails a day much of it securities reports

ldquoThe problem with research is everybody is getting the same stuff therersquos no exclusivityrdquo says Penny Herscher CEO of FirstRain Inc a San Mateo California-based company that developed a search engine hedge fund managers use to prowl the Web for obscure market and company data ldquoThere is enormous interest at hedge funds to control their own informationrdquo

Exclusivity doesnrsquot come cheap Many independent firms have about 100 clients and charge them $15000 to more than $100000 a year They receive a basic subscription to reports and newsletters and for additional fees clients get the right to talk to analysts one-on-one and attend conferences where they can meet with company executives

Shrinking Industry In September Zelman hosted a three-day conference at the Four Seasons Resort amp Club near Dallas where about 350 guests including clients tried to glean insights from the CEOs of KB Home Pulte Homes Inc and others

The proliferation of research firms in the past few years will make it harder for them to survive says Scott Cleland a former telecommunications analyst who closed his own firm in 2005 after concluding he was in a shrinking industry Cleland says therersquos an oversupply of analysis which is bound to push down the prices the independents can charge On Oct 6 Integrity Research reported that 11 independent firms had disbanded in recent months

ldquoIf the independents analyze their own business the way they analyze the industries they cover theyrsquoll conclude what I did The business is increasingly not viablerdquo says Cleland who now runs a Washington-based telecom consulting firm called Precursor LLC

lsquoControl My Own Destinyrsquo

Many independent analysts are happy to swap the market power of their former employers for their newfound freedom Edward Wolfe who built Bear Stearnsrsquos transportation research team became exasperated with how disastrous decisions made by colleagues in other parts of the firm hurt his group In late 2007 Bearrsquos massive losses on subprime mortgages drove its shares from a high of $17151 in January 2007 to $481 in March 2008 obliterating the deferred compensation that accounted for up to 50 percent of Wolfersquos pay

ldquoOur team was having a great year but because of issues in mortgages our compensation was impacted and that really got to merdquo Wolfe says ldquoI want to be in control of my own destiny and the

revenue I generaterdquo After JPMorgan absorbed Bear in March 2008 he quit and opened his own firm Wolfe Research LLC in New York one month later

Zelman the credit Suisse analyst had little idea how difficult running her own shop would be There are clients to advise new customers to win and a never-ending stream of research to distribute

A Frenetic Pace While shersquos delegated some chores -- President David Zelman her husband manages day-to-day activities and client relations and Director of Research Dennis McGill a former Credit Suisse colleague who helped Zelman set up her firm oversees the analysis process -- Ivy is still preoccupied with making sure all the parts of her 15-employee company perform

ldquoYou worry about the client thatrsquos not paying you and the salespeople who may not be doing their jobs and at Credit Suisse you didnrsquot have to worry about thatrdquo she says ldquoYou underestimate how much of your personal life you have to give uprdquo

Ivy and David 46 a former Salomon Brothers Inc institutional salesman share an office suite in a three-story corporate park in suburban Cleveland Itrsquos decorated with their youngest childrsquos finger paintings and sometimes their three kids ages 4 to 9 visit after school

Even in Cleveland where the couple moved to be closer to Davidrsquos family Ivy retains a New York look -- black blouse and black slacks -- and a frenetic pace Phones are ringing nonstop on July 28 as Zelman analyzes just-released data New-home sales in June jumped the most in eight years and property values look to be stabilizing

Mounting Foreclosures Many of her clients are clamoring to know whether the market has hit bottom In terms of prices she says probably not One out of three owners has a mortgage worth more than the value of the home and mounting foreclosures and distressed properties are slated to account for 53 percent of home sales in 2010 compared with 40 percent in 2008 according to Moodyrsquos

ldquoWhen that inventory hits the market itrsquos going to undermine pricesrdquo she says

Zelman eyeballs the shares of Masco Corp a Taylor Michigan-based manufacturer of home improvement products and sees theyrsquove jumped 8 percent off their opening price of $1213

ldquoIf anyone asks just say we think the stock has gotten a little ahead of itselfrdquo Ivy calls across the room to David He nods phone in hand and passes the word to a client

Private Network Zelman relies on her own network of almost 1000 private homebuilders mortgage bankers and even drywall distributors to provide intelligence about the housing market Under a barter arrangement the contacts agree not to talk to other analysts in exchange for her research

Every month Zelman surveys her sources asking about demand for their products and the forces spurring or curbing it The data form the basis of her analysis and encrypted reports are available to clients on her Web site

Hedge fund managers use Zelmanrsquos reports to see where the housing market may be headed and as a check on months-old housing data that drive investor assumptions As early as July 2005 she alerted clients to the coming mortgage crash in a report called ldquoInvestors Gone Wildrdquo

ldquoYoursquore going to find out whatrsquos going on from her network long before you get it from the sell-side and publicly released datardquo says Ryan Randall an analyst at Passport Capital a Zelman client and $21 billion hedge fund firm

Premature Rally Investors buoyed by positive housing data bid up the SampP homebuilding index 43 percent from June 30 to Aug 28 Zelman learned from her network that the $8000 federal tax credit for first-time home buyers passed in President Barack Obamarsquos stimulus package was fueling demand and speculative

construction And as banks continue to disgorge foreclosed properties into the marketplace a supply glut could wallop homebuilding stocks yet again

ldquoThe rally may be prematurerdquo she says So on July 13 Zelman advised clients to exploit the short- term jumps in some homebuilding stocks while recognizing that the surge might end soon She upgraded MI Homes Inc a Columbus Ohio-based homebuilder to a ldquobuyrdquo and shares rose 55 percent to $1313 during the next 14 trading days Zelman cut MI Homes to ldquoholdrdquo on July 31 after it hit her price target The stock climbed another 12 percent by Oct 8

ldquoIvyrsquos a little too bearish on our industry right nowrdquo says Robert Schottenstein MI Homesrsquo CEO ldquoBut she understands what it takes to make money in this business and I have a great deal of respect for herrdquo

Rapidly Expanding Zelman who put herself through night school at George Mason University in Virginia and earned a bachelorrsquos degree in accounting plans to push her firm beyond the 20 homebuilding stocks she covers to draw new clients

She will initiate coverage of Home Depot Inc and Lowersquos Cos by the end of the year Zelman says her firm makes a profit and true to form shersquos cautious about overreaching

ldquoI donrsquot want to be in a situation where I hire five analysts and all of sudden theyrsquore making calls I disagree withrdquo she says ldquoTherersquos no rushrdquo

By contrast Telsey the retail analyst from Bear Stearns is rapidly expanding the firm she opened in February 2006 on Fifth Avenue New Yorkrsquos luxury apparel mecca Its 46 employees occupy a hive of glass-walled offices with polished-stone floors In a bullpen of cubicles a half dozen analysts scrutinize stocks in nine consumer-related industries for clients including PNC Capital Advisors

lsquoMarket Share Countsrsquo Telsey 46 in a corner office cluttered with black shopping bags from Barneys New York and stacks of financial reports says shersquos hiring analysts and pushing coverage into cosmetics footwear makers and drugstores

ldquoMarket share countsrdquo Telsey says ldquoWe didnrsquot get into this venture to be smallrdquo

Telsey a Manhattan native with a Master of Business Administration from Fordham University joined Bear in 1994 Twelve years later she was running its 18-member retail research team She grew frustrated at her inability to promote her people and award bonuses -- decisions made by management committees -- and watched as rivals especially hedge funds raided her ranks

ldquoThe bulge brackets provide an entry point for people to get into the research business but they werenrsquot making careers there anymorerdquo Telsey says ldquoI wanted to do my own thing where analysts could practice the craft of research as a careerrdquo

Tough First Year The first year was rough says Arnold Kanarick Telsey Advisoryrsquos executive vice president and Bearrsquos former human resources head About two-thirds of the money managers they solicited balked out of concern Telseyrsquos work would falter and she would lose access to CEOs She had to invest more than $1 million of her own capital in a sales staff and analysts in the hope business would come

ldquoSome independents will not be successful because theyrsquore undercapitalized and clients will hesitate to sign up because theyrsquore not sure theyrsquore going to surviverdquo Kanarick says ldquoWe say that with the voice of experiencerdquo

Telsey who favors black Italian pantsuits and Prada pumps plowed ahead with her research She tours malls across the country to see how merchandise is selling at the companies she covers and which stores are staging their wares creatively to boost sales

ldquoRetail is entertainmentrdquo says Telsey on Aug 31 over the pulsating club music in an American Eagle Outfitters Inc clothing store in San Francisco She flashes a smile at the salesclerks and peppers them with questions

Top Pick ldquoAre you working more hours or less in the last monthrdquo Telsey asks a clerk

ldquoLast week we all had a lot of hoursrdquo the clerk replies Sales are probably up at this store Telsey says

Her shoe-leather research paid off this year helping her select Gap Inc as a ldquotop pickrdquo for 2009 in an outlook she sent clients in January Telsey doesnrsquot issue ldquobuysrdquo or ldquosellsrdquo preferring to set price targets because thatrsquos how money managers select stocks

She said the San Francisco-based retailerrsquos struggle to rebound from years of falling sales had left it with $16 billion in cash no long-term debt and a winning back-to-basics lineup of jeans plaid shirts and chinos Gap shares soared 69 percent through Oct 8

Flashing Green Orbs

In the same outlook Telsey missed on Wal-Mart Stores Inc She predicted the stock which returned 18 percent in 2008 would continue its run in the first half of 2009 as the retailer pulled cost-conscious consumers from Target Stores Inc Instead investors pulled back in anticipation that the economy would recover and Walmartrsquos shares fell 15 percent by June 30

ldquoWalmart was last yearrsquos stockrdquo she says

Telsey says shersquos turning a profit winning over about a third of the institutional investors that were reluctant to hire her in 2006

ldquoThere are still a lot of good analysts at the bulge brackets so it comes down to what are you doing thatrsquos going to differentiate you from your competitorsrdquo Telsey says

When McCullough the macroeconomic analyst formed Research Edge in April 2008 he was intent on upending the way analysis is delivered to investors His pitch to clients is transparency

McCullough a former hedge fund manager at Carlyle Group makes pretend bets based on his teamrsquos stock recommendations and clients can view the outcome of each one of his 650 phantom investments on the Research Edge Web site He places flashing green orbs next to tickers hersquos buying and red lights by stocks hersquos shorting By running his firm like a virtual hedge fund he shows clients how his analysis performs lsquoShow Wins and Lossesrsquo ldquoThe research game is brokenrdquo McCullough 34 says ldquoWersquore just showing our clients what they normally donrsquot see If you want to be in the game you have to show your wins and lossesrdquo

On Sept 16 McCullough put Apple Incrsquos ticker on the site with a red light He advised clients to short the tech juggernaut at $18255 a share a 52-week high after Jim Cramer the CNBC investing personality recommended it

ldquoCramer was pumping it last nightrdquo McCullough wrote in a note

He believed the commentator was wrong and Apple would fall On Sept 21 the analyst covered his short bet on Apple at $18230 for a 014 percent return

ldquoItrsquos nice to be able to go back and see if his analysis has panned outrdquo says Birdsall of Brasada Capital Management a $50 million hedge fund firm founded in January

A Traderrsquos Metabolism Research Edgersquos seven analysts work in the former mansion of William Howard Taft the US president from 1909 to 1913 on the edge of the Yale University campus They cover a hodgepodge of industries Rebecca Runkle a former Morgan Stanley technology analyst researches software and

computers and Brian McGough another Morgan Stanley alum analyzes apparel and footwear Their colleagues study health care casinos and gaming and emerging markets

McCullough with an undergraduate degree in economics from Yale says his firm is profitable He has more than 100 institutional clients who pay $30000 to $100000 a year for his firmrsquos research and access to its analysts Individual investors who want to see the virtual portfolio and a limited amount of research pay $400 a month

McCullough a native of Thunder Bay Ontario and former captain of the Yale varsity hockey team has the metabolism and gung-ho nature of a trader

ldquoI had the most penalty minutes on the team in my sophomore yearrdquo says McCullough who had to replace two of his front teeth after they were knocked out on the ice

China Correction He gets up almost every morning at 4 am to review the Asian markets At 830 am on July 21 wearing a pullover fleece and jeans he convenes a daily morning conference call with clients McCullough and Andrew Barber his Asia expert predict that Chinese equities which had soared almost 76 percent during 2009 are headed for a correction

One key reason Short-term interest rates in Shanghai shot to 213 percent on July 21 from 121 percent on July 1 and pressed investors to liquidate holdings to meet margin calls The Shanghai Stock Exchange Composite Index fell 16 percent from July 21 to Sept 1

ldquoHersquos pretty freewheeling in his opinions but hersquos a very good macro strategist and hersquos made great calls in this marketrdquo says Ralph Reynolds McCulloughrsquos ex-boss at Carlyle and now co-founder of Bienville Capital Management LLC a New York hedge fund firm

lsquoIn It to be Rightrsquo McCullough jumped into analysis after managing long and short positions in consumer stocks as part of Carlylersquos $900 million Blue Wave hedge fund which was launched in March 2007 By the third quarter of that year the fund had dropped 93 percent mainly due to wrong-way bets on mortgages that didnrsquot involve McCullough His stock portfolio was also declining in value and that November he and his six-member team were fired he says

McCullough peeved by the episode invested more than $1 million of his own wealth to form Research Edge and challenge the big banksrsquo research machine

ldquoI wanted to show Wall Street what the best investment research process isrdquo he says ldquoIrsquom not in this to generate trade flow or a banking deal Irsquom in it to be right I want to build something that will lastrdquo

McCullough and his fellow independents have a long way to go before they can shake loose the big banksrsquo domination of the research game If they make good calls they may survive and even thrive

ldquoThere will always be an opportunity for those who can make other people moneyrdquo Luther Kingrsquos Purvis says

Thatrsquos the one unshakable truth on Wall Street

To contact the reporter on this story Edward Robinson in San Francisco at edrobinsonbloombergnet

httpwwwbloombergcomappsnewspid=20601170ampsid=a8bB1M8VCjA

Economy

October 9 2009

Fed Is Split Over Timing of Rate Rise By EDMUND L ANDREWS

WASHINGTON mdash Fissures are developing among policy makers at the Federal Reserve as they debate how and when to start raising the benchmark interest rate from its current level just above zero

With Fed officials forecasting that unemployment will average 98 percent in 2010 nobody appears to be arguing that monetary policy should be tightened anytime soon The central bankrsquos official mantra continues to be that the overnight federal funds rate will remain ldquoexceptionally lowrdquo for ldquoan extended periodrdquo

But Fed officials have hinted at new disagreement in recent weeks The arguments go beyond the traditional split between hawks who worry that easy money will stoke inflation and doves who contend that unemployment is the top problem

The more devilish debates are about how fast to act once the decision has been made and how to carry it out Beyond raising the overnight federal funds rate the Fed also has to unwind $2 trillion in special programs that prop up paralyzed banks and credit markets

Where Ben S Bernanke the Fed chairman stands in the emerging argument is a question mark At a conference held by the Fed on Thursday evening he assured economists that the central bank had a detailed list of tools to reverse course but offered no new hint of when he planned to begin his exit strategy

ldquoWhen the economic outlook has improved sufficiently we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configurationrdquo Mr Bernanke promised

Any move to tighten monetary policy over the next year or so could set the stage for a clash between the Fed and the White House The Obama administration has been outspoken in saying it does not want a quick end to stimulus policies whether fiscal or monetary

Policy makers are haunted by the results of previous miscalculations Mr Bernanke and others have warned that the central bank should not repeat its error in 1937 when it raised interest rates too early and helped extend the Depression for several years

At the same time officials at the Fed are acutely aware that it has been widely blamed for contributing to the housing bubble and the financial collapse by keeping the cost of borrowing too low for too long after the recession of 2001

One hint of the discord came Tuesday in a speech by Thomas M Hoenig president of the Federal Reserve Bank of Kansas City

Though he stopped short of calling for immediate rate increases Mr Hoenig made it clear that he was getting impatient

ldquoMy experience tells me that we will need to remove our very accommodative policy sooner rather than laterrdquo he told an audience of business executives ldquoEven if we were to start immediately much time would pass before incremental increases could be considered tight or even neutral policyrdquo

Mr Hoenig is not currently a voting member of the Fedrsquos policy committee on which the regional Fed presidents hold rotating seats but he presents his views at all meetings

And he is not alone

Richard Fisher president of the Federal Reserve Bank of Dallas sent a similar message in a speech on Sept 29 ldquoThat wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining tractionrdquo he told a business group

Other Fed officials with similar views include Jeffrey M Lacker president of the Federal Reserve Bank of Richmond Charles I Plosser president of the Philadelphia Fed and Kevin M Warsh an influential Fed governor

By contrast some top Fed officials in Washington and New York have repeatedly emphasized that the economy is still extremely weak and that unemployment already at its highest level since the early 1980s will probably climb above 10 percent and remain high for several years

ldquoThe turnaround is certainly welcome but it shouldnrsquot be overstatedrdquo Daniel K Tarullo a Fed governor said on Thursday in an address to a civic group in Phoenix ldquoThe employment situation continues to be dismalrdquo

William C Dudley president of the New York Fed presented a detailed case that seemed aimed at responding to those calling for a quick end to low rates

ldquoSome observers are concerned that this expansion will ultimately prove to be inflationaryrdquo he told an audience at the Corporate Law Center at Fordham University ldquoThis concern is not well foundedrdquo

Mr Dudley noted that unemployment among working-age men was 103 percent mdash higher than in any other downturn since World War II

On top of that he said consumers were reeling from the ldquowealth shockrdquo caused by the collapse in home prices and by losses to their stock portfolios That could cause people to increase their saving rate meaning less consumer spending in the short run

Finally Mr Dudley cautioned that banks faced another wave of losses from loans tied to commercial real estate

Beyond the disagreements about the relative dangers of rising prices versus rising joblessness Fed officials are grappling with how to decide on the need for higher interest rates

Mr Bernanke and other officials want to see evidence that the economic recovery is self-sustaining strong enough to generate jobs without the crutch of extremely low interest rates

But Mr Warsh as a Fed governor has begun arguing that the central bank cannot afford to wait for irrefutable evidence of a solid expansion Mr Warsh recently argued that the Fed should take at least some of its cue from stock prices and other financial indicators which turn around earlier and more quickly than the underlying economy

ldquoIf policy makers insist on waiting until the level of real activity has plainly and substantially returned to normalrdquo he warned in a speech on Sept 25 ldquothey will have almost certainly waited too longrdquo

Mr Warsh and some other Fed officials also argue that when the time does come to change gears the central bank may have to raise rates almost as fast as it slashed them when the crisis began

It remains unclear whether Mr Bernanke agrees with that idea though he and other Fed officials have emphasized that they have planned carefully for the Fedrsquos exit strategy and have all the tools in place to reduce the special support programs quickly

httpwwwnytimescom20091009businesseconomy09bernankehtmlthampemc=th

Business

October 9 2009 BACK TO BUSINESS

US Mortgage Backer May Need Bailout Experts Say By DAVID STREITFELD and LOUISE STORY A year after Fannie Mae and Freddie Mac teetered industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino

Problems at the Federal Housing Administration which guarantees mortgages with low down payments are becoming so acute that some experts warn the agency might need a federal bailout

Running questions about the FHArsquos future mdash underscored by interviews with policy makers analysts and home buyers mdash came to the fore on Thursday on Capitol Hill In testimony before a House subcommittee the FHA commissioner David H Stevens assured lawmakers that his agency would not need a bailout and that it was managing its risks

But he acknowledged that some 20 percent of FHA loans insured last year mdash and as many as 24 percent of those from 2007 mdash faced serious problems including foreclosure offering a preview of a forthcoming audit of the agencyrsquos finances

ldquoLet me simply state at the outset that based on current projections absent any catastrophic home price decline FHA will not need to ask Congress and the American taxpayer for extraordinary assistance mdash we will not need a bailoutrdquo Mr Stevens said in his testimony

But to its critics the FHA looks like another Fannie Mae The hearings on Thursday came on the same day that the federal agency charged with overseeing Fannie Mae and Freddie Mac provided a somber assessment of those giantsrsquo health In the year since the government stepped in to rescue them the companies have taken $96 billion from the Treasury and may need more

Since the bottom fell out of the mortgage market the FHA has assumed a crucial role in the nationrsquos housing market Created in 1934 to help lower-income and first-time buyers purchase homes the agency now insures roughly 54 million single-family home mortgages with a combined value of $675 billion

In addition these loans are bundled into mortgage-backed securities and guaranteed through the Government National Mortgage Association known as Ginnie Mae That means the taxpayer is responsible for paying investors who own Ginnie Mae bonds when FHA-backed mortgages hit trouble

ldquoIt appears destined for a taxpayer bailout in the next 24 to 36 monthsrdquo Edward Pinto a former Fannie Mae executive said in testimony prepared for the hearing Mr Pinto who was the chief credit officer from 1987 to 1989 for Fannie Mae went further than most housing analysts and predicted that FHA losses would more than wipe out the agencyrsquos $30 billion of cash reserves

The issue has polarized Congress Republicans who led efforts to rein in Fannie Mae and Freddie Mac before those companies ran into trouble are now seeking to bridle the FHA Many Democrats insist the FHA is playing a vital role in the housing market which is only just starting to stabilize

ldquoFHA has stepped into the void left by the private marketrdquo Representative Maxine Waters Democrat from California said at the hearing ldquoLetrsquos be clear without FHA there would be no mortgage market right nowrdquo

That was the case for Bernadine Shimon Like many Americans Ms Shimon has recently been through some rough times She lost a house to foreclosure declared bankruptcy got divorced and is now a single mother teaching high school English in a Denver suburb

She wanted a house but no lender would touch her The Federal Housing Administration was more obliging With the FHA insuring her mortgage Ms Shimon was able to buy a $134000 fixer-upper in August

ldquoThe government gave me another chancerdquo she said

The government is giving as many people as it possibly can the chance to buy a house or if they are in financial difficulty refinance it The FHA is insuring about 6000 loans a day four times the amount in 2006 Its portfolio is growing so fast that even FHA backers express amazement

For decades it was an article of faith that helping people of limited means like Ms Shimon get a house was good for the new owner good for the neighborhood and good for American capitalism Then came the housing bust which demonstrated that when lenders allowed people to buy houses they ultimately could not afford it hurt the parties mdash while putting the economy itself in a tailspin

In the aftermath of the crash there is wide divergence on how easy or how hard it should be to become a homeowner Skittish lenders are asking for 20 percent down which few prospective borrowers have to spare As a result private lending has dwindled

The government has stepped into the breach facilitating loans with down payments as low as 35 percent and offering other incentives to stabilize the market Real estate agents in some hard-hit areas say every single one of their clients is using the FHA

ldquoTheyrsquore counting their pennies scraping up that 35 percentrdquo Bonni Malone of Prudential Americana in Las Vegas said ldquoMostly theyrsquore buying foreclosed homes from banks although I had one client who bought from a guy that was dying Itrsquos turning around the marketrdquo

While the governmentrsquos actions have helped avert full-scale economic disaster there is growing concern that it might have doled out its favors with too generous a hand

Many of the loans the FHA insured in 2007 and last year are now turning delinquent agency officials acknowledge The loans made in those two years are performing ldquofar worserdquo than newer loans dragging down the whole portfolio Mr Stevens of the FHA said in an interview

The number of FHA mortgage holders in default is 410916 up 76 percent from a year ago when 232864 were in default according to agency data

Despite the agencyrsquos attempt to outrun its fate by insuring ever-larger amounts of new loans to such borrowers as Ms Shimon mdash the current rate is over a billion dollars a day mdash 777 percent of the portfolio is in default up from 56 percent a year ago

Barney Frank the Massachusetts Democrat who is chairman of the House Financial Services Committee said in an interview that the defaults were in essence worth it

ldquoI donrsquot think itrsquos a bad thing that the bad loans occurredrdquo he said ldquoIt was an effort to keep prices from falling too fast Thatrsquos a policyrdquo

The troubled loans are nevertheless weighing on the agencyrsquos capital reserve fund which has fallen to below its Congressionally mandated minimum of 2 percent from over 6 percent two years ago

The optimism expressed by Mr Stevens the FHA commissioner places him at odds not only with some outside experts but with Kenneth Donohue the inspector general of the Housing and Urban Development Department who is also FHArsquos watchdog Mr Donohue said the drop in reserves was ldquoa flashing red lightrdquo that the agency was not taking seriously enough

ldquoIt might be wersquoll get ourselves out of this and that everything will be fine but I donrsquot paint that rosy a picturerdquo Mr Donohue said ldquoTheyrsquore banking on the fact that the economy will continue to improve that the housing market will begin to sustain itselfrdquo

He noted that if private lenders had raised their down payment requirements in the last two years it raised the question ldquowhat does the FHA think it is doing by asking only 35 percentrdquo

Any more than that and Ms Shimon 45 would still be a renter As it was she cashed in her retirement savings account to come up with the necessary funds She did not have enough to spare for closing costs so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate She cried when the deal was done

The house was empty and trashed Slowly she is trying to bring it back to life She spent the first few weeks picking up garbage in the backyard

Is Ms Shimon a good bet Even she has no easy answer Her mortgage payment $1100 is half of what she takes home every month It is not easy to make ends meet Teachers can get laid off like everyone else

ldquoThe governmentrdquo she said ldquois doing what it needed to do mdash taking a risk on peoplerdquo

Chaz Fullenkamp an automotive technician in Columbus Ohio got an FHA loan even though he was living on the financial edge ldquoIf I got unemployed Irsquod be wiped out in a month or twordquo he says Thanks to the FHA however he is better off than he used to be

Mr Fullenkamp used FHA insurance to buy a house this spring for $179000 The eager seller paid the closing costs and also gave Mr Fullenkamp $2500 in cash He immediately applied for the $8000 tax rebate Even taking his down payment into account he came out ahead

ldquoI knew in my heart I could not really afford the house but they gave it to me anywayrdquo said Mr Fullenkamp 22 ldquoI thought lsquoWow Irsquom surprised I pulled that offrsquo rdquo

As the number of loans has soared random quality control checks have decreased sharply FHA staff members say Mr Donohue the inspector general cited numerous examples of organized fraud in testimony to Congress earlier this year

ldquoThey need to stop taking bad loans in the doorrdquo he said in an interview ldquoTheyrsquore taking on all this volume they have to have very active underwriting standardsrdquo

Jack Healy contributed reporting from New York

httpwwwnytimescom20091009business09fhahtml_r=1ampthampemc=th

Previous Articles in the Series

httptopicsnytimescomtopfeaturestimestopicsseriesback_to_businessindexhtml

Housing Chief Rebuts Warning of FHA Bailout Agency Says It Can Meet Future Losses

By Dina ElBoghdady Washington Post Staff Writer Friday October 9 2009

A former Fannie Mae executive warned a House panel Thursday that the Federal Housing Administration is destined for a multibillion-dollar taxpayer bailout in 24 to 36 months an analysis that the agencys top official immediately dismissed as completely unfounded

At a hearing before a House Financial Services panel Edward J Pinto predicted that the FHA will suffer $40 billion in losses leaving it unable to cover its bad loans without taxpayer help Pinto a real estate finance consultant who served as Fannie Maes chief credit officer from 1987 to 1989 said he testified so lawmakers would not be able to say that no one told them of the magnitude of the impending losses

His testimony came at a sensitive time for the FHA which faces increased scrutiny now that it has backed nearly a quarter of all loans made this year The loans it insures are the sole source of financing for most people who lack good credit or cannot make hefty down payments But its defaults have been climbing raising concerns that taxpayers may be forced to kick in if bad loans overwhelm the FHA

The agency recently said that a soon-to-be-released audit will show that its reserve fund has fallen below the level required by law meaning it will not be enough to cover 2 percent of all outstanding FHA mortgages

But absent a catastrophic decline in home prices we will not need a bailout FHA Commissioner David H Stevens told the panel

While the reserve fund is at a historic low it represents only part of the money the agency can tap to cover its losses Stevens said Theres a second fund the agency can also use when loans go bad In total the two funds had $304 billion to meet future losses as of June 30

The data from the forthcoming audit performed annually also project that the reserves will rebound to the required level within two to three years largely as a result of the recovery in the housing prices Stevens said

Home prices should bottom out in early 2010 according to IHS Global Insight the firm responsible for the price forecasts used in the audit According to a number of measures housing prices are stabilizing said Patrick Newport the firms US economist told the panel

In his testimony Pinto called the audits underlying assumptions overly optimistic The FHAs escalating default rate its rapidly eroding reserves and a recent dramatic increase in the amount of money people can borrow on FHA loans will have disastrous consequences he warned the panel FHA loans are especially vulnerable because they require only a 35 percent down payment -- well below the 10 to 20 percent private lenders demand

Pinto compared the FHA loans with Fannie Maes book of loans in 2006 which he said have similar characteristics and he applied the default rate on the Fannie loans to the FHA

mortgages By that measure the FHA was short $40 billion on its main financing account as of Sept 30 in effect stripping the reserve account of its required funding and leaving it $14 billion in the hole he said The FHA based on its history will not be able to modify enough loans to thwart the losses

Pinto suggested that the FHA raise its down payment requirement to 10 percent reduce the cap on how much money FHA borrowers can borrow and require FHA-approved lenders to co-insure the loans

In an interview Stevens said Pintos analysis is flawed in part because many of Fannie Maes loans at the time did not require borrowers to verify their income something the FHA requires of all its borrowers

After the hearing Rep Maxine Waters (D-Calif) the subcommittees chairwoman said she found Stevenss presentation convincing

I am feeling very confident about FHA Waters said I think its going to be able to continue to be a major source of support for home mortgages

Opinion

October 9 2009

OP-ED COLUMNIST

The Uneducated American By PAUL KRUGMAN If you had to explain Americarsquos economic success with one word that word would be ldquoeducationrdquo In the 19th century America led the way in universal basic education Then as other nations followed suit the ldquohigh school revolutionrdquo of the early 20th century took us to a whole new level And in the years after World War II America established a commanding position in higher education

But that was then The rise of American education was overwhelmingly the rise of public education mdash and for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars Education as one of the largest components of public spending has inevitably suffered

Until now the results of educational neglect have been gradual mdash a slow-motion erosion of Americarsquos relative position But things are about to get much worse as the economic crisis mdash its effects exacerbated by the penny-wise pound-foolish behavior that passes for ldquofiscal responsibilityrdquo in Washington mdash deals a severe blow to education across the board

About that erosion there has been a flurry of reporting recently about threats to the dominance of Americarsquos elite universities What hasnrsquot been reported to the same extent at least as far as Irsquove seen is our relative decline in more mundane measures America which used to take the lead in educating its young has been gradually falling behind other advanced countries

Most people I suspect still have in their minds an image of America as the great land of college education unique in the extent to which higher learning is offered to the population at large That image used to correspond to reality But these days young Americans are considerably less likely than young people in many other countries to graduate from college In fact we have a college graduation rate thatrsquos slightly below the average across all advanced economies

Even without the effects of the current crisis there would be every reason to expect us to fall further in these rankings if only because we make it so hard for those with limited financial means to stay in school In America with its weak social safety net and limited student aid students are far more likely than their counterparts in say France to hold part-time jobs while still attending classes Not surprisingly given the financial pressures young Americans are also less likely to stay in school and more likely to become full-time workers instead

But the crisis has placed huge additional stress on our creaking educational system

According to the Bureau of Labor Statistics the United States economy lost 273000 jobs last month Of those lost jobs 29000 were in state and local education bringing the total losses in that category over the past five months to 143000 That may not sound like much but education is one of those areas that should and normally does keep growing even during a recession Markets may be troubled but thatrsquos no reason to stop teaching our children Yet thatrsquos exactly what wersquore doing

Therersquos no mystery about whatrsquos going on education is mainly the responsibility of state and local governments which are in dire fiscal straits Adequate federal aid could have made a big difference But while some aid has been provided it has made up only a fraction of the shortfall In part thatrsquos because back in February centrist senators insisted on stripping much of that aid from the American Recovery and Reinvestment Act a k a the stimulus bill

As a result education is on the chopping block And laid-off teachers are only part of the story Even more important is the way that wersquore shutting off opportunities

For example the Chronicle of Higher Education recently reported on the plight of Californiarsquos community college students For generations talented students from less affluent families have used those colleges as a stepping stone to the statersquos public universities But in the face of the statersquos budget crisis those universities have been forced to slam the door on this yearrsquos potential transfer students One result almost surely will be lifetime damage to many studentsrsquo prospects mdash and a large gratuitous waste of human potential

So what should be done

First of all Congress needs to undo the sins of February and approve another big round of aid to state governments We donrsquot have to call it a stimulus but it would be a very effective way to create or save thousands of jobs And it would at the same time be an investment in our future

Beyond that we need to wake up and realize that one of the keys to our nationrsquos historic success is now a wasting asset Education made America great neglect of education can reverse the process

Oct 8 20 09

ECB Benchmark Rate Left at 1 Overview ECB stayed on hold at 10 in October ECB president Trichet expressed concern over the excess volatility and strength of the US dollar Nonetheless further rate cuts seem unnecessary for now as signs of economic stabilization and a deceleration of deflation have emerged Moreover the ECB will continue conducting QE operations begun July 6 Broad money supply growth continues to decelerate and credit to households and nonfinancial businesses is contracting

ECB Staff Projections o ECB View Overall the recovery is expected to remain rather uneven It will be

supported in the short term by a number of temporary factors but is likely to be affected over the medium term by the process of ongoing balance sheet correction in the financial and the non-financial sector of the economy both inside and outside the euro area (Introductory Statement October 8 2009)

o Annual real GDP growth will range between -44 and -38 in 2009 and between -05 and 09 in 2010

o Annual HICP inflation will range between 02 and 06 in 2009 and between 08 and 16 in 2010

o The ECB expects growth to remain subdued this year and start recording positive quarterly rates in 2010

o European Central Bank President Jean-Claude Trichet reiterated that negative headline inflation is a temporary phenomenon whereas inflation expectations remain firmly anchored at below but close to 2

Interest Rate Outlook o The floor for the refinance rate in this cycle will probably be 10 as the ECB moves on

to unconventional policy measures such as corporate bond purchases But ECB could be forced to do more reluctantly should the recovery falter or downside risks to price stability continue to build or the euro surges

o Elga Bartsch Morgan Stanley A zero interest rate policy is not the most likely scenario for the official refi rate It is however possible for the overnight rate (EONIA ndash the Euro Overnight Index Average which is the weighted average of overnight Euro Interbank Offer Rates for interbank loans)

o The ECB forecast using the Taylor Rule suggests the refinance rate should be -35 As interest rates reach their lower nominal bound the ECB will rely increasingly on balance-sheet expansion through unconventional easing to achieve an equivalent amount of easing

o See Recent ECB Statements for individual ECB policymakers views

Context

o Producer price inflation remains negative

o Consumer price inflation stopped moving deeper into negative territory in August 2009

o Broad money supply growth is slowing at an accelerating pace

o Recession Q3 2008 GDP contraction confirmed recession in eurozone which bottomed in Q1 2009

o Wage growth according to the ECB will moderate slightly in 2009 reacting with a lag to weakening activity while productivity recovers with the cycle

o The overnight money-market rates now track the ECBs deposit facility interest rate instead of the main refinance rate because banks are looking to deposit their money rather than lend it out

o Rate corridor around the refinance rate was narrowed from 100 basis points to 75 basis points on May 7 2009 to keep the deposit rate above zero at 025 while enabling the ECB to lower the marginal lending rate to 175 The ECB had earlier widened the corridor to 200 basis points (+-100 basis points around the main refinance rate for fixed-rate securities) on January 21 2009 to deter banks from borrowing more money than they really need since the cost of doing so would rise from 50 basis points to 100 basis points (the gap between the deposit facility and the refinance rates)

httpwwwrgemonitorcom168Global_Monetary_Policycluster_id=4680

The Federal Reserves Balance Sheet An Update Speech Chairman Ben S Bernanke At the Federal Reserve Board Conference on Key Developments in Monetary Policy Washington DC October 8 2009 To fight a recession the standard prescription for a central bank is to lower its target short-term interest rate thereby easing financial conditions and supporting economic growth In the current downturn however the Federal Reserve has faced two historically unusual constraints on policy First the financial crisis by increasing credit risk spreads and inhibiting normal flows of financing and credit extension has likely reduced the degree of monetary accommodation associated with any given level of the federal funds rate target perhaps significantly Second since December the targeted funds rate has been effectively at its zero lower bound (more precisely in a range between 0 and 25 basis points) eliminating the possibility of further stimulating the economy through cuts in the target rate To provide additional support to the economy despite these limits on traditional monetary policy the Federal Open Market Committee (FOMC) and the Board of Governors have taken a number of actions and initiated a series of new programs that have increased the size and changed the composition of the Federal Reserves balance sheet

I thought it would be useful this evening to review for you the most important elements of the Federal Reserves balance sheet as well as some aspects of their evolution over time As youll see doing so provides a convenient means of explaining the steps the Federal Reserve has taken beyond conventional interest rate reductions to mitigate the financial crisis and the recession as well as how those actions will be reversed as the economy recovers I laid out some of these points in April at a conference sponsored by the Federal Reserve Bank of Richmond but a lot has happened in the intervening period and so an update seems timely1

For those of you who might be interested in learning more about the Federal Reserves policy strategy by the way an excellent source of information is a feature of the Boards website titled Credit and Liquidity Programs and the Balance Sheet2 This source provides extensive and regularly updated information on our programs and goes well beyond the basic balance sheet data that we publish every week3

To get started slide 1 provides a birds eye view of the Federal Reserves balance sheet as of September 30 the quarter end with the corresponding data from just before the crisis for comparison As you can see the assets held by the Federal Reserve currently total about $21 trillion up significantly from about $870 billion before the crisis The slide shows the principal categories of assets we hold grouped (as I will explain) so as to correspond to the various types of initiatives weve taken to address the crisis The liability side of the balance sheet also summarized in slide 1 primarily consists of currency (Federal Reserve notes) and bank reserve balances (funds held in accounts at the Federal Reserve by commercial banks and other depository institutions) Later in my remarks I will discuss the relationship between Federal Reserve liabilities and broader measures of the money supply I will also discuss ways we can manage the link between the size of the Federal Reserves balance sheet and the

broader money supply during the transition back to a more familiar framework for monetary policy Our capital the difference between assets and liabilities is about $50 billion

The Asset Side of the Federal Reserves Balance Sheet Lets now look at the balance sheet in more detail beginning with the asset side For decades the Federal Reserves assets consisted almost exclusively of Treasury securities Since late 2007 however the share of our assets made up of Treasury securities has declined while our holdings of other financial assets have expanded dramatically As slide 1 shows putting aside the miscellaneous other assets category which includes such diverse items as foreign exchange reserves and the buildings owned by the Federal Reserve System the assets on the Federal Reserves balance sheet can be usefully grouped into four categories

(1) short-term lending programs that provide backstop liquidity to financial institutions such as banks broker-dealers and money market mutual funds

(2) targeted lending programs which include loans to nonfinancial borrowers and are intended to address dysfunctions in key credit markets

(3) holdings of marketable securities including Treasury notes and bonds the debt of government-sponsored enterprises (GSEs) (agency debt) and agency-guaranteed mortgage-backed securities (MBS) and

(4) emergency lending intended to avert the disorderly collapse of systemically critical financial institutions I will say a bit more about each of these in turn

Short-Term Lending Programs for Financial Institutions The breakdown of the first category of assets--short-term lending programs for financial institutions--is shown on slide 2 As you can see these assets currently total about $264 billion which is about 12 percent of the assets on the Federal Reserves balance sheet This category of assets consists mainly of loans made directly or indirectly to sound financial institutions Such loans are fully secured by collateral and in almost all cases by recourse to the borrowing institution and are for maturities no greater than 90 days Thus they involve very little credit risk the Federal Reserve has suffered no losses on any of these loans

From its beginning the Federal Reserve through its discount window has provided credit to depository institutions to meet unexpected liquidity needs usually in the form of overnight loans The provision of short-term liquidity is of course a longstanding function of central banks and--as we know from Bagehot and earlier authors--a principal tool for arresting financial panics4 Indeed when short-term funding markets deteriorated abruptly in August 2007 the Federal Reserves first response was to try to increase the liquidity available to the market by lowering the rate charged for discount window loans and by making it easier for banks to borrow at term However as in some past episodes of financial distress banks were reluctant to rely on discount window credit frustrating the Federal Reserves efforts to enhance liquidity The banks concern was that their recourse to the discount window if it somehow became known would lead market participants to infer weakness--the so-called stigma problem To address this issue in late 2007 the Federal Reserve established the Term Auction Facility (TAF) which as the name implies provides fixed quantities of term credit to depository institutions through an auction mechanism The introduction of this facility seems largely to have solved the stigma problem partly because the sizable number of borrowers provides a greater assurance of anonymity and possibly also because the three-day period between the auction and auction settlement suggests that the facilitys users are not using it to meet acute funding needs on a particular day As slide 2 shows as of September 30 conventional discount window loans totaled $29 billion and funds auctioned through the

TAF totaled $178 billion These programs along with similar lending by other major central banks appear to have helped stabilize the financial system here and abroad by ensuring depository institutions access to ample liquidity In particular increases in Federal Reserve loans to banks have been associated with substantial improvements in interbank lending markets as reflected for example in the sharp declines in the spread between the London interbank offered rate or Libor and measures of expected policy rates

Like depository institutions in the United States foreign banks with large dollar-funding needs have also experienced powerful liquidity pressures over the course of the crisis This unmet demand from foreign institutions for dollars was spilling over into US funding markets including the federal funds market leading to increased volatility and liquidity concerns As part of its program to stabilize short-term dollar-funding markets the Federal Reserve worked with foreign central banks--14 in all--to establish what are known as reciprocal currency arrangements or liquidity swap lines In exchange for foreign currency the Federal Reserve provides dollars to foreign central banks that they in turn lend to financial institutions in their jurisdictions This lending by foreign central banks has been helpful in reducing spreads and volatility in a number of dollar-funding markets and in other closely related markets like the foreign exchange swap market Once again the Federal Reserves credit risk is minimal as the foreign central bank is the Federal Reserves counterparty and is responsible for repayment rather than the institutions that ultimately receive the funds in addition as I noted the Federal Reserve receives foreign currency from its central bank partner of equal value to the dollars swapped Because the loan to the foreign central bank as well as the repayment of principal and interest are set in advance in dollar terms the Federal Reserve also bears no exchange rate risk in these transactions Slide 2 shows the current value of outstanding swap lines at $57 billion down from $554 billion at the end of last year reflecting the marked improvement in dollar-funding markets across the globe

In March 2008 following a sharp deterioration in funding conditions and the near failure of the investment bank Bear Stearns the Federal Reserve opened up its short-term lending facilities to primary dealers5 Discount window lending and swap lines are part of the Federal Reserves standard toolkit and are recognized in the Federal Reserve Act with provisions specifically identifying and authorizing each practice However the extension of credit to primary dealers is not authorized by the act in routine circumstances To make these loans which we judged to be necessary for the stability of the financial system and of the economy the Board of Governors invoked general emergency lending authority provided by section 13(3) of the act which allows the Federal Reserve to make secured loans under unusual and exigent circumstances to any individual partnership or corporation Using this authority the Federal Reserve made short-term collateralized loans available to primary dealers through an analogue to the discount window called the Primary Dealer Credit Facility (PDCF) In serving as a lender of last resort to this important class of financial institutions the Federal Reserve supported broader market and systemic stability Reflecting a gradual improvement in financial markets outstanding PDCF credit dropped to zero this past spring For similar reasons the Federal Reserve also invoked the 13(3) authority to provide liquidity to another type of financial institution money market mutual funds The money fund industry suffered a significant run in September 2008 after a prominent fund broke the buck--that is was unable to maintain a net asset value of $1 per share Together with an insurance program offered by the Treasury the Federal Reserves lender-of-last-resort activity helped to end the run and stabilize the money funds The final row of slide 2 shows that credit outstanding under the Federal Reserve programs aimed at stopping the run on money funds has also dropped essentially to zero6

The unstinting provision of liquidity by the central bank is crucial for arresting a financial panic By the same token the pricing and terms of central bank lending facilities should discourage usage and encourage firms to return to the private markets when the panic subsides Slide 2 shows that this has been the case Short-term lending to financial institutions was zero in June 2007 just before the crisis began and exceeded $11 trillion at the end of last year Currently as I mentioned this category has fallen to about $264 billion a decline of more than 75 percent since the turn of the year We expect this trend to continue as markets improve

Targeted Lending to Address Credit Market Dysfunction The second category of assets on the Federal Reserves balance sheet shown on slide 3 consists of targeted lending programs aimed at improving the functioning of certain key credit markets thereby providing critical support to the economy Unlike the first category of assets some of these loans are to nonfinancial borrowers As the slide shows this category comprises the Commercial Paper Funding Facility (CPFF) and the Term Asset-Backed Securities Loan Facility (TALF) The current amount of credit outstanding under these programs is about $84 billion or four percent of the assets held by the Federal Reserve

The commercial paper market is an important source of short-term funding for both financial and nonfinancial firms in the United States In September 2008 the collapse of the investment bank Lehman Brothers set off a chain reaction The money fund that broke the buck to which I just alluded did so because of its losses on Lehman Brothers commercial paper Because money market funds are major investors in commercial paper the run on the money funds that ensued also severely disrupted the commercial paper market During this period commercial paper rates spiked even for the highest-quality firms Moreover most firms were unable to borrow for terms longer than a few days exposing both the borrowing firms and the lenders to significant rollover risk The Federal Reserves CPFF addressed this risk by offering to lend at a term of three months at a rate above normal market rates plus upfront fees to high-quality commercial paper issuers This program appears to have been quite successful Since the CPFF was created commercial paper spreads have returned to near-normal levels and--as anticipated--borrowings from the CPFF have declined sharply from $334 billion at the turn of the year to less than $50 billion today

Before the crisis securitization markets were an important conduit of credit to the household and business sectors some have referred to these markets as the shadow banking system Securitization markets (other than those for mortgages guaranteed by the government) were virtually shut down in the crisis eliminating an important source of credit7 To address this concern the Federal Reserve in conjunction with the Treasury launched the TALF Under the TALF eligible investors may borrow to finance purchases of the AAA-rated tranches of certain classes of asset-backed securities The program originally focused on credit for households and small businesses including auto loans credit card loans student loans and loans guaranteed by the Small Business Administration More recently we have added commercial mortgage-backed securities to the program with the goal of mitigating a severe refinancing problem in that sector

The TALF has had some success in restarting securitization markets Rate spreads for asset-backed securities have declined substantially and we are seeing some market activity that does not use the facility Like our other programs the TALF carries little credit risk for the Federal Reserve because we lend investors less than the value of the collateral and because capital from the Treasury provides additional loss-absorption capacity Unlike the other programs TALF credit outstanding has increased over time as the loans made under this program are for terms ranging from three to five years

Relative to the Federal Reserves short-term lending to financial institutions the CPFF and the TALF are rather unconventional programs for a central bank I believe they are justified by the extraordinary circumstances of the past year and by the need for the central banks crisis response to reflect the evolution of financial markets Nonbank sources of credit such as the commercial paper market and the securitization markets are critical to the US economy especially compared with the more bank-centric economies of many foreign countries By backstopping these markets the Federal Reserve has helped normalize credit flows for the benefit of the economy

Purchases of Longer-Term Marketable Securities The third major category of assets on the Federal Reserves balance sheet is holdings of high-quality marketable securities--specifically Treasury securities agency debt and agency-backed MBS As shown by slide 4 these holdings currently total about $16 trillion or about 75 percent of Federal Reserve assets By way of comparison slide 4 also shows that prior to the crisis the Federal Reserve held $791 billion in securities which was about 90 percent of its assets and that all of these securities were Treasury obligations

Even as other categories of assets shrink Federal Reserve holdings of longer-term securities are set to continue to rise in the near term and will increasingly dominate the asset side of the balance sheet As slide 4 shows our holdings of securities declined from the period before the crisis to the beginning of this year The Federal Reserve announced in November 2008 that it would begin to purchase agency debt and agency MBS then in March it announced plans to increase such purchases to as much as $125 trillion in agency-backed MBS and $200 billion in agency debt and also announced plans to buy up to $300 billion in Treasury securities8 We recently indicated that we expect to purchase the full $125 trillion of agency-backed MBS announced in March9 The Treasury purchase program is being completed this month while the purchases of agency securities will be executed by the end of the first quarter of 2010 Note incidentally that the Federal Reserves purchases of Treasury securities have served only to bring its holdings of US Treasury debt back to roughly the level of before the crisis The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses As best we can tell the programs appear to be having their intended effect Most notably 30-year fixed mortgage rates which responded very little to our cuts in the target federal funds rate have declined about 1-12 percentage points since we first announced MBS purchases in November helping to support the housing market

Support for Specific Institutions In addition to the programs I have discussed the Federal Reserve has provided financing directly to specific systemically important institutions In particular with the full support of the Treasury we used our emergency lending powers to facilitate the acquisition of Bear Stearns by JPMorgan Chase amp Co and also to prevent the imminent default of the insurance company AIG Slide 5 summarizes the amount of credit outstanding from these episodes

From a credit perspective these emergency loans obviously carry more risk than traditional provisions of central bank liquidity Two observations on this point are worth making First these loans amount to less than five percent of the Federal Reserves balance sheet Thus Federal Reserve loans that are collateralized by riskier securities are quite small compared with our holdings of assets with little or no credit risk Second and more important these financial risks were the result of actions taken to avert what likely would have been a substantial further intensification of the financial crisis with potentially dire economic consequences

All that said we undertook these operations with great discomfort and only because the United States has no workable legal framework for winding down systemically critical financial institutions in a way that would allow firms to fail and their creditors to lose money without inflicting massive damage on the financial system The Administration and other regulatory agencies have joined the Federal Reserve in calling on the Congress to develop a special resolution regime for systemically critical nonbank financial institutions analogous to one already in place for banks that could be invoked when the impending failure of such institutions threatens financial stability The rules governing such a regime should spell out as precisely as possible the role that the Congress expects the Federal Reserve to play in such resolutions

The Liability Side of the Federal Reserves Balance Sheet Having reviewed the main categories of assets on the Federal Reserves balance sheet let me touch briefly on the liability side (slide 6) The two main components of our liabilities are Federal Reserve notes (that is paper currency) and reserves held at the Federal Reserve by depository institutions In addition as the governments fiscal agent the Federal Reserve holds Treasury deposits

The amount of currency in circulation is determined by the publics demand The public here includes non-US residents as by some estimates more than one-half of US currency by value is held outside the country Banks are required to deposit with the Federal Reserve a certain quantity of reserves which depends on the amount of customer deposits that the banks hold10 Reserves exceeding the required amounts are called excess reserves As you can see from slide 6 the large majority of bank reserves are currently excess reserves

Effectively the Federal Reserve funds its lending and securities purchases primarily through the creation of bank reserves As you can see the quantity of bank reserves held at the Federal Reserve has risen dramatically as the Federal Reserves balance sheet has expanded and reserves are likely to continue to grow as the Federal Reserve purchases additional agency-backed securities Currency and bank reserves together are known as the monetary base as reserves have grown therefore the monetary base has grown as well However because banks are reluctant to lend in current economic and financial circumstances growth in broader measures of money has not picked up by anything remotely like the growth in the base For example M2 which comprises currency checking accounts savings deposits small time deposits and retail money fund shares is estimated to have been roughly flat over the past six months

Large increases in bank reserves brought about through central bank loans or purchases of securities are a characteristic feature of the unconventional policy approach known as quantitative easing The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets Such purchases should in principle both raise asset prices and increase the growth of broad measures of money which may in turn induce households and businesses to buy nonmoney assets or to spend more on goods and services In a quantitative-easing regime the quantity of central bank liabilities (or the quantity of bank reserves which should vary closely with total liabilities) is sufficient to describe the degree of policy accommodation

Although the Federal Reserves approach also entails substantial increases in bank liquidity it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed For lack of a better term I have called this approach credit easing11 In a credit-easing regime policies are tied more closely to the asset side of the balance sheet than the

liability side and the effectiveness of policy support is measured by indicators of market functioning such as interest rate spreads volatility and market liquidity In particular the Federal Reserve has not attempted to achieve a smooth growth path for the size of its balance sheet a common feature of the quantitative-easing approach

Exit Strategy My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period At some point however as economic recovery takes hold we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road Looking at the Federal Reserves balance sheet is useful once again in helping to understand key elements of the Federal Reserves exit strategy from its current policies (slide 7)

As we just saw in slide 6 banks currently hold large amounts of excess reserves at the Federal Reserve As the economy recovers banks could find it profitable to be more aggressive in lending out their reserves which in turn would produce faster growth in broader money and credit measures and ultimately lead to inflation pressures As such when the time comes to tighten monetary policy we must either substantially reduce excess reserve balances or if they remain neutralize their potential effects on broader measures of money and credit and thus on aggregate demand and inflation

To some extent excess reserves will automatically contract as improving financial conditions lead to reduced use of our special lending facilities and ultimately to their closure Indeed as I have already noted the amount of credit outstanding in the first two categories of assets (short-term lending to financial institutions and targeted lending programs) has already declined substantially from about $15 trillion at the beginning of the year to about $350 billion In addition reserves could be reduced by about $100 billion to $200 billion each year over the next few years as securities held by the Federal Reserve mature or are prepaid

However even if our balance sheet stays large for a while we have two broad means of tightening monetary policy at the appropriate time--paying interest on reserve balances and taking various actions that reduce the stock of reserves In principle we could use either of these approaches alone however to ensure effectiveness we likely would use both in combination

The Congress granted us authority last fall to pay interest on banks balances at the Federal Reserve Currently we pay banks an interest rate of 14 percent When the time comes to tighten policy we can raise the rate paid on reserve balances as we increase our target for the federal funds rate In general banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve Moreover they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because by so doing they can earn a spread without risk Thus the interest rate that the Federal Reserve pays should tend to put a floor under short-term market rates Raising the rate paid on reserve balances also discourages excessive growth in money or credit because banks will not want to lend out their reserves at rates below what they can earn at the Fed Considerable international experience suggests that paying interest on reserves is an effective means of managing short-term market rates For example the European Central Bank (ECB) allows banks to place excess reserves in an interest-paying deposit facility Even as the ECBs liquidity operations have substantially increased its balance sheet the overnight interbank rate has remained at or above the ECBs deposit rate The Bank of Japan the Bank of Canada and several other foreign central banks have also used their ability to pay interest on reserves to maintain a floor under short-term market rates

Although in principle the ability to pay interest on reserves should be sufficient to allow the Federal Reserve to raise interest rates and control money growth this approach is likely to be more effective if combined with steps to reduce excess reserves I will mention three options for achieving such an outcome

First the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements (reverse repos) with financial market participants including banks the GSEs and other institutions Reverse repos which are a traditional and well-understood tool of monetary policy implementation involve the sale by the Federal Reserve of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date Reverse repos drain reserves as purchasers transfer cash from banks to the Fed Second using the authority the Congress gave us to pay interest on banks balances at the Federal Reserve we can offer term deposits to banks roughly analogous to the certificates of deposit that banks offer to their customers Bank funds held in term deposits at the Federal Reserve would not be available to be supplied to the federal funds market Third the Federal Reserve could reduce reserves by selling a portion of its holdings of long-term securities in the open market Each of these policy options would help to raise short-term interest rates and limit the growth of broad measures of money and credit thereby tightening monetary policy

Overall the Federal Reserve has a wide range of tools for tightening monetary policy when the economic outlook requires us to do so We will calibrate the timing and pace of any future tightening together with the mix of tools to best foster our dual objectives of maximum employment and price stability

Conclusion By using our balance sheet the Federal Reserve has been able to overcome at least partially the constraints on policy posed by dysfunctional credit markets and by the zero lower bound on the federal funds rate target By improving credit market functioning and adding liquidity to the system our programs have provided critical support to the financial system and the economy Moreover we have carried out these programs responsibly with minimal credit risk and with close attention to the exit strategy Our activities have resulted in substantial changes to the size and composition of our balance sheet When the economic outlook has improved sufficiently we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration

Footnotes 1 Ben S Bernanke (2009) The Federal Reserves Balance Sheet speech delivered at Looking Forward Rebuilding the Credit Markets the 2009 Credit Markets Symposium sponsored by the Federal Reserve Bank of Richmond held in Charlotte NC April 2-3 Return to text

2 See Credit and Liquidity Programs and the Balance Sheet Return to text

3 The Federal Reserve publishes its balance sheet each week typically around 430 pm Thursday The balance sheet is included in the Federal Reserves H41 Statistical Release Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks Return to text

4 See Brian F Madigan (2009) Bagehots Dictum in Practice Formulating and Implementing Policies to Combat the Financial Crisis speech delivered at Financial Stability and Macroeconomic Policy a symposium sponsored by the Federal Reserve Bank

of Kansas City held in Jackson Hole Wyo August 20-22 and Ben S Bernanke (2008) Liquidity Provision by the Federal Reserve speech delivered (via satellite) at the Financial Markets Conference sponsored by the Federal Reserve Bank of Atlanta held in Sea Island Ga May 13 Return to text

5 Primary dealers are broker-dealers that trade in US government securities with the Federal Reserve Bank of New York Return to text

6 The programs for money market funds are the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility or AMLF and the Money Market Investor Funding Facility or MMIFF Return to text

7 The shutdown of these markets was traced in part to broad concerns about the risks of structured products particularly those backed by nonprime mortgages In addition these difficulties were linked to the evaporation of liquidity from short-term credit markets In the years leading up to the financial crisis market participants increasingly used short-term debt to fund the purchase of highly rated tranches of securitizations in some cases with little or no liquidity support As a result when short-term credit markets froze the demand for highly rated tranches of securitizations dropped Return to text

8 See Board of Governors of the Federal Reserve System (2008) Federal Reserve Announces It Will Initiate a Program to Purchase the Direct Obligations of Housing-Related Government-Sponsored Enterprises and Mortgage-Backed Securities Backed by Fannie Mae Freddie Mac and Ginnie Mae press release November 25 and Board of Governors of the Federal Reserve System (2009) FOMC Statement press release March 18 Return to text

9 Board of Governors of the Federal Reserve System (2009) FOMC Statement press release September 23 Return to text

10 Reserves can also be held in the form of vault cash Return to text

11 See Ben S Bernanke (2009) The Crisis and the Policy Response speech delivered at the Stamp Lecture London School of Economics London England January 13 and Ben S Bernanke (2009) Federal Reserve Policies to Ease Credit and Their Implications for the Feds Balance Sheet speech delivered at the National Press Club Luncheon National Press Club Washington DC February 18 Return to text

The Federal Reserves Balance Sheet An Update October 8 2009 httpwwwfederalreservegovnewseventsspeechbernanke20091008ahtm

Data for slides presented with speech given by Chairman Bernanke on October 8 2009

Federal Reserve Balance Sheet (Billions of dollars)

9300962707Total assets 2144 869 Short-term lending programs for financial institutions 264 0

Targeted lending programs 84 0 Securities holdings 1593 791 Treasury securities 769 791 GSE-related securities 824 0 Emergency lending 101 0 Other assets (such as foreign exchange bank premises) 102 78

Total liabilities 2093 836 Federal Reserve notes 874 775 Reserve balances 848 16 Treasury deposits 273 4 Other (such as foreign official deposits) 98 41

Assets Short-Term Lending Programs for Financial Institutions

(Billions of dollars) 93009 123108 62707

Short-term lending programs for financial institutions 264 1159 0

Discount window 29 94 0 Term auction facility 178 450 0 Currency swaps 57 554 0 Primary dealer credit facility 0 37 0 Money market fund facilities 0 24 0

Assets Targeted Lending Programs (Billions of dollars)

93009 12310862707Targeted lending programs 84 334 0 Commercial Paper Funding Facility 41 334 0 Term Asset-Backed Securities Loan Facility 43 0 0

Assets Securities Holdings (Billions of dollars)

93009 123108 62707 Securities holdings 1593 496 791 Treasury securities 769 476 791 GSE-related securities 824 20 0 Note GSE Government-sponsored enterprise Return to table

Assets Emergency Lending (Billions of dollars)

93009 12310862707Emergency lending 101 113 0 Maiden Lane LLC (Bear Stearns) 26 27 0 Maiden Lane II LLC (AIG RMBS holdings) 15 20 0

Maiden Lane III LLC (AIG-backed CDOs) 21 27 0

Credit to AIG 39 39 0 Note RMBS Residential mortgage-backed security Return to table CDO Collateralized debt obligation Return to table

Liabilities (Billions of dollars)

93009 12310862707Total liabilities 2093 2199 836 Federal Reserve notes 874 853 775 Reserve balances 848 860 16 Required balances 26 22 13 Excess balances 822 838 3 Treasury deposits 273 365 4 Other (such as foreign official deposits) 98 121 41

Exit Strategy bull Wind-down of short-term lending bull Interest on reserves bull Reverse repurchase agreements bull Time deposits for depository institutions bull Runoffs and asset sales

08102009

A new season starts in the Berlusconi soap opera

ldquoI donrsquot care what Napolitano saysrdquo is what Italyrsquos prime minister said about Italyrsquos president according to La Repubblica We know from previous occasions that Berlusconi is not a good loser and he wasted no time to accuse the constitutional court of a socialist bias and of playing politics The court yesterday struck down Berlusconirsquos immunity law which gives him immunity from prosecution while in office on two constitutional grounds The first is article 3 which stipulates that all citizens are equal before the law and the second is article 138 which says that such legislation should have been constitutional law not ordinary law

The ruling unblocks two legal cases against Berlusconi in Milan including one on which he is accused of corruption Berlusconi meanwhile pledged that he would not resign and that he would see out his term with or without the immunity law The article also quoted the Italian justice minister as saying that the ruling was a surprise especially the reference to Art 138 which the court could have stipulated five years ago

The court ruled with a majority of 9 of the 15 justices La Repubblica said the deliberations had been difficult and controversial

A French answer to the timing of the exit There were two articles that gave us a clue about what criteria the French government will use to determine when is the right time to start exiting Among Francersquos policy establishment there is a strong consensus on this question Christian Lagarde writes in the FT that the timing is determined entirely by unemployment Once this falls it is time to exit Josef Stiglitz in an interview with the Wall Street Journal relays the position of Dominique Strauss-Kahn according to which the right timing is when ldquounemployment is down long enoughrdquo ie not just waiting until unemployment falls but continue to wait for a while longer Since employment is forecast to deteriorate at least until the winter 20102011 in most industrialised economies it is difficult to see ndash under this metric at least ndash how an exit could happen any

time soon

Lellouche wants joint Franco-German ministries Frankfurter Allgemeine reports this morning that the French European minister Pierre Lellouche wants to start a new era of Franco-German co-operation In a newspaper article he called a common European bond to finance Franco-German infrastructure projects better co-ordination in tax and energy policies even joint ministries In particular he proposed that France and Germany join forces in negotiating with Russia about energy supplies as a first step towards a European energy agency The article says France was particularly concerned about post-crisis developments as both countries are now pursuing different policies The article also said that Germanyrsquos unilateral decision to include a balanced budget clause in its constitution has caused consternation in Paris

Spainrsquos deficit even worse Spainrsquos deficit projections look likely to be derailed by huge overshoots from the autonomous regions with 10 out 17 regions failing to reach the target in 2008 The target is 075 of GDP but Navarre had a deficit of 47 while Valencia and Catalonia had deficits of over 2 with debt-to-GDP ratios of over 10 El Pais writes that the 2008 published yesterday are a warning about what is to come in the crisis which in Spain at least shows no signs of decelerating

And more problems ahead

Edward Hugh has an in-depth analysis on Spainrsquos falling current account deficit He points towards the net outflow of interest on external borrowing which runs at euro3bn a month The biggest danger to the Spanish economy right now is an economic recovery elsewhere as that would raise interest rates and with it Spainrsquos interest payments It would raise the cost of mortgages as 85 of all mortgages are variable-rate

US is fretting over the end of the dollar as a reserve currency The FT has an article over the anxieties in the US about the recent weakness of the dollar which has tuned into a political problem for the Obama administration The administration itself painstakingly tries to cling to the illusion of a strong-dollar policy yet the economic reality is changing fast There is agreement among analysts that the normalisation of financial markets and rising interest rates elsewhere have re-introduced risk appetite and raised flows of funds abroad Ken Rogoff said the dollar would lose its reserve currency status within 40 years

Czech prime minister tries and fails to calm fears Frankfurter Allgemeine reports on a meeting between Reinfeldt Barroso Buzek and Fischer to discuss the Czech ratification of the Lisbon Treaty Fischer assured his colleagues that the Czech constitutional court had given assurance that the latest constitutional challenge would be decided swiftly and that everything was still on course for ratification before the end of the year When asked whether he had received assurance from Klaus Fischer apparently became evasive and Reinfeldt confirmed that several attempts to contact Klaus had failed

Austria to extend export guarantees

The Austrian government is to support its export industry by new extended guarantees reports Der Standard The state plans to reinsure export insurers for exports to other OECD countries and the EU the latter will be subject to approval from the Commission The guarantees of euro2bn-euro3bn are to be taken by end of 2010 and financed by the Oestreichische Kontrollbank The scheme exists already for exports to non-OECD countries such as Ukraine So far only one credit insurer made use of the state guarantee

Paul de Grauwe on debt Paul de Grauwe makes an important point about the stability pact in an article in Telos He writes that when the pact was conceived private debt was totally ignored But since the pactrsquos creation private debt exploded especially in the financial sector ultimately forcing governments to provide full-scale guarantees which would later reverberate on the public debt (This means that any effective debt control regime must take private-sector developments into account)

httpwwweurointelligencecomarticle581+M54b3b6111c20html

08102009 Wasting a crisis By Richard Portes

We are on the verge of lsquowasting a crisisrsquo In both Europe and the US reform of financial regulation is either taking the wrong directions or stalled Politicians are picking the easy targets that they believe will appease public opinion or caving in to well-connected well-financed lobbying by the resurgent big banks

That is not for want of good analysis by academics and others We understand what happened why it happened and what could lessen the risk of a future crisis of this magnitude[1] The best of the regulators as well as the Financial Stability Board have some agreement on the appropriate solutions But they are not calling the shots And the national regulators are often part of the problem rather than the solution They are reluctant to collaborate with each other and with supranational institutions partly for fear of losing some of their authority partly because they too face strong lobbies and are subject to regulatory capture

Let us start where our political leaders started ndash and mainly seem to be ending tax havens bonuses regulating hedge funds private equity and credit rating agencies We then consider the banks themselves macroprudential regulation and regulating the markets We conclude with an important set of cross-border issues that hinder progress in many of these areas

Tax havens had nothing to do with the crisis nor with preventing or mitigating future crises but they were an easy convenient target And they are disappearing That is good but we might wonder why they were not shut down earlier since the major countries always had the instruments of pressure that they have finally used

The quick return of big bonuses is offensive as was the overall widening of income differentials we saw in the two decades preceding the crisis But anyone who criticised greed should not be surprised that there is no shame and calls for new higher standards of behaviour are unrealistic Bonuses may have encouraged lsquoshort-termismrsquo But caps will be evaded one way or another as the big financial firms compete for stars who they believe contribute much more to profits than whatever bonuses they need to offer them Even if enforced new compensation rules will not significantly curb dangerous risk-taking nor instil long-term incentives After all most employees of Bear Stearns and Lehman Brothers had much of their personal wealth invested in their companiesrsquo shares ndash and lost it The right policy response to deal with extreme inequality is to raise taxes on very high incomes (not those over pound150000 but those over pound1000000 say) and to tax wealth

The draft Alternative Investment Funds Directive proposed by the European Commission without external consultations and embraced by indignant parliamentarians and some heads of government is another misplaced irrelevant effort There is no evidence that hedge funds or private equity had any role in causing the crisis although hedge fund deleveraging has been a part of the process through which the financial crisis has hit both asset prices and the real economy Still the funds were not as highly leveraged as the big banks and they played no part in the emission of toxic securities relatively little part in their absorption These institutions require more regulatory oversight only insofar as they behave like banks and do maturity transformation with unduly high degrees of leverage

The European Commission and Parliament rushed to regulate the credit rating agencies and now the US Congress may take similar measures But this is precisely the wrong way to go Rather than registration surveillance and monitoring their models which will have no effect whatsoever the right policy would be to remove the agencies from the regulatory system That is eliminate the lsquoregulatory licencersquo which gives the ratings a direct role in limiting investment choices by asset managers and banks The regulators have in effect outsourced to the agencies their own responsibilities for evaluating the riskiness of institutionsrsquo portfolios while eliminating the institutionsrsquo responsibilities for due diligence And official lsquorecognitionrsquo of a few agencies is one reason for the highly oligopolistic structure of the industry and its dysfunctional incentives which in turn underlie some of the shocking practices that were an important element in the creation and sale of toxic assets The SEC and some congressmen have raised the fundamental issues but it seems unlikely that they will take effective action In Europe policy-makers underestimate the importance of the regulatory licence

The banking sector was already overly concentrated before the crisis It is now more so and there will be many more failures of small and medium-size banks with resulting further lsquoconsolidationrsquo The remaining big banks have even more power Far from being humbled by their egregious errors they are vigorously and successfully opposing reforms that might reduce their profitability or their capacity to lsquoinnovatersquo for which read lsquogenerate new kinds of overly complex opaque highly profitable financial instruments and activitiesrsquo The banks are not just too big to fail they are too big andtoo complex to regulate even to manage effectively or to control risk But only Neelie Kroes has any apparent desire to break them up ndash the UK Competition Commission and FSA and US Department of Justice and financial regulators have no appetite for this nor do

finance ministries

There has been some serious discussion among officials of setting capital ratios that rise with bank size or simply taxing banks on the basis of their assets This is feasible and might be effective but ministers and legislators have so far shown little interest A lsquoTobin taxrsquo on financial transactions would doubtless reduce their volume ndash if it were enforceable which is highly unlikely But that would have little effect on size or concentration in the financial sector Moreover at any realistic rate it would not curb speculation and some analyses suggest it would raise rather than lower volatility in financial markets This is a bad idea whose time has fortunately not come ndash another reason to be thankful for the exit of Peer Steinbruumlck

The bottom line nothing much will be done about the banks and their modus operandi despite ndash or because of ndash their highly vocal concern about lsquooverregulationrsquo and the supposed proliferation of national-level constraints on their activities The US Treasuryrsquos proposal for a new agency to protect the consumers of financial services is perceived by the banks as a threat sufficiently serious to warrant strong opposition which may well gut it even if the new agency is created Some initiatives ndash including public ownership ndash and the deleveraging process itself will for a time reduce the degree of globalisation of the big banks but probably not enough to ease the severe problems of cross-border regulation and crisis resolution

The only potentially effective policy instrument here is the excellent lsquoliving willrsquo proposal that big banks be required to propose detailed pre-packaged resolution procedures that would apply when regulators judged that the bank had gone beyond the stage where prompt corrective action could save it These would be agreed ex ante with all the bankrsquos regulators which would require some degree of ex ante acceptance of burden sharing across regulatory jurisdictions But this would not be in the form of burden-sharing rules that would apply uniformly regardless of the particular circumstances of the institution Many policy-makers who have opposed such rules therefore seem keen on the living will It would have the additional important benefit of forcing the banks to unwind some of the most complex features of their organisational structures ndash the many and interlocking subsidiaries and branches whose primary purpose is often tax avoidance and whose secondary effect is to hinder effective control and risk management by the centre

We know what to do for macroprudential regulation an essential new component of a reformed regulatory regime some combination of countercyclical capital ratios liquidity ratios leverage ratios and perhaps mortgage loan-to-value ratios The banks will complain that this is all too complex too constraining so the outcome is likely to be a relatively weak set of requirements with the ratios set too low to make much difference There is one important consequence of such macroprudential regulation however that has been somewhat neglected Although business cycles may be more highly correlated across countries now than in the past they are still to a considerable extent national as are some asset price bubbles (eg within the eurozone we saw housing price bubbles in Ireland and Spain while German housing prices actually fell) That implies that the parameters of countercyclical macroprudential regulation have to be set at a national level which in turn implies that the host regulator rules That means that branches of global banks would be treated differently in different countries ndash an unsustainable position Hence there will be pressure on cross-border banks to go from branches to subsidiaries

New regulation of securities markets is likely to be weak It is widely recognised that the US Commodity Futures Modernisation Act of 2000 which precluded any regulation in this area was a major mistake but proposed changes are minor The pressure to move some over-the-counter transactions to central counterparties has finally had some effect but

just as the banks have dragged their heels as long as possible before conceding this so they will fight to retain opacity for the most lucrative transactions They maintain that many of these instruments are so tailored to customer requirements that their specificity makes it impossible even to put them through central counterparties much less to permit exchange trading But it is only exchange trading that could really provide the transparency necessary for effective regulatory oversight and control That transparency and the limits on specificity the commoditisation of these instruments would make them much less profitable And if some specificity is lost so much the better ndash it is the complexity and lack of transparency that has turned out to be dangerous

It is not surprising that the lobbying effort here is intense and likely to be decisive And some segments of the non-financial sector have been lobbying too with effect by claiming that even routing swaps through a central counterparty would require them to put up large amounts of collateral In any case their interest rate and foreign exchange derivatives are not particularly dangerous ndash but credit default swaps (CDS) are not so much in their original form as insurance but in the way the market morphed far beyond this role

It is even more unlikely however that there will be any move to enforce exchange trading for CDS contracts Nor will there be any attempt to ban lsquonakedrsquo credit default swap (CDS) contracts where the buyer is not insuring against credit risk on a holding of an underlying bond but rather is simply taking a position on which way the marketrsquos perception of the riskiness of a firm or sovereign will move These instruments have been a potent source of destabilising speculation even market manipulation There is no justification for these instruments as beneficial hedges and since the cost of funds for issuers must stay above the CDS price the market can be a key link in a vicious circle that brings an institution down And that major weakness in our financial structure seems likely to survive simply because the market is so profitable for a few big banks

Finally the problems of cross-border competition and obstacles to cooperation are formidable Competition in the labour market makes it difficult for any national regulator to enforce really hard-hitting curbs on potentially harmful compensation practices Competition among financial centres leads to regulatory arbitrage and unwillingness of national regulators to disadvantage their own large cross-border institutions Memoranda of (mis)understanding among regulators with no binding force and bureaucratic obstacles to quick action are useless when crises come Again the only feasible and effective way of organising resolution of a large complex financial institution in distress is the lsquoliving willrsquo proposal Some politicians including the British Chancellor of the Exchequer seem keen on it But we need broad agreement among the major countries That could be well worth the considerable effort it would require

Overall then the perception that we have avoided catastrophe has already weakened the momentum for serious reforms and the obstacles are formidable We know the lessons of the crisis but may be unable to apply them That would be a huge missed opportunity

[1] See MDewatripont et aleds Macroeconomic Stability and Financial Regulation CEPR March 2009 V Acharya and M Richardson eds Restoring Financial Stability Wiley 2009 M Brunnermeier et al The Fundamental Principles of Financial Regulation CEPR and ICMB 2009 and a wide range of contributions on wwwVoxEUorg

The author is Professor of Economics London Business School and President Centre for Economic Policy Research Richard Portes Wasting a crisis08102009 httpwwweurointelligencecomarticle581+M51603b1a7dd0html

US regulators probe mainframes market By Richard Waters in San Francisco

The US Department of Justice has begun a preliminary investigation of the mainframe computer market potentially drawing fresh scrutiny of dominant mainframe maker IBM more than half a century after US regulators first took action to curb its power

IBM said it understood a competitor had been approached by regulators over the issue and that it would ldquoco-operate with any inquiriesrdquo

The signs of interest from the justice department appear to echo a similar enquiry opened by European regulators two years ago though the precise focus of the DoJrsquos review could not be established

IBM has historically dominated the market for mainframes ndash machines that handle high-volume processing and are used in intensive applications by banks telecoms operators and others ndash thanks to its control of both the machinesrsquo hardware and software operating system

That drew scrutiny from US regulators in the early days of business computing eventually prompting IBM to ldquounbundlerdquo its technology and sell its software separately ndash a move that helped to lay the foundations for the modern software industry

The company has faced more recent claims from a handful of smaller companies that it has acted unfairly by refusing to license out its operating system preventing rivals from building lower-cost machines that are compatible with its technology

A US judge last week summarily dismissed one of those complaints against IBM from T3 a Florida-based company that had been forced to abandon sales of its own IBM-compatible mainframe after the computer giant refused to renew a licence for its software

Judge Lewis Kaplan in federal court in Manhattan said that T3 did not have a case to make because IBM had licensed the technology in the past to two of the companyrsquos suppliers rather than to T3 directly

He added that the suppliers which had brought complaints of their own also lacked a case since IBM had acted within its rights to stop licensing its old software when it moved on to a new generation of technology

Despite the dismissal of the T3 case IBM said on Wednesday that it understood that the DoJ had asked the company for documents from the litigation It added ldquoWe continue to believe there is no merit to T3rsquos claims and that IBM is fully entitled to enforce our intellectual property rights and protect the investments that we have made in our technologiesrdquo

httpwwwftcomcmss04bd95262-b3a6-11de-ae8d-00144feab49ahtml

WWIIs Unclaimed Treasure States Battle US For Billions in Lost War Bonds

By David Cho Washington Post Staff Writer Thursday October 8 2009

Nearly 70 years ago the federal government began issuing hundreds of billions of dollars in savings bonds to finance the greatest war effort in the nations history with no less than President Franklin D Roosevelt who summoned patriotic Americans to one great partnership buying the very first

But the bonds came with a catch They wouldnt be paid off for 40 years an unusually long time As the decades passed after World War II $167 billion worth of bond certificates were either forgotten in dusty attics or thrown out in the trash

That treasure has remained unclaimed But now someone is stepping forward the states

A half-dozen state governments have filed a lawsuit against the federal government to get that money They say the Treasury Department has done nothing to find the original bondholders or their descendants -- not even sending out a letter when it came time for the government to repay the bonds Moreover the states say they have laws that empower them to take for themselves whatever goes unclaimed which would be a welcome infusion of cash at a time of economic distress

The Treasury has decided to fight back seeking to keep the states hands out of its pockets Oral arguments are expected to begin in the coming weeks in US District Court in New Jersey where the lawsuit was originally filed

Its daunting said Randall Berger a partner at Kirby McInerney who is representing the states in the suit But the states are doing it because they need the money and because they have these statutes that clearly lay out what happens to unclaimed property

Spokesmen for the Treasury and the US attorneys office which represents the department declined to comment

The case will largely turn on the issue of where the boundaries are between federal and state power say lawyers for the states If the court rules in favor of the US government the Treasury could keep money it owes to ordinary Americans But if the states win they could continue to tap unclaimed US bonds in the future in effect establishing a new stream of funding from Washington

Some states such as California and New York stand to reap as much as $16 billion according to figures compiled by the states based on federal data Virginia and Maryland could get more than $300 million each while the District could get as much as $81 million The states that have joined the lawsuit are Kentucky Missouri Montana New Jersey North Carolina and Oklahoma More havent joined because they do not know about it Berger said

When the savings bonds were first sold in 1941 the government stressed the patriotic duty of citizens to support the war effort The Treasury produced radio musicals urging listeners to buy war bonds while broadcast networks enlisted top celebrities to make a similar pitch

Newspaper carriers volunteered to sell bonds along their routes Well after World War II the Treasury continued to issue the bonds though their maturity was reduced to 30 years in 1965

Because many of the bonds may have been lost over the decades state officials said they expect that a substantial chunk of the unclaimed money may end up in their coffers if they win the lawsuit The Treasury kept a list of the original addresses of the bondholders but never tried to contact them according to court documents filed by the states But the agency has set up a Web site TreasuryDirectcom to help people figure out whether they or their relatives hold a bond In many cases original bondholders died and their rights passed to relatives

State governments employ staff members who are responsible for matching unclaimed property -- everything from land to checking accounts -- with the rightful owners But state officials wouldnt purse the bondholders before the federal government provided the unclaimed proceeds The Treasury balked A lawsuit was filed in 2004 to settle the matter and after a lengthy exchange of motions is now seeing the inside of a courtroom

In April Sen John D Rockefeller IV (D-WVa) introduced a bill to have the Treasury pay states $30 for every bondholder they find

Senator Rockefeller believes we should return unclaimed bonds to their rightful owners putting money in the pockets of families during tough economic times said Rebecca Gale a Rockefeller spokeswoman He introduced this legislation with the support of state treasurers so the states would have a chance to review and find the rightful owners

But some state officials involved in the suit criticized the measure for not resolving who should get the unclaimed bonds No companion bill has been introduced in the House

For now it appears it will be up to the federal courts to settle the matter

In court filings the states cited the 10th Amendment of the Constitution which they say gives them the right to be custodians of unclaimed funds

It makes more much sense rather than have the money sit in the Treasury for Montana to take charge of its part Montana Attorney General Steve Bullock said The savings bonds that were issued starting some 60 years ago werent there to benefit the federal government if the bonds were unclaimed

The federal government fired back arguing that the bonds do not represent unclaimed property and that the states do not have the standing to interfere with a federal contract between a bondholder and the government Federal attorneys also raised the issue of sovereign immunity -- a principle that bars lawsuits against the federal government unless the government allows such suits to go forward In this case the government has not given the states permission to sue on this matter

Such arguments are part of a long legal battle over state and federal powers as old as the United States itself One of the case filings by the states refers to legal precedence established when American colonists were fighting for independence from King George III of England

Attorneys for the states say the matter could end up in the Supreme Court given the constitutional issues at hand

In this case we are talking about the differences in power the framers of the Constitution had in mind between the federal government and the state government said Berger the lead attorney for the states

httpwwwwashingtonpostcomwp-dyncontentarticle20091007AR2009100703681htmlhpid=artslot

Oct 7 2009

How Can Congress Fix the OTC Derivatives Market

Overview Representative Barney Franks latest derivatives legislation proposed Oct 2 goes less far than the administrations proposal The draft by Frank a Massachusetts Democrat would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc compared with the administrationrsquos proposal The administrationrsquos plan would force all standardized derivatives transactions to be executed on an exchange or processed through a regulated clearinghouse which impose collateral and margin requirements on trades Frankrsquos bill wouldnrsquot move as many trades to exchanges (Bloomberg October 6 2009)

o On July 24 Congressman Barney Frank spoke on the CDS draft bill to be released in early August If we can get rules where almost every derivative is traded on an exchange and those that arent because they are just too unique are backed by additional capital he said then that may do it Otherwise Franks draft bill could ban naked CDS in which investors dont own the the underlying debt The administrations final draft bill delivered to Congress on August 11 contains new provision to block OTC derivatives from being marketed inappropriately to unsophisticated parties like eg pension funds and local government agencies

o June 26 Gary Gensler the new Commodity Futures Trading Commission (CFTC) chairman in a speech proposed higher capital requirements for customized products to encourage standardization and on-exchange trading He also singled out hedge funds as causing a run on liquidity

o Senate Hearing Results June 23 Securities and Exchange Commission (SEC) Chairman Mary Schapiro proposed that her agency oversee derivatives linked to stocks bonds (including corporate CDS) and securities and that the CFTC oversee all other derivatives including derivatives related to interest rates foreign exchange commodities energy and metals At the hearing Gensler pushed for more aggressive regulation than the Obama administration had requested seeking to require that standardized derivatives be traded on electronic exchanges including a central counterparty as well as price and volume transparency (via WSJ)

o Professors Viral Acharya and Robert Engle NYU Stern The focus on standardized OTC products is dangerous all derivative products should be addressed in the new regulations (via WSJ)

o See BIS H2 2008 OTC Derivatives Survey

httpwwwrgemonitorcom

Oct 7 2009

Will Unsecured Bank Creditors Take A Haircut Eventually Or Secured Ones Overview The deepest darkest concern of bond professionals is whether bond holders of banks will ever be asked to share the bailout pain Ever since Lehman the Feds reluctance to impair bank bonds has been palpable For starters finance issues represent more than 60 of 1-5 year maturity bonds They are ubiquitous in pension funds insurance company portfolios and until last fall money market funds (most money market funds have moved up the capital structure to CDs at this point) So there are systemic reasons to protect them (Paul Kedrosky) Large foreign holdings of bank debt may complicate matters further as the US is dependent on foreign financing

o FDIC Chairwoman Sheila Bair Like the broad authority provided to the FDIC these powers should include the ability to reject burdensome contracts sell assets resolve claims and establish and operate bridge financial companies A more far reaching proposal to consider is limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm This could involve limiting their claims to no more than say 80 percent of their secured credits This would ensure that market participants always have lsquoskin in the gamersquo(October 4 2009)

o Joseph Mason The point on secured creditors incl repo and derivatives counterparties is a very important one because due to regulatory exemption from stays in case of bankruptcy these creditors seize their collateral immediately Repo and derivatives counterparties are de facto senior to depositors in case of bank failures thus potentially depleating the deposit incurance fund (October 6 2009)

o Example via FT Goldman Sachs stands to receive a payment of $1bn - while US taxpayers would lose $23bn - if embattled commercial lender CIT files for Chapter 11 bankruptcy protection The agreement with Goldman states that if CIT defaults or goes bankrupt it would be required to pay a make-whole amount of $1bn the people familiar with the matter said It is however more likely that Goldman would postpone the full payment it is entitled to (October 5 2009)

o On the other hand CIT test case shows that the government is less eager to engage and that bondholders are starting to consider a debt restructuring

o March 20 Economist it looks just about possible that Americarsquos banking system and with it its unsecured creditors can stagger on assuming $13 trillion in incremental losses as per RoubiniParisi-Capone if 1) American banks were to convert all of their hybrid tier-one capital of $440bn into common equity of currently $700bn and 2) if pre-tax pre-provision earnings continue to roll in at the current rate of about $200bn pa

o March 20 Greenspan The need of fresh either public or private capital is ldquonorth of $750 billionrdquo and canrsquot be met just from banksrsquo cash flows

o March 11 Bloomberg Most US bank debt is held by insurers and foreign investors with a small portion owned by mutual funds said FTNrsquos Darst The Investment Company

Institute a trade group representing mutual funds doesnrsquot keep statistics on fund ownership of bank debt spokeswoman Ianthe Zabel said

o Bloomberg Rep Brad Sherman (House Financial Services Committee member) Banks can go into receivership shed their shareholders shed or reduce the amount they owe to their bondholders and come back out much stronger institutionsrdquo Bond investors growing increasingly scared

o March 11Bloomberg The concern among debt holders is reflected in Citigrouprsquos $789 million outstanding in 725 percent subordinated notes due in October 2010 which fell 7 cents on March 11 to 70 cents on the dollar and have lost 237 cents in the past three weeks according to Trace the bond-pricing service of the Financial Industry Regulatory Authority That puts the spread over Treasuries of similar maturity at 327 percentage points Bank of Americarsquos 74 percent senior subordinated debt due in January 2011 rose 49 cents to 85 cents on the dollar They traded at 989 cents in Febuary

o Barney Frank suggested government takeovers should not hit bondholders as this would risk damaging investors such as university and hospital endowments and drive them from the banking sector however bank debt has taken a hit in recent months with the sector not benefiting from the increase in demand for investment grade bonds in other sectors (FT)

o Chris Whalen (IRA) Remembering that half of the liabilities of C BAC and JPM are funded out of the bond markets and not via deposits it should be clear to one and all that the US taxpayers are not in a position to subsidize the bond holders of these three banks representing some $15 trillion in debt if the deposits of these banks are to be protected Some people indeed many people believe that we must avoid another Lehman Brothers type resolution where bondholders take a loss but to us the only scenario where depositors of C BAC JPM do not take a loss is if we haircut the bond holders

o PIMCO Shake hands with the Government If you thought Lehman Brothers was a mistake just stand by and see what nationalizing Citi or BofA would do Positions itself as if pain-sharing unlikely

o Interfluidity Nationalize like real capitalists if we have a bit of courage we should impose haircuts or debt-to-equity conversions on unsecured creditors but I dont think we have that kind of courage

o Jeremy Siegel (Wharton) Any additional infusions of taxpayer money should ensure that the banks bondholders take a haircut in addition to the losses already felt by stockholders who have watched the value of their shares plummet

Oct 7 2009

What Do German Factory Orders Suggest About the Strength of the Recovery Overview On October 7 2009 data on German factory orders showed an further gain for the month of August The result suggests a further expansion of industrial production in the coming month The question remains how strong and sustainable the recovery will turn out to be

Recent Trends o Factory orders rose 14 in the month of July following a gain of 31 in July 2009

While this sixth consecutive monthly gain exceeded the consensus forecast orders are still down 204 compared to August 2009 Analysts had expected an increase of 11 Total orders have increased 17 since February 2009

o Foreign orders rose 46 while domestic orders declined 19 following a strong expansion in the previous month In July 2009 domestic orders jumped 95 due to a large demand from the defense sector

o The Manufacturing PMI posted another increase in September supported by a further rise in new orders which proved to be the strongest since March 2008

Comments and Forecasts

o Another solid set of numbers that points to the effectiveness of earlier stimulus measures in boosting manufacturing output Taken on their own these numbers continue to suggest German Industrial Production will post a large increase tomorrow We continue to believe this in turn should be consistent with the German economy posting a 1 growth figure in the third quarter largely off the back of the ldquocash for clunkersrdquo car incentive scheme (Societe General Cross Asset Research October 7 2009)

o According to Nick Kounis from Fortis Bank ldquoGermany is clearly the star performer reflecting its status as an export powerhouse Other big economies -- such as Italy and Spain -- are seeing a lackluster recovery Indeed this report underlines the view that we have a two-speed Europe in terms of the pace of economic recoveryrdquo (via Bloomberg October 7 2009)

o According to Dominic Bryant from BNP at present the orders data are consistent with manufacturing production rising by about 4 over the next 2-3 months This means that Q3 and Q4 manufacturing production growth will be strong - in the region of 3-35 qq The orders data will be stronger - an unchanged reading in September would mean a Q3 increase in orders of around 80 qq which would be the strongest reading since Q3 1976 (BNP October 7 2009)

o ldquoIndustry is slowly recovering but wersquore still far away from pre-crisis levelsrdquo said Joerg Lueschow an economist at WestLB AG in Duesseldorf ldquoI donrsquot expect many impulses from domestic demand in the coming months Therersquos a huge overcapacity so companies may not feel compelled to investrdquo (via Bloomberg October 7 2009)

o The latest data suggested the V-shaped recovery in Germanyrsquos industry had continued over the summer Increases in orders would normally be expected to feed through into stronger production in coming months (FT October 7 2009)

httpwwwrgemonitorcom385Germanycluster_id=14431

October 7 2009 500 AM ET

QampA Joseph Stiglitz Sees Welcome Change at the IMF

For years Joseph Stiglitz has been the scourge of the International Monetary Fund Since the Asia financial crisis of a decade ago he has excoriated the IMF for making matters worse in developing countries by pushing them to cut budget deficits during recessions rather than help them pursue expansionary policies But the Nobel-prize-winning economist and best-selling author has seen a change in the IMFrsquos behavior

He discussed his views while eating kebab with Bob Davis of the Wall Street Journal during the IMFrsquos annual meeting in Istanbul Below is an edited transcript

What was the most significant part of the IMF meeting

Stiglitz The strong statement that [IMF Managing Director Dominique] Strauss-Kahn made that there is an asymmetric consequence of a withdrawal [of fiscal stimulus] If you do it too early the costs are very great compared to waiting too long And his statement that we ought to be waiting until the unemployment is down long enough [before starting to withdraw stimulus] Itrsquos a repositioning of the IMF from what it has been historically Now it says it believes in Keynesian economics that stimulus works and that it cares about unemployment

There was a great deal of discussion at the IMF meeting of Strauss-Kahnrsquos idea to turn the Fund into a kind of global central bank mdash a lender of last resort to nations Part of the reason for his idea was to encourage countries to reduce their foreign currency reserves Whatrsquos your view of that proposal

Stiglitz I was surprised how much global reserves were part of the discussion [in Istanbul]hellip Reserves are important If countries are putting aside large amounts of reserves thatrsquos money thatrsquos not being spent When you say you need more global demand an obvious way to resuscitate global demand is to fix the global reserve system

Were you impressed with Strauss-Kahnrsquos proposal or did you have something different in mind Stiglitz There is just the beginning of a discussion The argument put forward is that if nations could come to their friendly neighborhood bank mdash the IMF mdash when they need money they would have less need to put money in reserves

The problem with that idea is if yoursquore going to give up self-insurance which is what the accumulation of reserves amount to and go to cooperative insurance through the IMF you have to be confident that when the times comes that you need the money the IMF

will provide it without conditions But the IMF has always operated in the past with much more circumspection The problem is that even countries whose polices are seen as good [by the IMF] know that its next administration may not be seen as good You donrsquot want to leave yourself in the situation where you have not accumulated reserves and you have lost favor [at the IMF] It also may be that the next administration is good but the IMF has changed its definition of good The result is that itrsquos unlikely that countries mdash particularly given the history of the IMF mdash will feel sufficient comfort in this new collective insurance to give up much of their desire for self- insurance

Do you have a better idea Stiglitz There are a number of better ideas that are closer to what [John Maynard] Keynes wanted when he went to Bretton Woods [where the IMF and World Bank were created] The basic framework is something along the following lines Countries of the world get together and decide to issue a new global reserve currency that will be exchangeable into their currencies Every year they issue a certain amount of these which represent say half of what countries would normally put into reserves So rather than having to not spend to accumulate reserves the poorer countries get a grant which they put in reserves and which is there when they want it Itrsquos up to their discretion

Herersquos a metaphor to explain the idea Assume that beneath the IMF building they suddenly discover a gold mine Every year it produced $600 billion of gold Then the IMF would have to decide who to ship the gold to Say there was a sense of social fairness and they give it disproportionately to the poor countries

Now the countries have gold in their reserve and they donrsquot have to put away their own income A little bit later someone comes up with the idea that you really donrsquot have to ship the gold wersquoll just ship some pieces of paper saying underneath the IMF you own some gold Then you realize it doesnrsquot really matter that there is gold under the IMF so long as people are willing to exchange their pieces of paper for other pieces of paper called euros dollars

Wouldnrsquot you need a new institution to distribute these new reserves if the IMF isnrsquot trusted

Stiglitz Unlike the IMF there couldnrsquot be conditions attached to the distribution [The institution] probably couldnrsquot be branded IMF But thatrsquos less important than the broader issue of creating new reserves and the automaticity of distribution

Yoursquore sounding a lot more positive about the IMF given your well-known opposition to how the IMF operates

Stiglitz They should be recognized for not repeating earlier mistakes they made during the Asia crisis Strauss-Kahn is presenting the institution in a very different way They are acting more openly Still the IMF is engaged in contractionary macroeconomic policies in many of its programs maybe even most of them What the IMF would say is if it were not for our funding it would even be more contractionary There are still anxieties[in borrowing nations] Several countries have expressed the concern that [the IMF] is putting the screws to them They complain they are being pushed on exit strategy [to withdraw stimulus]

Do you credit Strauss-Kahn for changing the IMF in ways that you consider an improvement Stiglitz Hersquos played a transformative role httpblogswsjcomeconomics20091007qa-joseph-stiglitz-sees-welcome-change-at-the-imf

Obama under fire over falling dollar By Edward Luce and Krishna Guha in Washington

The falling US dollar is giving ammunition to the critics of the Obama administration and fuelling broader concerns about the potential erosion of Americarsquos reserve currency status

The depreciation of the US dollar is sparking growing jitters among critics of the Obama administration over the potential loss of Americarsquos reserve currency status Economists point out that a declining dollar could prove a boon to the US economy in the absence of credible anxiety over inflation

Republican politicians have highlighted the dollarrsquos slide as evidence of waning US power

Sarah Palin the former vice-presidential Republican candidate on Wednesday sought to link the dollar decline to rising US indebtedness and dependence on foreign oil ldquoWe can see the effect of this in the price of gold which hit a record high today in response to fears about the weakened dollarrdquo she wrote on her Facebook site

Australian dollar jumps on employment data - Oct-08

Investors cling to gold as prices surge - Oct-07

US consumer credit falls for seventh month running - Oct-08

Breitbart shapes conservative agenda - Oct-07

Bachmann voices ire at lsquoBail-out Nationrsquo - Oct-07

Blog Money supply - Oct-07 With other nations also expressing concern about dollar weakness the administration is at pains to emphasise that it understands the responsibilities that come with issuing the worldrsquos reserve currency and will live up to them

ldquoIt is very important to the United States that we continue to have a strong dollarrdquo Tim Geithner Treasury secretary said at the weekend ldquoWe recognise that the dollarrsquos important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidencerdquo

Angst about the dollar ndash which has fallen 115 per cent on a trade-weighted basis over the past six months ndash extends beyond ideological conservative political circles

Last week Robert Zoellick president of the World Bank warned that ldquothe United States would be mistaken to take for granted the dollarrsquos place as the worldrsquos predominant reserve currencyrdquo

Much of todayrsquos debate echoes the traditional political response in the US whenever the currency depreciates But it is now accompanied by warnings from Americarsquos creditors many of which are widely rumoured to be eyeing large purchases of US real assets such as property and companies

ldquoThe dollar has always been a testosterone issue among Americarsquos political classesrdquo said Norm Ornstein a veteran analyst at the conservative American Enterprise Institute

ldquoThis time there may be a legitimate debate to be had over the dollarrsquos reserve status but Sarah Palin is not qualified to participate in itrdquo

While the latest swoon in the dollar is attracting attention analysts say that it needs to be put in context In trade-weighted terms the dollar is essentially back to where it was at the start of the financial crisis on August 9 2007 according to Federal Reserve data

While the price of gold has gone up financial market measures of inflation expectations have not The yield on the 10-year note was trading at 318 per cent on Wednesday Indeed analysts say that the dollarrsquos slide stems more from investorsrsquo growing appetite for risk and the prospects of interest rate rises elsewhere

ldquoThe first order reason for the decline in the dollar has been the normalisation of marketsrdquo said Ken Rogoff a Harvard professor and former IMF chief economist ldquoThe financial crisis probably has brought forward the day when the dollar is no longer dominant ndash but maybe from 75 years to 40 yearsrdquo

Copyright The Financial Times Limited 2009 You may share using our article tools Please dont cut articles from FTcom and redistribute by email or post to the web

Edward Luce and Krishna Guha Obama under fire over falling dollar October 7 2009httpwwwftcomcmss008ca4832-b36a-11de-ae8d-00144feab49ahtml

Business

October 7 2009 STOCKS AND BONDS

Stocks and Gold Gain as Investors Shun the Dollar By JACK HEALY and KEITH BRADSHER

Investors clamored to buy pretty much anything on Tuesday mdash as long as it was not the dollar

A seven-month slide in the value of the dollar gained force as investors migrated to other markets and fretted over a report that crude oil could one day be priced in other currencies hobbling the dollarrsquos role as a vehicle for global trade

On Wall Street shares climbed on hopes of robust profit reports as earnings season unofficially begins this week And the dollarrsquos decline propelled gold prices to record highs above $1040 an ounce and touched off a buying spree for copper silver platinum and crude oil mdash commodities that typically hold their value if the dollar does not

ldquoRight now it doesnrsquot give any sign of pulling back significantlyrdquo said James Steel a commodities analyst at HSBC ldquoTherersquos still a worry about the dollar Therersquos a latent worry about inflationrdquo

The dollar slipped further against major currencies continuing a decline that has sent it tumbling 15 percent since early March The dollar fell to $147 against the euro and the Japanese yen strengthened to 8883 for every dollar

Investors who sought the relative safety of the American currency during the financial crisis are now pursuing higher returns in stocks commodities and foreign currencies out of concern that demand for American debt is waning and that the dollar could someday lose its status as the worldrsquos reserve currency

Underlying the dollarrsquos weakness is the growing perception that many policy makers around the world and in Washington may welcome a slow but sustained depreciation of the dollar especially against the Chinese renminbi and other Asian currencies

A weaker dollar would make imported goods more expensive in the United States and American exports more competitive but it could make overseas investors wary of buying the Treasury bonds that the country needs to sell to finance its deficit

The slide gained momentum after the Reserve Bank of Australia surprised investors Tuesday by raising interest rates making Australia the first big economy to lift rates after the global financial crisis

Countries around the world mdash including the United States mdash trimmed interest rates to record lows as the credit crisis metastasized last year in an emergency effort to stimulate the markets and keep lending from drying up Although credit is flowing better now the Federal Reserve has indicated that interest rates will hover near zero for some time

ldquoThe move was taken as a sign that the global economy is firmly on the road to recoveryrdquo said Vassili Serebriakov a currency strategist at Wells Fargo ldquoThatrsquos lifted risk appetites and assets across the world The dollar strengthened when global financial markets went into a tailspin and has retraced back all that strengthrdquo

Adding to the turmoil a report on Tuesday in The Independent a British newspaper suggested that China France Japan and Russia were in secret talks with Persian Gulf countries to abandon the dollar for international trade in oil and replace it with a basket of currencies and gold

The article named no sources and was quickly denied by Muhammad al-Jasser the governor of the Saudi central bank and Dmitry Pankin Russiarsquos deputy finance minister French officials declined to comment In China the government is closed for a weeklong holiday but well-connected bankers were skeptical

ldquoWhile informal discussions might have taken place I doubt they represent a serious intent to undermine the existing global monetary order or the role of the US dollarrdquo said Fred Hu who is the chairman of greater China for Goldman Sachs and advises the Chinese government

But the report caught the attention of investors because several economists had been predicting that at some point the worldrsquos oil exporters would start moving toward other currencies to limit exposure to the dollar

ldquoIt wonrsquot be easy to make such a shift itrsquos a pretty unrealistic idea in the near termrdquo said Qu Hongbin an HSBC economist in Hong Kong But in the years to come he added China would be delighted if it could print its own currency to pay for oil instead of having to earn dollars through exports

Any shift away from the dollar for oil trading or for commodities more broadly would seriously undermine global demand for dollars and strengthen the alternatives to it This would make it harder for Washington to borrow overseas to finance its budget and trade deficits and could fuel inflation in the United States

Analysts characterized the surge in commodities prices on Tuesday as a reaction to weakness in the dollar rather than a sign of bullish hopes for a quick recovery Although activity is picking up oil consumption remains subdued as factories work at part capacity and consumers are still reluctant to spend thousands of dollars on gold jewelry when the recovery is tenuous Crude oil futures in New York rose 43 cents to $7083 a barrel and gold futures rose $2190 to $103970

Despite worries about the eclipse of the dollar and an estimated $16 trillion deficit in 2009 the United States is still finding many eager buyers in the debt market Foreign governments have billions of dollars in their coffers and demand for Treasury notes has risen since May making it cheaper for the government to finance its own operations

The Dow Jones industrial average rose 13150 points or 137 percent to 973125 and the broader Standard amp Poorrsquos 500-stock index was 1426 points or 137 percent higher at 105472 adding to their sharp gains from a day earlier The Nasdaq was 17 percent or 3542 points higher at 210357

Interest rates rose The Treasuryrsquos benchmark 10-year note fell 1032 to 103 332 and the yield rose to 326 percent from 322 percent late Monday

httpwwwnytimescom20091007business07marketshtmlthampemc=th

Economy

October 7 2009

Paralysis in the Debt Markets Is Deepening the Credit Drought By JENNY ANDERSON A year after Washington rescued the big names of American finance itrsquos still hard to get a loan But the problem isnrsquot just tight-fisted banks

The continued disarray in debt-securitization markets which in recent years were the source of roughly 60 percent of all credit in the United States is making loans scarce and threatening to slow the economic recovery Many of these markets are operating only because the government is propping them up

But now the Federal Reserve has put these markets on notice that it plans to withdraw its support for them Policy makers hope private investors will return to the markets which imploded during the financial crisis

The exit will require a delicate balancing act government officials said

ldquoYou do it incrementally where and when you think you can and not soonerrdquo said Lee Sachs a counselor to the Treasury secretary Timothy F Geithner

The debt-securitization markets finance corporate loans home mortgages student loans and more In good times they enabled banks to package their loans into securities and resell them to investors That process known as securitization freed banks to lend even more money

Many investors have lost trust in securitization after losing huge sums on packages of subprime mortgages that had high default rates The government has since spent more than $1 trillion trying to restore the markets with mixed success

Until more of the securitization market revives or some new form of financing takes its place a wide range of loans needed to secure a lasting economic recovery will remain elusive experts said

ldquoGiven the imperative for securitization markets to fuel bank lending we wonrsquot have meaningful economic growth until securitization markets are re-establishedrdquo said Joseph R Mason a professor of banking at Louisiana State University Mr Sachs agrees ldquoItrsquos very important these markets come back to get credit to businesses and families who need it and also as a sign of confidencerdquo

Enormous swaths of this so-called shadow banking system remain paralyzed Depending on the type of loan certain securitization markets have fallen 40 to 100 percent

A once-thriving private market in securities backed by home mortgages has collapsed from $744 billion in 2005 at the peak of the housing boom to $8 billion during the first half of this year

The market for securities backed by commercial real estate loans is in worse shape No new securities of this type have been issued in two years

ldquoThe securitization markets are deadrdquo said Robert J Shiller the Yale University economist and housing expert who predicted the subprime collapse The government is supporting them he said but itrsquos unclear what will happen when it extricates itself ldquoWersquore stuckrdquo he said

Despite the running problems federal officials hope to start weaning the securitization markets off government support next spring The Federal Reserve has spent about $905 billion buying government-guaranteed mortgages in an effort to keep mortgage rates low It will continue buying until it reaches its target of $125 trillion

Complicating the Fedrsquos plan banks mdash the other source of credit next to the securitization markets mdash continue to rein in lending according to data from the Federal Reserve And next year banks face accounting rule changes and capital requirements that could further restrict their ability to make loans

To be sure certain corners of the securitization market are percolating again thanks to the governmentrsquos Term Asset-Backed Securities Loan Facility or TALF which provides attractive financing for investors who buy the securities

Bonds backed by consumer debt mdash credit card debt auto loans and some student loans mdash are being issued at costs close to those before the financial crisis an indication that the market is functioning again

But the program applies only to borrowers with stellar credit It does not cover credit card debt or auto loans for people with blemished credit histories

ldquoThe market is coming back but a lot of it is because of TALFrdquo said Hyun Song Shin a Princeton economist who studies securitization ldquoThe big question is Will the private issuance market stand on its own two feet without TALF or has there been a fundamental change in the market that it is somehow hobbled permanentlyrdquo

That question is hard to answer as long as the government is dominating certain securitization markets So far the Fed has been most aggressive in supporting the market for mortgage-backed securities which plays a crucial role in housing finance The Fed is virtually the only buyer for these instruments purchasing about $905 billion worth of government-guaranteed mortgage-backed securities through mid-September Industry analysts estimate that is about 80 to 85 percent of the market

ldquoThis is public supportrdquo said George Miller executive director for the American Securitization Forum which represents the industry ldquoAt the end of the day the mortgage risk is held by the taxpayerrdquo

Investors are particularly concerned about the commercial real estate market A big worry is that $50 billion of securitized commercial property loans are due to be refinanced in the next year If that canrsquot be done a toxic mix of declining property prices and maturing loans could lead to fresh losses at many banks

ldquoIf therersquos no mechanism those properties will defaultrdquo said Arnold Phillips who oversees mortgages and structured securities for the $50 billion in fixed-income investments managed by the California Public Employeesrsquo Retirement System

As long as the market remains closed banks will be reluctant to make loans for commercial real estate since they would have to hold on to them rather than package them into securities

Meanwhile the programs the government has started have not changed securitization practices that many investors say were a cause of the financial crisis Lawmakers remain concerned that when securitization comes back it does so in a way that doesnrsquot put the financial system at risk

ldquoOur challenge is to have a robust securitization process that adds value to the economy and doesnrsquot undermine itrdquo said Senator Jack Reed Democrat of Rhode Island and chairman of the Banking Subcommittee on Securities Insurance and Investment He plans to hold a hearing on securitization next month to find out why consumers and businesses are still having so much trouble getting loans JENNY ANDERSON Paralysis in the Debt Markets Is Deepening the Credit Drought October 7 2009 httpwwwnytimescom20091007businesseconomy07shadowhtmlthampemc=th

Paul Krugman October 7 2009 858 am

Still chasing shadows This article on the continued troubles in credit markets was informative But it raised a puzzle Call me naive but why does Fed policy seem to assume that the only way to repair credit markets is to return to the status quo ante circa January 2007

Herersquos how I think about what has happened these past 2+ years I think in terms of a sort of flow chart showing ways that savers can connect with borrowers

Traditionally mdash ie before the 1980s mdash the public put its money in banks and banks made loans to borrowers thus the diagonal arrow from banks to borrowers represents traditional banking

By 2007 however much of this traditional channel had been supplanted by shadow banking debt was securitized and the securities sold to the public mdash the straight arrow across the bottom of the figure

Then the crisis came The public rushed for safety which basically meant guaranteed deposits One rough indicator is holdings of MZM mdash money of zero maturity mdash which is the sum of bank deposits and money-market deposits

In effect the public rushed back into the banks But the banks werenrsquot willing to lend out these excess funds Instead they accumulated deposits at the Fed

To prevent a complete collapse of credit the Fed in effect recycled these deposits back into private credit via the TALF and other securities-purchase programs So funds now flow all around the first figure getting to the public via ldquoBernanke bankingrdquo (my term)

Everyone agrees that this is a stopgap and we want to get the Fed out of the business of private lending over time

But herersquos my question why does it have to be a return to shadow banking The banks donrsquot need to sell securitized debt to make loans mdash they could start lending out of all those excess reserves they currently hold Or to put it differently by the numbers therersquos no obvious reason we shouldnrsquot be seeking a return to traditional banking with banks making and holding loans as the way to restart credit markets Yet the assumption at the Fed seems to be that this isnrsquot an option mdash that the only way to go is back to the securitized debt market of the years just before the crisis

Why Are we still convinced that securitization is a far superior system to conventional banking and if so why

Inquiring minds want to know Still chasing shadows October 7 2009

Paul Krugman Still chasing shadows October 7 2009 httpkrugmanblogsnytimescom20091007still-chasing-shadows

RGE Monitors Newsletter mieacutercoles 07102009 901

Greetings from RGE

Today we present a preview from our global economic outlook for Q4 which will be released to RGE clients later this month The full version of the outlook includes a more in-depth version of the following analysis as well as RGErsquos country-by-country projections for economic growth

Asian economies rebounded in Q2 2009 as aggressive monetary and fiscal stimuli cushioned domestic demand and quick inventory adjustment eased the downturn in industrial production Capital inflows have buoyed the asset markets and net exports have contributed to GDP growth as imports have contracted faster than exports

However policy measures are inadequate to close the output gap emanating from sluggishprivate demand and sharp export contraction All Asian economies will slow sharply in 2009 and grow below potential in 2010 RGE forecasts Asia to grow a mere 26 in 2009 and 54 in 2010 Asia ex-Japan (AXJ) will grow 49 in 2009 and 66 in 2010 As the impact of policy measures fade in 2010 the pace of Asiarsquos recovery will hinge on the recovery of global export demand and continued risk appetite RGE projects that Japan will contract sharply in 2009 and grow below 10 in 2010 Fiscal stimulus will push Chinarsquos growth to over 80 during 2009 and 2010 India will grow less than 60 in 2009 and below potential in 2010 The Asian Tigers (Singapore Taiwan and Hong Kong) Thailand Malaysia and New Zealand will contract in 2009 while the contraction in South Korea will be mild and Australia will barely grow The Philippines Indonesia Vietnam Pakistan and Sri Lanka will slow sharply in 2009

Unlike 1997 or 2001 Asia cannot employ an export-led strategy to drive the economic recovery As consumers in the advanced economies deleverage over the next few years and foreign direct investment (FDI) recovers slowly attaining the pre-crisis GDP growth rates in Asian countries will largely depend on the governments ability to rebalance growth towards domestic demand and accelerate structural reforms Government and private consumption and investment should be moved away from the export sectors Reforms should increase government spending on safety nets and public services move workers to the service sector improve financial sector intermediation and diversify exports towards emerging markets Since these reforms will take a few years Asias growth in the short-term will remain tied to the US economy via trade and financial linkages

Under RGErsquos baseline scenario the US economy will have a U-shaped recovery with anemic GDP growth and consumer deleveraging over the next few years In that case Asia too will have a U-shaped recovery While Asia might have a stronger rebound compared to other regions the strength of the recovery will vary across countries Economies highly dependent on exports such as Japan the Asian Tigers and Malaysia might witness a slower recovery and will take longer to go back to the pre-crisis growth rates Countries with larger domestic demand attractive asset markets greater policy space andor faster reforms such as China India Indonesia Vietnam and the Philippines might witness a stronger recovery

Export and Manufacturing Activity to Recover Sluggishly

Exports in most countries are rising on a month-on-month basis Global inventory restockingand high base effects of 2008 will boost exports during H2 2009 and early 2010 Chinese commodity stockpiling and infrastructure spending despite slowing from the recent highs will benefit countries like Australia Indonesia Vietnam and India Inventory restocking in China the US and EU will boost the exports of the Asian Tigers plus Thailand and Malaysia Exports of these countries might benefit somewhat if the Chinese fiscal stimulus boosts domestic consumption and import demand during 2010 A sustained improvement in Asian exports however will depend on the demand recovery in the US and EU and the revival of the global electronics cycle

Fiscal stimulus faster inventory adjustment andor domestic demand recovery has revived manufacturing activity in China India and Vietnam Inventory restocking will boost industrial production in the export-dependent economies during H2 2009 and H1 2010 particularly in the technology sector But the sustainability of manufacturing activity in these countries will depend on the strength of export recovery

Domestic Demand Picking Up Slowly

Fiscal and monetary stimuli have improved mortgage conditions and retail and auto sales while the asset market rally has created some wealth The job losses have slowed but weak hiring and wage pressures will lead to a slow recovery in consumption

The export downturn excess capacity and tight (albeit improving) credit conditions will keep investment sluggish until 2010 though government-led investment will pick up Initial Public Offerings (IPOs) and MampA activity have picked up in many countries But bank credit in emerging Asia (ex-China) is extremely sluggish foreign bank lending is down sharply and FDI is falling or slowing in many countries Sluggish recovery in exports and global credit conditions will keep FDI inflows modest duri0ng 2010

Policy Measures Will Remain Supportive

Inflation is picking up in many countries on a month-on-month basis Most countries will exit deflationChina India Indonesia and Vietnam with the recovery in domestic demand the closing of output gaps and low base effects of 2009

Most central banks in the region will keep interest rates on hold through 2009 due to the fragile economic recovery and subdued core inflation If continued capital inflows fuel asset bubbles and raise domestic liquidity central banks will raise the bank reserve requirements conduct open market operations and implement measures directly targeting the asset markets during H2 2009 and early 2010 before they start hiking interest rates Countries witnessing faster economic recovery andor vulnerable to asset bubbles and commodity prices such as South Korea China India Vietnam and Indonesia will start raising rates in H1 2009 Countries experiencing a weaker recovery and larger output gaps such as Malaysia Singapore New Zealand and Taiwan will delay rate hikes until H2 2009

Fiscal stimulus will be a major driver of growth in Asia supporting consumer spending slowing the pace of job losses and improving credit access for firms especially the small and medium enterprises and exporters But fiscal policy will be inadequate to close the output gap and will become a drag on growth in most countries over the course of 2010 especially if private demand is slow to recover Fiscal concerns and inflation risk will constrain most governments from expanding the stimulus High spending and waning tax and commodity

revenues will erode the fiscal health of several countries including Japan India Vietnam Thailand and Malaysia and cause the debt-to-GDP ratios to surge

Sustainability of Asset Market Rally Depends on Risk Appetite

A quick economic rebound capital inflows and better-than-expected corporate earnings have buoyed the Asian equity markets Valuations have risen steadily though they remain below the peak levels of the boom years The surge in markets like India China Sri Lanka Vietnam and Indonesia has raised concerns that the rally might be getting ahead of fundamentals

Asian currencies will continue to appreciate as global risk appetite buoys the asset markets the trade balances are cushioned and the US dollar remains weak But central banks aggressive intervention in the foreign exchange market will limit currency gains until exports recover In 2010 countries like India Indonesia Singapore and South Korea might allow currency appreciation to control headline inflation

The real estate sector especially housing has picked up since Q2 2009 in countries like China Hong Kong Singapore Vietnam and South Korea due to attractive prices favorable borrowing conditions under stimulus measures and speculative activity fueled by capital inflows and liquidity However slow improvement in labor market conditions any slowdown in risk appetite and government measures to curb speculation will negatively impact the real estate sector and prolong its recovery

Ask Paul Krugman Questions About the Economy By The New York Times

Update | Oct 5 2009 148 pm Comments are now closed Update | Oct 6 2009 322 pm Read Paulrsquos responses

Everyone knows someone who has suffered from the recession But is the recession now almost over Most economists argue that it is at least in a technical sense But while consumer spending is up the unemployment rate is growing the manufacturing outlook is bleak and the government is projected to run huge deficits over the coming years

How do we interpret various data and which numbers are the most relevant What do we need to do to get the economy back on track and how will we know when we are finally out of the woods Ask Paul Krugman your questions in the comments space below He will respond to a selection of them in the coming days

bull Definition of ldquoEconomyrdquo bull Signs of Recovery bull Stimulus Money bull Rescue Efforts bull End of the Recession bull Economic Indicators bull Jobs bull Health Care Myths bull Public Programs bull Energy and the Environment bull Bailouts and the Banks bull GDP bull Income Inequality bull Regulation bull Global Issues bull Outsourcing bull VATs bull Credit bull State of the States bull Reading List bull Optimism bull Changing Perspectives

Definition of ldquoEconomyrdquo Q From a ldquomartian-looking-down-at-earthrdquo perspective what exactly is an ldquoeconomyrdquo How would you sum it up What alternative ways could we conduct our societies that might work better if we could start from scratch What do you think is going to work in 10 25 and 50 years that we are not doing now mdash Brian J Wimmer

A I guess Irsquom a bit boring on such issues ndash I donrsquot have any deeply unconventional insights Irsquod say that the economy is everything that involves making or using goods and services That

means leaving out subtler things like love faith and culture (Alfred Marshall described economics as being the study of the ldquoordinary business of liferdquo

Irsquom also fairly conventional on how economies should be run Self-interest is still the best motivator we know ndash or more accurately the only consistent motivator So Irsquom for market economies But Irsquom for market economies with strong safety nets with adult supervision in capital markets with public provision of goods the private sector does badly (like basic research and much of education) An idealized New Deal is about as far as I go

Signs of Recovery Q What does a recovered US economy look like Obviously many of the activities we did in the past such as home construction and real-estate related businesses and all sorts of things based on credit driven consumer spending will no longer work Related to this shouldnrsquot stimulus money be used to build a different sort of economymdash Jeremy Hickeson

A The recovered economy will surely involve more manufacturing ndash in fact before the world economy collapsed we were seeing a boom in manufactured exports with shortages of machinists and other skilled workers It will probably include a lot of green employment in the broad sense ndash not just people building and running wind farms but people busily improving insulation and installing white roofs

As for the stimulus a lot of what we should be doing isnrsquot so much building the future as avoiding collateral damage from the crisis We should be giving much more aid to state and local governments so that education and basic services arenrsquot crippled by the slump We should be investing in basic infrastructure which we need regardless of the shape of the economy Itrsquos not clear that the stimulus has to be very much influenced by likely change in direction ndash although trying to prop up the housing industry is a mistake

Stimulus Money Q One of the arguments I hear most frequently against fiscal stimulus is that wersquore taking money from future generations While I understand the benefits that such a stimulus can provide now how is it beneficial in the long term mdash Chris B

A First of all in the immortal words of John Maynard Keynes in the long run we are all dead Beyond that however the recession is causing low business investment which means lower capacity in the future itrsquos causing young people to postpone or cancel education itrsquos pushing people out of the work force eroding their skills itrsquos raising child poverty with devastating consequences for personal development Stimulus by mitigating the slump helps limit all these long-term costs

Rescue Efforts Q If you were in the Obama administration (and why arenrsquot youhellipbut that is a different question) and were given the power to do what you think is needed to rescue the economy what exactly would you do firstmdash Pat McDowell

A Right now more job creation efforts Itrsquos OK if we donrsquot call it a stimulus and itrsquos OK if we donrsquot put it all in one bill but at this point wersquore looking at an output gap ndash the difference between what the economy should be producing and what it will actually produce ndash of between $2 trillion and $3 trillion over the next year and a half while the remaining stimulus in the pipeline is probably less than $400 billion We have to do much more

End of the Recession Q Can you explain why itrsquos meaningful to say that the ldquorecession is over in a technicalrdquo sense when every meaningful number is looking bleak mdash AwK

A OK the official definition of a recession in the United States is that itrsquos a recession if the recession-dating committee of the National Bureau of Economic Research says it is But the committee loosely speaking says that a recession is a period when everything is going down And thatrsquos not true anymore Industrial production is rising GDP is almost certainly rising So the economy has stopped shrinking

Now I agree that this doesnrsquot say much about the reality most Americans face ndash because the jobs picture is still getting worse But itrsquos fairly clear that the official records will eventually say that the recession ended in the summer of 2009

Economic Indicators Q How can consumer spending be rising at a time when more and more people are out of work Doesnrsquot the money that fuels consumer spending usually come from employment Doesnrsquot this contradict the economic maxim that expenditures are equal to income mdash Tim

A That ldquoeconomic maximrdquo is deeply misleading Consumers can and do spend either more or less than their income And even for the economy as a whole in the short run income adjusts to match spending not the other way around

That said some of the recent bump in consumer spending probably is unsustainable In particular there were a lot of one-time purchases due to ldquocash for clunkersrdquo which wonrsquot persist and will actually probably be offset with lower purchases going forward

Q What are the three most important factors to track (and over what time frame) to gauge if the economy has finally turned the corner How critical are household wealth and consumer debt in influencing the above factors - are they lagging or predictive indicators mdash aditya rana

A What I can tell you is what Irsquom watching Irsquom watching unemployment insurance claims ndash I wonrsquot feel that wersquore over the worst until those drop well below 400000 a week (theyrsquore still in the mid-5s) Irsquom watching the ISM surveys looking for signs of strong (not marginal) growth And Irsquom watching the monthly employment reports

Wealth and debt are predictive factors not indicators And for what itrsquos worth theyrsquore predicting a long hard slog

Jobs Q How will we know that the employment picture is going to start moving in the right direction Is there any way to know when wersquore going to start coming out of the woods mdash Rachel Engel

A Yes ndash watch for job growth at a rate of 150000 or more a month watch for a rise in the employment-population ratio Nothing like that in the data now As I mentioned in an earlier reply wersquoll probably have advanced warning from the new claims data and the ISM surveys ndash but so far hope is not on the way

Q We never have full 100 employment and 4-6 unemployment seems to have been the norm for the past several years Are we in for a period where that norm is going to have to double Things could be much worse ndash 90 of us still have our jobs mdash John Kopp

A No no no ndash we should not settle Bear in mind that if you add in people who have stopped looking because itrsquos hopeless who are working part-time when they want a full-time job and so on the unemployment rate is actually 17 And those 17 have families relatives friends The fact is that most Americans are hurting or suffering anguish because of the troubles of people they care about ndash me included This is not an acceptable situation

Health Care Myths Q The economics professor for my MBA program states that universal health care systems lead to rationing of health care Specifically he brought up the single payer system in Canada the time people have to wait in lines for care in that system and the ldquogreat numberrdquo of Canadians coming to the US for care How do I refute his claims that this is rationing especially when it doesnrsquot meet the traditional definition of rationing Irsquove argued with him a great deal but he seems to weasel his way around my arguments mdash Chris V

A Try Googling Canadian health care myths Herersquos a pretty good example Or bring up the fact that many of the surgeries Americans get faster than Canadians are paid for by hellip Medicare

Public Programs Q I grew up in Chicago in the 1930s and enjoyed playing in a very nice playground constructed by the WPA I patronized a public library decorated with attractive murals painted by the WPA My ldquoheroesrdquo were the neighborhood young men that went off to work in the woods with the CCC Wouldnrsquot those programs work today Shouldnrsquot the federal government be obliged to become the employer of last resort Irsquod appreciate your comments mdash Andrew Brtis

Q Please comment whether and how much Congress should be putting money into a rebirth of the WPA and CCC program and to also into green energy and transportation systems mdash A Swift

A So yes I think such program would make sense ndash the WPA and CCC provided a lot of jobs at relatively low budget cost because they paid fairly low wages and didnrsquot go through middlemen But I also understand why the Obama administration didnrsquot include that kind of program in its plans ndash itrsquos the politics Not only would it have been denounced as ldquosocialismrdquo anything like that would be condemned as waste Remember the idea of spending $200 million cleaning up the National Mall was denounced as total waste and fraud even though thatrsquos Americarsquos front yard So the times arenrsquot ready for another WPA

Energy and the Environment Q I found your recent comment intriguing that while ldquotraditional energyrdquo companies have large lobbying organizations ldquogreen energyrdquo companies being young do not Is there a typical pattern to the transfer of economic effectiveness from one industry or one sector of an industry to another Are there recognizable metrics for such a transition mdash MichMan

Q Can President Obamarsquos ldquogreen technologyrdquo plans really make that much of a difference in turning around the US economy long term (Specifically in terms of GDP employment and deficit reduction) mdash Thomas Camlet

A What I think I said was that the industries of the past have strong lobbies while the industries of the future donrsquot I think fairly crude measures of what Irsquom talking about would be good enough think of the large share of GDP currently accounted for by oil and coal versus the negligible share of solar and wind ndash even though eventually the oil will be gone and the coal will be taxed heavily to protect the environment so that renewable will dominate

As for the economic impact right now Obamarsquos technology plans arenrsquot a big deal although theyrsquore good But if we pass WaxmanMarkeyBoxerKerry establishing a cap and trade regime eventually that will have a huge impact on the economy ndash maybe not today and maybe not tomorrow but soon and for the rest of our lives (Sorry couldnrsquot help myself)

Bailouts and the Banks Q If government is going to act as a form of insurance for banks by bailing out systemically important firms when they fail should it not also collect a ldquopremiumrdquo of sorts when the good times roll If losses are to be socialized (as they must be in order to prevent a spate of mass misery) shouldnrsquot gains be shared as well Is the political power of finance the only thing stopping this approach or would it not be possible in our world of globalized capital mdash dan

Q Politics aside would high marginal tax rates be an effective check on excessive executive compensation mdash Rich

A Yes to both Actually we probably will get some increase in bank fees for deposit insurance But the big issue is the informal guarantees ndash the knowledge that the feds will step in to rescue important financial institutions The quid pro quo should be fees and even more important tighter regulation But the political power of the banks stands in the way

As for high marginal tax rates ndash yes Back when socialists like Eisenhower ran the country and taxes on the rich were much higher there was less temptation to run big risks with other peoplesrsquo money in search of giant bonuses

GDP Q The economists Sen and Stiglitz recently were on a commission appointed by President Sarkozy to develop a better measure of economic success than GDP Have you read their report and if so what did you think of it Is GDP really a useful measure and if not what should replace it mdash Aslak

Q Pertaining to investments and consumer spending which of the two do you think is more vital to United States GDP growth If your answer differs from short to long run please explain why mdash Dominic

A I donrsquot see an easy way to develop a better measure than GDP ndash but not because GDP measures everything important It doesnrsquot and itrsquos crucial to understand that But if you try to add in other things the question is what weight you place on them ndash which is a matter of taste not science GDP is good for what it is a measure of marketable output the thing is to always keep in mind that health inequality peace and so on are also important but not in the GDP

I think the question of consumption versus investment depends on what question yoursquore trying to answer Either one can lead a recovery ndash but right now given how overstretched consumers are it really has to be investment Investment also has the virtue of enhancing long-run growth But consumption is the goal of economic activity so we donrsquot want to condemn it

Income Inequality Q Can you give me a rigorous wonky explanation of how income inequality contributed to the Great Recession How will our extremely unequal distribution of wealth affect future economic growth mdash Nicholas

Q How do we raise the income of the working class Better yet how do we get the working class back to work Irsquom part of the working class and your biggest fan mdash Kathi Cooper

Q You have written quite a bit about income and wealth inequality in the United States (most notably in The Conscience of a Liberal) In particular you have been concerned about how much it has increased in the last three decades How do you think the financial crisis and recession will affect inequality in the US over both the short and long term Will inequality worsen still further mdash Cherie Campbell

A Irsquod like to make this a morality play in which the crisis was caused by injustice but itrsquos not that simple Itrsquos hard to see how inequality led in any direct way to the slump You have to tell a more indirect story One issue is that the extraordinary rewards to the upper 001 played a role in causing excessive speculation and risk-taking leading to the crash Another is that both rising inequality and the Great Recession were due in large part to Reaganism ndash to the belief that the unrestrained market is always right

We donrsquot have any certain answers about what can raise working-class incomes but several things should be tried First of all Health Reform ndash at the very least we can ensure that every American can afford needed care Second strengthen workersrsquo bargaining power make it easier for workers to organize and harder for employers to bust unions An America where Wal-Mart was unionized would look quite different Third better unemployment compensation so that workers face less financial risk At this point the effects of the crisis on inequality arenrsquot clear The Depression led to much lower inequality ndash but that was because it led to the New Deal If the political effects of this crisis are less profound which alas seems likely we may be solidly back in the second Gilded Age a few years from now

Regulation Q My belief is that the government has an important role to play in the free market as a referee and guarantor of fairness in the way the market operates When the government abandons that role it brings about recessions like we are now experiencingndashcaused it seems to me by people taking advantage of the system to enrich themselves at the expense of lots of others Do you agree with this and can you lay out the proper role of the government as a regulator in the free market Thanks from an admirer mdash John Woods

A Quite Irsquom not sure what to add without a long essay We obviously need government regulation of financial markets government regulation of food and product safety (after that last story in the Times I may never eat ground beef again) government safety nets for health and income Basically a bigger better New Deal

Global Issues Q Irsquom a student of economics from Peru Here economic authorities say the next year Peruvian economy will grow in nearly 5 but I donrsquot understand something We are a primary export economy and our principal trading partner is precisely USA So like statistics show us if USA rate of unemployment is growinghellipHow a little economy like Peru can grow next yearhellipOther questions for you USA deficit is growing sohellip Do you think this huge debt will be principal cause for a future economic catastrophe (a huge inflation rate)hellip mdash Carlos Rojas

Q I am interested in knowing Prof Krugmanrsquos views on the US economy vis a vis the international situation broadly defined as globalization It seems to me that the salad days since WW II when the US could lead the world economy pretty much ended in 2008 Do you think thatrsquos true US economists and certainly US politicians never address the fact the global economic playing field is not even and cannot possibly mimic any known economic model How does the US compete now against state-run economies (China) oligarchies (Russia) and cartels (OPEC) Will the Reaganomic model of outspending them work again mdash William Wetstone

Q How much is the world economy dependent on the US economy What are the major factors that need to be tackled to put the world economy back on track Is globalization at risk mdash Sharmila

Q What is the significance of US dollar hegemony to Americarsquos position in the world and can you describe circumstances that could result in the end of US dollar hegemony mdash Hank Sheller

A OK about Peru economies donrsquot all have to grow at the same rate Itrsquos hard to grow when the whole world economy is crashing but now that the apocalypse has been postponed it should be possible for some developing countries to ldquodelinkrdquo themselves to some extent As far as the US role in the world we donrsquot have the dominant position we had a generation ago and canrsquot lead a recovery all by ourselves On the other hand itrsquos not clear that state-dominated economies ndash if there really are any these days ndash have an advantage If China eventually becomes No 1 it wonrsquot be because the Chinese are ruled with an iron fist it will be because there as smart as we are and there are a lot more of them than there are of us

The dollarrsquos role in the world actually looks stronger now that it did before the crisis Why Because our only serious rival the euro looks weaker The euro zone has been fragmented in this crisis especially the bond market with debt of weaker European countries seriously discounted This pushes the eurorsquos ability to rival the dollar back at least for a while And nobody else is really in the running

That said the benefits of owning a key global currency are much overrated Yes we get a little free financing because Latin Americans keep $100 bills in their safes and the Chinese buy a lot of Treasury bills But ultimately the role of the dollar isnrsquot very important to American prosperity ndash when the British pound lost its international role nobody in Britain noticed or cared except a few lost souls in Whitehall

Outsourcing Q Affordability of employees is important for the viability of a company Most US companies have ldquooutsourcedrdquo to China India or South East Asia If jobs have to be lsquoretainedrsquo back in US AND company to run ldquoprofitablyrdquo obvious question is can US employees afford to have Indian salary At the same tax to bridge the deficits gap income tax has to lsquoincreasersquo either by increasing number of employees or increasing wages which is unlikely Can number of employees increase without ldquoimmigrationrdquo and how will the immigration laws change mdash Raghuraman R

A Actually there are a lot of advantages to producing in advanced countries even at much higher wages ndash thatrsquos why theyrsquore advanced countries US manufacturing was having a clear revival in 2007 before the crisis hit So if we get a recovery going outsourcing will seem a lot less important as an issue

VATs Q Many of our trading competitors have ldquovalue added taxesrdquo which if I understand them correctly are essentially taxes on consumption including consumption of imports And I believe that exports are generally exempted from VATs We do not have a VAT in the US and most of our taxes are levied on income which is to say on production So if goods manufactured in the US and exported carry a heavy tax burden at production and then a heavy tax burden again at consumption and goods manufactured elsewhere and imported into the US are taxed lightly at production and then lightly again at consumption is it any surprise that we have been rapidly losing our manufacturing base Can we ever hope to re-build our manufacturing economy in the face of what are in effect unreciprocated tariffs on our exports Or do I just misunderstand the effect of VATs mdash Basho

A Well the consensus view on VATs is that they have no net effect on competitiveness They are as you say taxes on consumption ndash which means that it makes sense to exempt

exports and tax imports think of it as a sales tax not levied on out-of-state sales Itrsquos a wash when it comes to international trade To the extent that VATs replace taxes on production well other taxes arenrsquot exactly taxes on production We think for example that payroll taxes fall almost entirely on workers rather than raising costs to employers So the bottom line is that our tax structure probably doesnrsquot have much to do with the position of manufacturing Wersquove got weak manufacturing because we attract so many capital inflows which keep the dollar at a high level in normal times And that era may now be over

Credit Q Can you explain why consumer credit has gotten tighter and interest rates are climbing Irsquom seeing my credit card APR go from 9 to 17 for no valid reason Does the Fed stimulus money have any effect on consumer credit mdash Jeffrey Holtzman

A Actually there are a lot of credit card defaults which partly explains the rise in rates But itrsquos also true that therersquos a lot less competition in the banking world now with the ranks thinned by failure So something bad is happening

State of the States Q If California now a failed state in partial default (paying some employees with non-negotiable IOUrsquos) what is the US Does the US now slide slowly from little discrete defaults toward total debt repudiation Is there a quick test to determine a countryrsquos degree of default mdash Walter H Drew

A The US is different from California among other things our leader can pronounce the countryrsquos name (Getting a bit punchy here) Seriously the federal financial position has a long way to go before itrsquos California-level bad

It will be very big news mdash indeed an earthquake mdash if and when the US government fails to make a payment on time So far that hasnrsquot happened I donrsquot think it will happen and if it does it will probably happen during the Palin administration

Reading List Q What books newspapers and magazines do you read to increase your knowledge Do you read any fiction mdash Jeff O

A I read the worldrsquos greatest newspaper of course I also skim the Wall Street Journal and the Financial Times every morning Beyond that Irsquove become an avid reader of quality economics and financial blogs Mark Thomarsquos Economistrsquos View and the links from there are a good place to start Magazines not so much ndash I like the New York Review of Books mostly for the things I donrsquot know anything about

I read a lot of historical and science fiction ndash Irsquom an avid Charlie Stross fan And lots and lots of history ndash reading about Cornelius Vanderbilt right now

Optimism

Q Many economists and economy-watchers are far more pessimistic than you seem to be about our prospects in the near- and medium term They talk about another shoe dropping a slightly postponed day of reckoning in the financial sector and further collapse of the real economy In your opinion what is the best argument for this dark view If you donrsquot subscribe to it why mdash Jack

A The best argument is that there are surely big losses yet to happen especially in commercial real estate But my view is that at this point there are so many explicit and

implicit guarantees in place that we canrsquot have the kind of financial chain reaction we had last fall

Changing Perspectives Q Paul how much has your economic perspective changed over the years mdash Tom

A Of course Irsquove changed my views on some issues ndash I think itrsquos apocryphal but Keynes is supposed to have said ldquoWhen I receive new information I change my views What do you do sirrdquo I think the biggest change is on the ability of monetary policy to solve recessions I was pretty confident on that score until around 1998 when I looked seriously at Japan did some modeling and realized that liquidity traps were real On other issues I think Irsquove changed my emphasis more than my views on globalization I still donrsquot see eye to eye with say the Economic Policy Institute but our differences there now seem much less important to me than our agreement on core values

Basically the Bush years were a clarifying experience for me I got much more focused on the central dispute between hard-line right-wingers and the rest of us and less interested in smaller disputes among basically reasonable people No doubt ideology andor wishful thinking sometimes colors my views But I try to fight against that ndash which I think is all you can do

American Economy September 20 2007 1126 pm

Is This the Wile E Coyote Moment Lots of buzz suddenly about the possibility of a sharp fall in the dollar The Canadian dollar is back at parity with the greenback there are rumors that the Saudis are planning to diversify into euros and maybe even that the Chinese might break the dollar peg A nice summary at Barry Ritholtzrsquos blog The Big Picture

I could say that I saw this coming the problem is that Irsquove been seeing it coming for several years and it keeps not arriving (and I donrsquot know if this is really it even now) The argument I and others have made is that the US trade deficit is fundamentally not sustainable in the long run which means that sooner or later the dollar has to decline a lot But international investors have been buying US bonds at real interest rates barely higher than those offered in euros or yen mdash in effect theyrsquove been betting that the dollar wonrsquot ever decline

So according to the story one of these days there will be a Wile E Coyote moment for the dollar the moment when the cartoon character who has run off a cliff looks down and realizes that hersquos standing on thin air ndash and plunges In this case investors suddenly realize that Steinrsquos Law applies mdash ldquoIf something cannot go on forever it will stoprdquo ndash and they realize they need to get out of dollars causing the currency to plunge Maybe the dollarrsquos Wile E Coyote moment has arrived ndash although again Irsquove been wrong about this so far

Much more about all this in a thoroughly incomprehensible paper I recently published in the European journal Economic Policy Donrsquot bother clicking if you hate funny diagrams and Greek letters

Oct 6 2009 From The Wall Street Journal httponlinewsjcomarticleSB10001424052748704471504574446941541499588html

How the Fed Can Avoid the Next Bubble The Central Bank needs to watch asset prices and raise rates quickly when it decides the time is right

By Nouriel Roubini and Ian Bremmer

Ben Bernanke and the Federal Reserve face a number of very difficult challenges in the years ahead They include

bull Resisting pressure to monetize deficits which would eventually cause high inflation bull Implementing an exit strategy from the massive monetary easing of the past year bull Maintaining the Feds independence which has been compromised by the direct and indirect bailout of financial institutions and congressional attempts to micromanage the central bank bull Properly calculating asset prices and the risk of asset bubbles according to the Taylor rule an important guideline central banks use to set interest rates bull Supervising and regulating the financial system more effectively particularly in the role of systemic risk regulator

The first two tasks are closely related In order to prevent a persistent monetization of deficits that would lead to inflation the Fed must implement an exit strategy from the unconventional monetary easing that began in late 2008 If the fiscal and monetary stimulus is taken away too soon there is the risk of relapsing into deflation If it is taken away too late we may eventually face a fiscal crisis and an inflationary recession or stagflation

The Fed does not control fiscal policy But to avoid a game of chicken wherein loose fiscal policy forces the Fed to monetize deficits to prevent a spike in bond yields the Fed needs to pre-emptively state it wont be buying more Treasury bills

As for the exit from monetary easing the Fed must learn from the fateful mistake it made after the 2001 recession Then the central bank cut the federal-funds rate too much and kept it too low for too long It also moved far too slowly when the normalization occurredmdashin small increments of 025 from summer 2004 until the summer of 2006 when it peaked at 525 Normalization took two full years It was in that period of slow normalization that the housing mortgage and credit bubbles spiraled out of control The lesson learned When you normalize move rapidly or prepare for another dangerous bubble

Of course this is easier said than done From 2002 to 2006 the Fed moved slowly because the recovery appeared anemic and because of significant deflationary pressures This time around the recession is more severemdashunemployment is at 98 and is expected to peak above 10 and we are experiencing actual deflation Therefore the incentive not to exit too soon will be greater and the risk of creating another bubble is greater Indeed the sharp increase in the stock market and commodities and narrowing of credit spreads since March are partly due to a wall of global liquidity chasing assets and already causing asset inflation

If the conflict between economic growth and financial stability requires that monetary policy remain loose then it is critical that the supervisors and regulators of the banking sector move

aggressively to prevent another bubble from emerging Thus they should quickly adopt the regulatory reforms agreed to by the G-20mdashincluding a new insolvency regime for financial institutions deemed too big to fail a serious approach to limiting systemic risk and appropriate rules governing incentives and compensation for bankers and traders

It wont be easy to define systemic regulation and too-big-to-fail There is a significant risk that doing so will provide an implicit guarantee for large and complex financial institutions There is also a longer-term risk that actions taken by congressional and regulatory agencies will distort global financial markets Western financial institutions now depend heavily on state financial backing and several governments have tweaked rules and regulations to support the large financial institutions that are now at least partially taxpayer-owned Further governments could increasingly require domestic financial institutions to lend more at home which will curtail their foreign operations Creating a system of effective financial regulationmdashwhile resisting the impulse to favor domestic institutionsmdashwill be a real challenge for most countries including the US

Over time once the fed-funds rate is normalized incorporating asset prices into monetary policy making is also necessary to ensure financial stability While it is correct that the fed-funds rates may not be the most effective instrument at controlling asset and credit bubbles excessively cheap money is always a source of such bubbles So faster normalization of the fed-funds rate will eventually be important

The Feds involvement in quasi-fiscal operations creates other challenges As long as the Fed remains involved in maintaining financial stability and in preventing other episodes of systemic risk it will be hard to eliminate the perception that the Fed will be involved as a lender of last resort for too-big-to-fail firms So far this Pandoras Box remains open

The way to prevent future moral-hazard distortions is to create a regulatory regime where too-big-to-fail institutions have much higher capital requirements a greater liquidity buffer lower leverage and lower involvement in risky and illiquid investments if they are depository banks They should be supervised internationally and must be able to be closed down in an orderly fashion should failure loom

The Fed is currently resisting a Treasury-led effort to review how it is organized out of concern it might forfeit its independence Yet the governance structure of the New York and other regional Federal Reserve banks left them effectively controlled by large financial institutions last year so such a review is necessary While congressional interference in the Feds jurisdiction is a danger the recent quasi-fiscal activities of the Fed bear a review

The Fed also needs a greater regulatory backbone The Fed had the power to regulate mortgage markets but failed to use this power out of a misplaced deference to laissez-faire attitudes and Wall Street Regulating mortgage markets requires a careful balance short-term regulatory forbearance to avoid a greater credit crunch along with medium-term countercyclical supervisory actions in order to prevent the emergence of further asset and credit bubbles

Establishing financial stabilitymdashin addition to price stability and growthmdashis the essential role of the central bank Achieving this goal in a way that avoids moral-hazard distortions as with the too-big-to-fail finance institutions and prevents another bubble in the next years will surely be one of the greatest challenges ever faced by the Fed Mr Bremmer president of Eurasia Group is co-author of the The Fat Tail The Power of Political Knowledge for Strategic Investing (Oxford University Press 2009) Mr Roubini is a professor of economics at New York Universitys Stern School of Business and chairman of RGE Monitor

Oct 6 2009

Ganging Up on the Dollar Could Oil Exporters Move Away from Dollar Pricing o Intermittently oil exporters especially Russia Iran and Venezuela discuss moving away

from pricing oil in dollars OPEC members have tended to be divided on this issue A October 2009 report in the Independent a British paper suggested that GCC countries had discussed moving away from dollar pricing with China and Russia although the report was denied by Saudi Arabia the largest OPEC producer which has a very large stock of US assets it added to concerns that key creditors might move away from the US dollar

o A move away from dollar pricing could weaken the US dollar if it reduced the use of the dollar in oil transactions and savings Moving to a different nominal pricing structure would not in itself mean less of these transactions but it could be a precursor

o Venezuela Iran suggest OPEC price oil to a currency basket rather than dollar alone resisted by other members especially in the Gulf which peg to the dollar Iran has already banished the dollar from the oil trade

o Aside from Kuwait which pegs to a basket the GCC countries all peg to the US dollar which constrains the diversification of their foreign assets GCC countries have insisted that they will stay with their pegs until they move to a new GCC monetary union Thus the chance When the dollar weakened in 2007 and early 2008 these countries had to buy a lot of dollars to maintain their pegs

o The dollar is the most liquid currency and US based markets are more liquid in the oil trade

o Several oil exporters especially Russia Venezuela and Iran have significantly reduced their dollar savings but the GCC still maintains well over a majority dollar share boosted by Saudi Arabia Oil exporters have worried about the volatility of their earnings in real terms

o Deals between Chinese oil companies and Brazil Russia and Venezuela will be partly paid back in oil not currency Some analysts suggest that this could be be one step towards lessening the dominance of the US dollar in the oil trade though the price will still be pegged to the predominant currency in which oil transactions take place is most important in determining the effect on the foreign exchange markets

o al-Badri (OPEC head) OPEC might shift to non-dollar prices but it will take time at least a decade

Russias oil market

o In 2008 Russia launched a ruble-denominated commodity exchange for domestic consumption may increase use of ruble in oil-trade externally in future (NYT) but that would likely mean allowing more ruble strengthening

o Oil will be priced by Russian standards and paid for in rubles with the Russian trading system meant as a challenge to US economic hegemony and part of a growing global dissatisfaction with a dollar based financial system Russia had become unhappy with what it saw as underpricing of Ural oil which is priced according to north sea blends

o In August 2007 OPEC worried that the real price of OPEC basket was actually lower than in 2006 despite a higher nominal price The weak dollar lowered the purchasing power of OPEC members who source imports primarily from EU Asia OPEC oil price rose 130 in dollars from 2003- August 2007 79 in euros

o BNY noted that the Oil industry structure trade with US lessen odds of any short-term pricing changes but reserve diversification could increase

o Mazraati (OPEC) 73 of OPEC nominal oil revenues from 1970-2004 were lost to imported inflation and dollar depreciation

o Richard Berner OPEC production cuts offset weak dollar diversification (incl Irans demand for non-$ payment) adds to dollar weakness

o Brad Setser notes that currency of oil exporters savings and the settlement not pricing currency matters (2007)

o Global Insight further dollar falls may increase support for non-dollar pricing dollar weakness overshadowed environmentenergy security agenda

Oct 6 2009

How Healthy are Spanish Banks Overview Daniel Gros in Spain and Ireland construction investment has increased to levels (18-20 of GDP) not seen in any other OECD country except Japan There is evidence of large contrtruction overhang with serious implications for consumption and financial institutions Edward Hugh estimates 20 of mortgages to be at high risk (August 18 2009) There is a debate underway on whether banks in Spain are hiding their losses given the severity of the economic fallout of the housing bust with unemployment at 18 o Variant Perception Consider this the value of outstanding loans to Spanish developers has

gone from just euro335 billion in 2000 to euro318 billion in 2008 a rise of 850 in 8 years If you add in construction sector debts the overall value of outstanding loans to developers and construction companies rises to euro470 billion Thats almost 50 of Spanish GDP The authors sustain that Spanish banks are extenting non-performing construction loans rather than allowing them to default(August 18 2009)

o June 16 Moodyrsquos downgrades 30 Spanish banks and savings banks o June 11 FT PwC the accounting firm said it would be necessary to invest euro25bn ($35bn) to

euro70bn ndash or 2-6 of gross domestic product ndash to recapitalize the Spanish financial sector in

2009 Moreover with some 40000 branches Spain is one of the worldrsquos most overbanked countries

John Hempton on the (hidden) Losses of Spanish Banks Posted on Tuesday October 6 2009 at 0926PM by CV in Bronte Capital Economics Business and Finance Eurozone watch John Hempton Spain | Post a Comment

I am a sucker for a good argument presented with the correct dose of eloquence and cold facts and John Hemptons latest tour of the balance sheet of the Spanish bank BBVA is just that Essentially John sets out to address the question of whether Spanish banks are hiding their losses or as John ultimately goes on to argue frontloading their eventual losses by extending credit to bad debtors in stead of writing down on the balance sheet

Of course this is not only a question of the practices of BBVA and whether you buy Johns extrapolation from the case of BBVA to the case of the entire Spanish banking industry and on to the Spanish economy and the Eurozone itself I believe the analysis and underlying points deserve a closer look Personally I do think that this is one of the most important questions we face in the context of the ongoing financial crisis namely the extent to which the periphery of the Eurozone (and in particular Spain) harbour the ingredients to pull the whole edifice down or very close to the brink as a result of an unravelling which lies ahead in the beginning of 2010 as government and monetary stimulus begins to wane andor the pressure from deleveraging and internal devaluation becomes too much

Readers with a good memory or just a specific interest in this topic will remember the debate that arose in the context of the report by Variant Conception that essentially attempted to call the emperor in the form of the Spanish banking industry with not clothes The VP report stirred up quite a flurry with for example an Iberian Equity piece that specifically targeted the arguments of Variant Perception I have a good overview of the initial skirmish here if you want to read up on the background on this (although John draws up the playing field very nicely in his piece) As you will see I am with the bears here but I do think that we need to settle this with facts and good reason and to this end I would rate Johns piece very highly even if it also tends to conform with my world view

Now the basic point made by Hempton is as far as I can see the following

There is a time honoured way of hiding losses in banking ndash a method that Variant Perception suggests is being done on a breathtaking scale in Spain The method is rather than call a bad loan bad ndash to just extend it a bit more credit If the borrower canrsquot pay the interest give them a bigger loan or line of credit They will use the loan to become current The slogan is that a ldquorolling loan gathers no lossrdquo Even the most diabolical subprime mortgage book in the US showed only small losses until the market stopped rolling the loans

Together with this qualifying comment at the end

All these problems of the same type that Variant Perception alleges in Spain ndash but none are of the scale Variant Perception alleges in Spain In other words I can unequivocally support the notion that the Spanish banks are hiding their losses ndash but support for the

notion that these losses are so large that France and Germany will be left ldquoholding the bagrdquo is not to be found in the US data

What the Spanish bankers have been telling us about their credit is ndash at least on the American data ndash easily shown to be lies We just donrsquot know whether they are big lies

For the sake of Europe I hope they are not

This last point is naturally important and somehow goes to the heart of the problem at hand here Are we dealing with one or a few rotten apples or is the whole plantation sour At this point we can only speculate on the basis of the facts that are on the table For me personally it is thoroughly outside my realm of analytical ability to say whether this is a widespread practice among Spanish banks although the extent to which it is we should be very worried with respect to the Spanish macroeconomy which is alread as Edward noted recently in an exceptionally dire state

But more importantly the arrows of causation may run in both directions here Specifically (and I may be reading too much into Hemptons analysis here but still) one important underlying current seems to be that with the absolute horrific situation in which the Spanish economy finds itself we should be seeing a lot more pain in the banking sector in the form of loan writedowns or simply deleveraging And of course the extent to which we arent suggests that Spanish banks are trying to frontload their inevitable losses and the further this goes on the more grim it will be when the penny drops This I should add has been my colleagues Edward Hughs point (and to some extent my own too) right back from the summer of 2007 when it became clear that the subprime crisis was not merely a US undertaking Basically better rattle the closet well and good in the beginning and face all the skeletons than have a bunch of them come knocking you out later on when you have grown potentially complacent

To finish off with my own albeit modest contribution to the discussion it is worthwhile taking a look at the chart I have prepared from ECB data on the aggregate balance sheets of monetary financial institutions in France and Spain where the former is naturally present as a benchmark case

Essentially the graph plots of a moving average of a weighted value [1] of loans to housholds loans to non-financial corporations and loans for household purchases in France and Spain (stock value end of period) The change is month on month and then smoothed with a 6 month moving average On the basis of the my remarks above the hypothesis to test here would be the extent to which Spain has clearly had a larger boom and subsequent bust than France the degree and pace of deleveraging should also be comparatively larger and faster in Spain Clearly and even though the process of deleveraging in Spain is moving faster than in France it does not correspond to the macroeconomic differences between the two economies Could then be evidence of a macroeconomic pendant to practices shown by Hempton to

prevail at BBVA This is to say is the apparent lack of fastpaced deleveraging in Spain evidence by contraposition to the argument Hempton implies in his analysis

This is difficult to say and clearly this is no smoking gun since we cannot see beyond well what we cannot see and thus Spain may just be about to hit sht in the second half of 2009 Also a larger sample size would aid the hypothesis significnatly but it does at least makes me think that there may be more to this than meets the eye

[1] I constructed this myself and it is NOT complicated Mail me if you really want to know what I did

httpclausvistesensquarespacecomalphasources-blog2009106john-hempton-on-the-hidden-losses-of-spanish-bankshtml

Bronte Capital MONDAY OCTOBER 5 2009

Are the Spanish banks hiding their losses Looking at the American data Whether the Spanish banks are hiding their losses is a major debate going on in the blogosphere and has been detailed at length in the Financial Times The stakes are very high ndash this is a debate about the stability of the Eurozone and possibly of Europe itself

Background

I have a lot of American readers whose interest in finance stops at the American border I need to outline what is going on

Spain had a monstrous building boom ndash a building boom on (at least) Californian standards based very much on coastal development The building boom has slowed considerably The building boom attracted relatively unskilled labour ndash as building booms are apt to do ndash and about 40 percent of all migrants to EU settled in Spain Wikipedia (I wish I could read the original Spanish source) state that the foreign population in Spain has gone from about half a percent of the population in 1981 to over 11 percent recently This change in racial mix has resulted in only minor tensions (with the possible exception of the large terrorist attack in Madrid)

The financial crisis has hit Spain hard Unemployment is about 20 percent ndash though this overstates the GDP contraction A lot of the new immigrants are now unemployed

Twenty percent unemployment would normally result in large bank losses ndash indeed you would expect bank insolvencies However this has not happened The two giant Spanish banks (Santander and BBVA) appear amongst the most profitable in the world and have substantial market capitalisation Strangely Spain looks solvent despite its apparent economic catastrophe Part of the explanation might be that the economic problems in Spain fall mainly on the newer immigrants and the unskilled end of the labour market ndash and that these people are not the loan customers of the bank In this formulation the Spanish recession is about the same depth as the American recession ndash and the 20 percent unemployment rate is just an artefact of the migrant economy

Either way both big banks are depleting loan reserves (at least compared to delinquency and non-performing loans) But both banks are reporting low losses and low loan arrears

The banks however could be lying

The stakes are enormous The bears (led by Spanish resident Economics Professor Ed Hugh and the financial research house Variant Perception) argue that the Spanish regulators and banks are conspiring to hide Spainrsquos insolvency ndash and when Spain turns out like Argentina either the European central bank (that is the old German central bank) will bail out Spain at great cost to the Central Europeans or the European monetary experiment ndash and possibly the whole European political experiment will be challenged as Spain fails economically and socially Itrsquos alright to bail out Latvia after its economic disaster Latvia is small Spain however is large and important in a European context Ed Hugh would argue that it is best to deal with the problem now ndash because delayed it will get much worse

Do not for a minute think that the stakes here are overstated Full blown economic collapses (eg Latvia Iceland Argentina) usually lead to riots and governments falling Where ethnic tensions run high those riots often have a racial element (rioting crowds find scapegoats) Europe can paper over the Bronze Solider riots in Estonia (which pre-date the crisis) They can paper over riots in Iceland and Latvia because the economies are small But an economic disaster in Spain would pose major difficulties ndash difficulties I think European Union would survive ndash but which would stress the system to its core

To be this bad though the banks would need to be hiding their losses on a grand scale Most banks in crises hide a few losses (and spread them over time) However the bears are truly apocalyptic The Variant Perception report is an absolute classic of hyper-bearishness If it really is that bad then either central European taxpayers are going to be stuck with a huge bill or the core political union in Europe is vulnerable

Less worried folk have pointed to inconsistencies in both Ed Hugh and Variant Perceptionrsquos data analysis An ordinary level bank failure could be dealt with by Central European taxpayers with only minor stress ndash however if you believe Variant Perception we are not looking at an ordinary level collapse ndash its way bigger than that Ibex Salad ndash a blog with the unlikely topics of the Spanish Stock Market Spanish Economy and the olive oil business is the counterpoint to Ed Hugh and Variant Perception

The data is mostly ambiguous ndash as the bears would argue ndash the data is largely faked anyway ndash finding inconsistencies in the data is to be expected They would argue that common sense ndash and the overbuild visible when you open your eyes ndash indicates that there is a serious problem here

I really do not know I am not close enough to the ground in Spain to know ndash and ndash frankly ndash analysing (supposedly) faked data in a language I canrsquot read from a desk in Australia is unusually difficult But there seem to be four variants

(a) The Spanish banks are telling the truth ndash and this is a storm in a teacup

(b) The Spanish banks are doing a normal amount of bank over-optimism in the face of a crisis ndash and whilst the banks are really stretched (but not telling us) the banks are ultimately solvent ndash and the European experiment is fine

(c) The Spanish banks are in fact diabolical ndash and the losses are maybe 15-20 percent of a year of Spanish GDP ndash in which case a bailout by (effectively) German taxpayers is possible or

(d) Variant Perception is in fact unreasonably bullish ndash and Spain will collapse economically and socially and we will be thankful if all we get back is someone like the Generalissimo The modern European experiment will be deemed to fail because a single European Union with a single currency canrsquot hold together in a crisis because Germany wonrsquot or canrsquot bail out Spain Italy and Greece in a crisis

Instinctively I am in camp (b) above However I acknowledge all of the above are possibilities

Migration racism and currency union

I am going to do a little further explaining of the stakes here The threat to currency union in Europe always was ultimately racism

When you have currency union you can no longer have a high interest rate in Spain or Italy (when those economies warrant a high rate) and have a low rate in Germany when Germany is recessed You have a single interest rate across the currency zone

The underlying state of most of the past 15 years was Spain booming Germany mildly recessed Currency shifts or shifts in value between the Deutsche Mark and the Peseta can ndash by dint of currency union ndash no longer happen The main mechanism of economic adjustment is removed

America has always done that The same interest rate applies in the rust belt in the sun belt in California and in Boston And we know how economic adjustment happens Americans move A vast number of Americans do not live in their home town and the bulk of the worldrsquos busiest airports are American Internal American migration is massive

However migration within Europe has always involved more issues The languages are different Several countries have histories of nasty endemic racism There are large cultural barriers

Monetary Union ndash whether by design or just outcome was always going to confront those barriers And it was always going to be slow There is a reason why the GermanSpanish imbalance was so long lasting last decade ndash which was that it is much harder for a German to move to Spain than it is for say a Hoosier to move to California

The changing racial mix of Spain throughout the boom seemed to show that massive shifts in racial mix and massive internal migration could be accommodated without the tensions of Europersquos dark past They were the embodiment and a proof of the European political experiment If Spain collapses beyond bail-out (as per Argentina) then monetary union is over ndash and economic union with racial harmony will be challenged

As I said ndash the stability of Spain is a big issue and the crux point is the losses in the Spanish banking system

The Spanish American data

Sitting at my desk in Bondi Australia I have no real advantage in answering the big questions about the solvency of Spain and whether Spain really is the black hole in Europersquos balance sheet

But I can add to the debate The Spanish banks have American operations ndash and using reasonable comparisons we can work out whether the Spanish banks are hiding their American losses So far I have not seen any analyst do this ndash but it is surely worthwhile I am going to focus on BBVA because I once had a detailed understanding of their American operation (Compass)

Several years ago BBVA paid a premium to buy Compass to form BBVA Compass This is how they describe the bank

BBVA Compass is a leading US banking franchise located in the Sunbelt region BBVA Compass is among the top 25 largest banks in the US based on deposit market share and ranks as the third largest bank in Alabama and the fourth largest bank in Texas Headquartered in Birmingham Alabama it operates 579 branches throughout Texas Alabama Arizona Florida Colorado and New Mexico

This bank files US statutory filings (better known as ldquocall reportsrdquo) There is no reason to presume that the Spanish regulator is conspiring with American regulators to fake the accounts of a bank headquartered in Alabama Moreover there are other sunbelt banks to use as comparisons ndash whereas in Spain you can only really compare BBVA to Santander ndash and the bears would argue that there is no point checking for faked data by comparing it to other faked data

If BBVA is telling the truth in America then there is a reasonable chance they have a culture of truth telling That would suggest that they are probably telling the truth in Spain

However if BBVArsquos American accounts are riddled with deception (or at least an overly-optimistic prediction as to their losses) then it is likely that BBVA has a culture of understating losses ndash and that that culture extends home to Spain

Of course the truth could be (and I would normally expect the truth to be) somewhere in the middle A little bit of excessive optimism is normal behaviour for a banker in a crisis But a little bit of excessive optimism does not imply bank or national insolvency ndash just some difficulty The European experiment can survive that

So what does the BBVA Compass call report say Is BBVA hiding its American losses If so ndash how bad loss hiding culture

I have posted the key Call Report to Scribd

Here is a a comparison ndash comparing BBVA USA ratios to a sample of similar bank holding companies chosen by the FFIEC (You will need to click for the complete picture with all three tables in this post)

httplh5ggphtcom_AL2FXcy6tvwSsmq69I86wIAAAAAAAAAjk0LOqMuMNOUos1600-himage5B415Dpng

The instant conclusion is that BBVA has higher delinquencies than the competition but has lower loan loss provisions and is charging less off than the competition This conclusion is robust almost no matter how you cut the BBVA USA data I think we can safely conclude that BBVA is hiding its losses If anything it is slightly worse than the above indicates because nobody in their right mind thinks that the comparables (larger American regional bank holding companies) are honestly stating their losses But if the comparables are understating losses then BBVA is understating them more

This puts me firmly into camps (b) (c) or (d) above The question is no longer whether they are hiding the losses ndash but whether the scale of problems (in Spain) is sufficient to cause major political ructions or whether it is just an issue for the stock market [Disclosure I am short BBVA and the position is modestly painful as the stocks have appreciated]

How are BBVA hiding their losses in America

There is a time honoured way of hiding losses in banking ndash a method that Variant Perception suggests is being done on a breathtaking scale in Spain The method is rather than call a bad loan

bad ndash to just extend it a bit more credit If the borrower canrsquot pay the interest give them a bigger loan or line of credit They will use the loan to become current The slogan is that a ldquorolling loan gathers no lossrdquo Even the most diabolical subprime mortgage book in the US showed only small losses until the market stopped rolling the loans

We have some evidence that BBVA is rolling bad loans Here is the loans outstanding by sector (again you will need to click for detail)

httplh6ggphtcom_AL2FXcy6tvwSsmrCUrjlDIAAAAAAAAAjsCYMuEk0L4KMs1600-himage5B425Dpng

The level of rolling loans is not at the alarming levels that Variant Perception alleges are present in the Spanish economy Then again Alabama and the other states in which Compass is large do not have 20 percent unemployment The aggression which BBVA grew the book in the past five years however is breathtaking You can see where all that Spanish risk comes from and why Spain had such a monstrous property boom

Construction loans ndash a perspective from the American bookhellip

The main allegation in the Variant Perception report is that the Spanish banks are massively overweight construction loans ndash and that they are extending those loans rather than allowing default The core statistic is given in the following paragraph

Consider this the value of outstanding loans to Spanish developers has gone from just euro335 billion in 2000 to euro318 billion in 2008 a rise of 850 in 8 years If you add in construction sector debts the overall value of outstanding loans to developers

and construction companies rises to euro470 billion Thats almost 50 of Spanish GDP

They add that they think that most of those loans will go bad (which implies a Spanish crisis many times worse than America ndash and implied bailout requirements that are similarly bad)

Construction loans at almost 50 percent of GDP is a truly astonishing figure The entire US mortgage market is roughly 104 trillion dollars ndash or about 75 percent of GDP (and as the crisis has shown that seems too large) The idea that construction loans are nearly 50 percent of GDP had me falling off my chair I tried to confirm this figure (as it felt like garbage) Alas I could not However Iberian Securities has done some legwork

Variant picks-up a classic wild-card to spice-up the report Specifically they say most of the euro470bn in outstanding loans to developersconstruction (50 of Spainrsquos GDP) could go bad The report forgets to mention- however- that a chunk of the euro32 bn in outstanding loans to developers does not necessarily involve residential lending but commercial lending (which is relatively safe in Spain in our view) It does not say either that a not-low percentage of construction activity in Spain involves public works so a proportion of the construction-related debt (euro141bn) should be attached to that public sector accordingly Also it is worth considering that residential work-in-progress in Spain mdash one of the biggest contributors to the euro320bn figure mdash is generally collateralized (with Spanish major developers reporting LTV of 50-65 approx) Factor-in these and the final loss on this portfolio should be a fraction of what Variant claims In our models we assume a 15 peak NPL ratio on Developers (76 in 1Q09) and a 10 NPL ratio on Construction loans (67 in 1 09)

Even at 67 percent of GDP construction loans are too big relative to GDP and the time in the cycle ndash but they are not big enough to cause problems for Spain I still cannot reconstruct the data to get construction loans that small in Spain There are over 600 thousand homes under construction in Spain ndash and most of those are financed Add the finance on those loans to other easily identifiable construction loans and you get over 10 percent of Spanish GDP I am not confident with the Iberian Securities estimate

However we do get clean numbers in America for BBVArsquos subsidiary ndash and it is clear that they are into construction loans in a fairly big way ndash and that their construction loan book is not good and they hiding the losses

Here is the composition of BBVArsquos American lending book versus its American peer group

httplh6ggphtcom_AL2FXcy6tvwSsmrOmjGBJIAAAAAAAAAj49aFt5EykLtos1600-himage5B435Dpng

Its pretty clear that BBVA USA is not afraid of construction loans relative to peers ndash and ndash on the evidence presented here ndash is probably rolling them (and hence deferring losses) This is nothing like the scale alleged in the Variant Perception report but it suggests that the basic Variant Perception allegation of hiding construction losses is more likely than not to be true

I should note that the construction loans are 1064 percent non-accrual (which is slightly less than peer) It seems unlikely you would willingly be expanding lending in this category with those credit statistics Its far more likely that the company is hiding losses by rolling non accrual loans

A note on scale

All these problems of the same type that Variant Perception alleges in Spain ndash but none are of the scale Variant Perception alleges in Spain In other words I can unequivocally support the notion that the Spanish banks are hiding their losses ndash but support for the notion that these losses are so large that France and Germany will be left ldquoholding the bagrdquo is not to be found in the US data

Post script I have linked to a few blogs here ndash but the important ones are Ibex Salad and A Fistful of Euros These blogs disagree with each other ndash but they are of the highest quality If you are interested in this stuff then put them on your blog roll

A few disclosures are necessary here All the key players in the blogosphere debate (hyper-bears and moderates) are my ldquoFacebook friendsrdquo In this day-and-age you donrsquot have real friends ndash just computer friends I do not know what they will think of me after this post I expect disagreement and I will post follow-ups Some I am sure will disavow my ldquofriendshiprdquo

Second - at Bronte we have a small position short the Spanish banks ndash it has not been profitable Moreover we are deliberately short them on the US stock exchange ndash which means we are short the banks long US dollars That has been particularly bad of late because the US dollar is weak However in a true crisis the Peseta (and yes I mean the Peseta) will be really weak ndash and we would rather be short them on a US listing where the cash balance is held in US dollars than on a Spanish listing where the cash balance is Euro converted into Peseta at an unfavourable exchange rate

Just like with Charter One ndash BBVA caused me more than a dose of heartache I was short Charter One when Sir Fred Goodwin and his RBS idiots came and purchased it at a massive premium That was the single worst day of my career Similarly I confess to being short shares in Compass when BBVA bid for them (admittedly for a much smaller premium) Nonetheless it was ndash as they say ndash not a good day at the office

Finally it is a long weekend public holiday in Australia You can tell a nerd when he writes 3350 words on Spanish banking when he is meant to be on holiday

httpbrontecapitalblogspotcom200910are-spanish-banks-hiding-their-losseshtml

Differing Views on the Spanish Banking Sector Thursday September 3 2009 at 0823AM CV in Economics Business and Finance Eurozone watch Iberia Equities Markets and Trading Monetary Policy Spanish Banks Variant Perception

[Update Some additional comments have been posted on this not least the response of VP which can be found in its full length (+the Iberian Equity piece) here and here Edward adds some points on AFOE and FTs Alphaville elaborates further as well]

Who does not like a good argument I for one do especially when it comes to economics A lot of water has already gone under the bridge relative to the note published a couple of weeks back by VariantPerception on the Spanish banking sector which provided a timely and in my opinion accurate analysis of the issues facing the Spanish banking and financial system as a function of the dire macroeconomic situation Spain finds itself with skyrocketing unemployment and lingering (and entrenching) deflation Now the reason that I point out how a lot of water has gone under the bridge is quite simply that I know the people at Variant and as you know I also know Edward Hugh who was very effective in dessimating the conclusions of the report across his (second) empire now growing on Facebook As Edward noted here on A Fistful of Euros in the immediate aftermath of VariantPerceptions report it quickly got a lot of attention

Now I wish that I could present PDFs of both reports here (ie the VP and Iberian Equity report) but I cant due to the fact that such reports are usually behind the firewall However this first note by FTs Alphaville on the VP report and the second note just published on the challenge by Iberian Equities are enough to get a sense of the argument

I have seen VPs rebuttal and I still square with their side of the fence Especially Iberia Equities make the following point in their report

Variant claims Spanish banks are not marking their loan books to market Non-performing loans in Spain (46 of the systemrsquos loans by the end of Junrsquo09) are marked-down according to different provisioning calendars set by the Central Bank For non-mortgage loans NPLs are provisioned at the end of year 2 The majority of mortgage loans (40 of loans or two thirds of mortgage loans) have been ndash until the BoS made changed the interpretation of the rule - also 100 provisioned by year 2 Only a small fraction of low ndashrisk mortgages (20 of loans) are provisioned according to a long calendar (100 provision by year 6) By international standards Spainrsquos provisioning calendars are quite strict especially considering gt60 of loans have a mortgage collateral

To which VP replies

Non-performing loans are being passed off as current vacuumed up and rolled ito cedulas to deposit at the ECBs repo window (Incidentally that is the only way many Spanish banks are finding any semblance of liquidity right now Without the ECB some Spanish banks would have the same liquidity problems that subprime mortgage originators had The ECB is a mega warehouse effectively for the Spanish banking system This is intimately tied in to the question of funding excess consumption in Spain which we discussed)

In my opinion and apart from the glaring neglect in the Iberian Equity report on the macroeconomics of the situation this is the most important omission This is to say that had it not been possible (which it still is) for Spanish banks to park many of their assets at the ECB as collateral for funding they would have effectively needed to mark to a non-existing market (ie write off the whole thing in one swoop in which case it would have been bye bye Sandy) I mean this was what happended with Bear Stearns and Lehmann and then only afterwards did the Fed (and the appointed buyers) wade in to scoop up these assets which are now sitting and waiting for better times (presumably I mean I dont know how quick they are ground down to reflect market fundamentals)

So as you can see I am still with VP here but not everyone may agree in which case it is naturally something which should be debated with facts and reason

httpclausvistesensquarespacecomalphasources-blog200993differing-views-on-the-spanish-banking-sectorhtml

The Perfect Storm In The Spanish Banking Teacup by Edward Hugh

September 3rd 2009 at 941 am Well Jonathan Tepperrsquos initial Variant Perception Report on the Spanish Banking system (here with Catalan translation here) has certainly stirred things up After a string of articles in the Madrid press (including this one here which talks of the ldquoSeven Days Which Shook The Spanish Financial Systemrdquo) Intildeigo Vega of Iberian Equities - one of the leading Spanish bank analysts (indeed Iberian Equites was ranked 4th by Starmine for Ibex 35 stocks in 2008 it will be interesting to see if they keep their rating in 2009) - has come out with a full frontal reply The reply is covered by FT Alphavillersquos Tracy Alloway here and I reproduce the full text here on my Spain Economy Watch blog

Not surprisingly Varariant Perception has come back in full swing and you can find Izabella Kaminskarsquos FT Alphaville coverage here while I reproduce the full text on my Spain Economy Watch blog

Perhaps the key quote in the whole affair is this one from Variant Perception

ldquoNon-performing loans are being passed off as current vacuumed up and rolled ito cedulas to deposit at the ECBrsquos repo window (Incidentally that is the only way many Spanish banks are finding any semblance of liquidity right now Without the ECB some Spanish banks would have the same liquidity problems that subprime mortgage originators had The ECB is a mega warehouse effectively for the Spanish banking system This is intimately tied in to the question of funding excess consumption in Spain which we discussed)rdquo

As Danish blogger Claus Vistesen so aptly puts it in his summary on Alpha Sources

In my opinion and apart from the glaring neglect in the Iberian Equity report on the macroeconomics of the situation this is the most important omission This is to say that had it not been possible (which it still is) for Spanish banks to park many of their assets at the ECB as collateral for funding they would have effectively needed to mark to a non-existing market (ie write off the whole thing in one swoop in which case it would have been bye bye Sandy) I mean this was what happended with Bear Stearns and Lehmann and then only afterwards did the Fed (and the ldquoappointedrdquo buyers) wade in to scoop up these assets which are now sitting and waiting for better times (presumably I mean I donrsquot know how quick they are ground down to reflect market fundamentals)

Finally a recent quote from the Economist

The new accounting guidelines will help Spanish lenders smooth out the effects of the property bust over time But the risk is that the problems are merely postponed The ratio of bad loans to the total property included has tripled to 46 over the past 12 months as unemployment appears to head inexorably towards 20

The true picture is worse still Commercial banks have bought about euro10 billion in debt-for-property swaps according to UBS Spainrsquos savings banks do not disclose the figure Assume it is similar to their commercial peers and

reclassify all these property purchases as bad loans and then the non-performing loan ratio would be 57 (before any further adjustments for loan restructuring) Deferring losses to mantildeana doesnrsquot change the extent of the difficulties facing Spainrsquos financial system

So as the Economist says we really donrsquot know what the real level of Non-performing Loans in the Spanish banking system is at this point mainly because the system itself is not providing enough high-quality detailed credible information for us to make that judgement That is partly why Jonathan Tepper is I imagine reduced to popular press articles and testimonials from insiders And one last question is there anyone still left out there who continues to believe that the ratio of bad loans actually fell to 46 percent in June from 466 percent in May I think all that is necessary for Jonathanrsquos point - that Spainrsquos banks are going to some considerable effort to cover up the extent of their growing bad loan problem - to be valid is that the former claim is untrue Crsquomon gentlemen try offering some credible numbers and then people may start to believe you Have you never heard of getting the bad news all out in order to be able to get on with the job But isnrsquot this just Spainrsquos problem at the moment people are going to any length not to get on with that badly needed economic correction This entry was posted on Thursday September 3rd 2009 at 941 am and is filed under A Fistful Of Euros Economics Country briefings You can follow any responses to this entry through the RSS 20 feed You can leave a response or trackback from your own site

Edward HughThe Perfect Storm In The Spanish Banking Teacup September 3rd 2009 httpfistfulofeurosnetafoeeconomics-country-briefingsthe-perfect-storm-in-the-spanish-banking-teacup

ftcomalphaville

Are Spanish banks hiding their losses

Posted by Izabella Kaminska on Aug 21 0907

Herersquos a somewhat scary view on Spain that came this week from alternative economic research house Variant Perception

The top line that Spain is now the hole in Europersquos balance sheet and that misunderstanding the severity of the crisis will prove costly to investors as it could have profound implications for the European banking system As it explains

Spain had the mother of all housing bubbles To put things in perspective Spain now has as many unsold homes as the US even though the US is about six times bigger Spain is roughly 10 of the EU GDP yet it accounted for 30 of all new homes built since 2000 in the EU Most of the new homes were financed with capital from abroad so Spainrsquos housing crisis is closely tied in with a financing crisis

The impact on the banking sector will be severe Consider this the value of outstanding loans to Spanish developers has gone from just euro335 billion in 2000 to euro318 billion in 2008 a rise of 850 in 8 years If you add in construction sector debts the overall value of outstanding loans to developers and construction companies rises to euro470 billion Thatrsquos almost 50 of Spanish GDP Most of these loans will go bad

Spanish banks in our view are now facing a very bleak outlook Spainrsquos unemployment rate reached over 17 there are now four million unemployed Spaniards and over one million families with not a single person employed in the family

We argue and will document anecdotally in this report that bull The real estate crash in Spain is worse than is widely believed much as the subprime problem was much worse than people believed bull Spanish banks are hiding their losses and rolling over debt to zombie companies much as Japan did in the last decade bull Investors are deluding themselves if they believe that Spanish banks are among the strongest in the world (This is a new theme See Forbesrsquos latest ldquoSpanish Banks In Top Formrdquo for an example of the new fawning articles on Spanish banks) If we are right Spain will soon have zombie banks like Japan and it will face a prolonged period of deflation However Spain will be much worse

According to Variant Spainrsquos situation is now pretty reminiscent of the early days of subprime when all the banking results still looked good until suddenly they didnrsquot

But before you can understand the weakness in the system you have to understand the counter argument mdash ie the idea that Spanish banks are among the strongest in Europe This is based on the idea of ldquodynamic provisioningrdquo according to Variant legislation that forced banks to build up reserves against future losses and prudent lending practice by the large private Spanish banks but which left lending to developers and buyers of second homes to the smaller regional Cajas banks

The problem though is one of magnitude which is bound to overwhelm even the benefits of dynamic provisioning in the end As Variant notes

Spainrsquos building stocks bubble looks very much like the US bubble and other classic bubbles It went up 10x and then went down 90 The math is very simple

Yet the picture above is not echoed by Spanish house prices which are down little more than 10 per cent from their peaks

So how can you explain the mismatch Well according to Variant a lot of it comes down to plain old smoke-and-mirrors As it says We believe that Spanish banks are hiding their problems We explore how they are doing this through 1) Getting a boost from accounting changes 2) Not marking loans to market 3) Continued lending to zombie companies 4) Making 40 year and 100 loan-to-value loans

All these are good points

On the first issue it is absolutely true that the Bank of Spain has now moved to relax its provisioning rules So whereas previously banks made provision for the full value of loans above 80 per cent LTVs after two years of payment arrears they now only need to reserve for the difference between the value of the loan and 70 per cent of the propertyrsquos market value Variant says that for many Spanish banks this has allowed them not to lose money this year

In April meanwhile Spainrsquos Expansion reported that Spanish banks control 25 per cent of appraisals directly and another 25 per cent indirectly through their shareholdings Which means they are mostly in charge of valuing the assets themselves As Expansion reported

This situation has placed the focus once again on the links between banks and the real estate appraisers that goes beyond in many cases a mere commercial relationship

Which means official housing statistics are not often corroborated by anecdotal evidence which suggest prices have already dropped between 30-50 per cent in some coastal regions

And even if the Spanish banks came into the crisis with prudent practices these notes Variant may now be changing quickly

Spanish banks are now the largest real estate holders in Spain They have come to own properties through many different avenues In order to hide from the effects of the real estate crash Spanish banks have been buying properties before the loans on them go bad and trying to dispose of them through their own real estate companies They have also come to own dozens of thousands of homes through debt for equity swaps Estimates put the value of property repossessed or swapped for debt by Spanish banks at about euro16 billion Consider the following Spanish banks are now running their own real estate companies and have websites set up to move their stock Among selling points are pricing discounts of 25-50 financial terms of Euribor plus 0 over 40 years and guarantees to re-purchase the property in the future

You can view Variant Perceptionrsquos rather impressive evidence for the above as well as the full report here

Related links Spanish mortgage alert - FT Alphaville Are you a member of the lsquoWorldrsquos Safest Banksrsquo - FT Alphaville Forget Latvia what about Spain - FT Alphaville

This entry was posted by Izabella Kaminska on Friday August 21st 2009 at 907 and is filed under Capital markets Tagged with covered bonds ecb mortgages santander Spain

EmailDeliciousFacebookDigg

httpftalphavilleftcomblog2009082168016are-spanish-banks-hiding-their-losses

Are you a member of the lsquoWorldrsquos Safest Banksrsquo Posted by Izabella Kaminska on Apr 22 1341 Itrsquos definitely a sign of the times when advertising execs feel the need to include the following accolade in their bank marketing material hellip part of one of the ldquoWorldrsquos Safest Banksrdquo Economist Paul Krugman notes the esteemed title in the following advert from Santanderrsquos Sovereign Bank

We feel the phrase potentially needs an accompanying seal a bit like the one displayed by the members of the small luxury hotels of the world So perhaps something like this

Related links The worldrsquos 50 rsquosafestrsquo banks - FT Alphaville

This entry was posted by Izabella Kaminska on Wednesday April 22nd 2009 at 1341 and is filed under Capital

markets People Tagged with Banks Paul Krugman santander

httpftalphavilleftcomblog2009042254988are-you-a-member-of-the-worlds-safest-banks

Toward a Wider Wireless World ATamp T Verizon to Open Cellphone Networks

By Cecilia Kang Washington Post Staff Writer Wednesday October 7 2009

Cellphone giants to federal regulators We can hear you now

That appeared to be the message from ATampT and Verizon Wireless on Tuesday when the telecom giants announced separately that they would open their networks more widely to popular and potentially rival phone services The twin policy decrees came as the Federal Communications Commission gets ready to take up rules that would prevent carriers from picking and choosing what services can access the Internet

ATampT said its high-speed 3G or third-generation wireless network would be open to Internet telephone services such as Skype on the iPhone reversing a stance that had drawn criticism by consumer groups and application companies Callers using Skype can potentially make international and other calls for far less than what they would pay on a traditional cellular service plan

Verizon Wireless meanwhile said it was teaming with Google to produce new cellphones based on Googles Android software The phones would be open for any applications including Google Voice a phone service that is blocked by Apple on its iPhone

Analysts said the announcements seemed aimed at heading off FCC action in two weeks over whether to take up new net neutrality rules intended to prevent companies from serving as gatekeepers of Internet content Chairman Julius Genachowski proposed two weeks ago a policy that would prevent any Internet service provider from blocking or unfairly prioritizing any legal content on the Web The plan has been particularly contentious in the wireless industry which has argued that it needs the freedom to manage networks because bandwidth is limited and consumers could experience slower access or dropped service if some applications hog capacity

Opening wireless services to greater consumer choice will drive investment and innovation in the mobile marketplace Genachowski said in a statement Tuesday

Verizon Wireless chief executive Lowell McAdam said the announcement with Google had little to do with the proposed rules He said he began discussions with Google chief executive Eric Schmidt 18 months ago to produce Android-based phones The deal brings together the nations largest cellphone operator with the Webs search engine goliath in a partnership that could offer competition to the runaway success of Apples iPhone Google has been one of the strongest corporate proponents of net-neutrality rules in Washington with Schmidt visiting Genachowski last Friday to thank him for the proposal

Trying to respond to whatever is urgently being discussed on the Hill was the farthest thing from our minds quite frankly McAdam said in a conference call

Analysts say Verizon has had more open policies than most other carriers

ATampT did not comment beyond its news release which said the company decided during the summer to take a fresh look at its policy on Internet phone service over the iPhone

iPhone is an innovative device that dramatically changed the game in wireless when it was introduced just two years ago said Ralph de la Vega chief executive of ATampT Mobility amp Consumer Markets in a statement Todays decision was made after evaluating our customers expectations and use of the device compared to dozens of others we offer

Analysts said the announcements timed one day before Genachowski delivers a keynote speech at a wireless industry conference in San Diego could also improve their image in the eyes of regulators

The timing is nice said Mike McGuire vice president of research at Gartner It is the carriers saying Okay we are responding and answering the market needs while also trying to stay within the guardrails that appear to be going up at the FCC

httpwwwwashingtonpostcomwp-dyncontentarticle20091006AR2009100603691html

Regulation Doubts over political resolve for reform By Norma Cohen Economics Correspondent

As the worldrsquos banking system teetered on the brink of collapse just about a year ago there were widespread heartfelt calls for reform Politicians of all stripes on both sides of the Atlantic spurred on by taxpayersrsquo outrage at the cost of bailing out those who ought to need help least vowed to get tough No longer would banks be allowed to become too big to fail or bankers be rewarded for taking risks that prove the undoing of their institutions

But just one year later as the worldrsquos economy begins to emerge from a severe recession and some big banks once again appear profitable it is not clear that the political resolve remains as strong To this end G20 finance ministers meeting in London agreed the broad outlines of a future regulatory structure designed to ensure that banks cannot take risks they do not understand or offer senior employees rich rewards for activities that years later prove the systemrsquos undoing

ldquoWe cannot put the world in the position where things go back to where they were at the height of the boomrdquo Tim Geithner the US Treasury secretary said at that meeting But already things appear to be heading that way In the US a newly emboldened banking sector has succeeded in beating back modest initiatives to alter rules allowing bankrupt homeowners to remain in their homes It is also making fierce headway against a new consumer protection agency for the financial sector and is pushing back hard against efforts to force OTC derivatives trading to go through clearing houses to limit the counterparty risk

Of those three initiatives only the last is directly relevant to the international banking community but banksrsquo successful efforts illustrate starkly the gap between what regulators say needs to be done and what is likely to happen on the bank supervision front Ahead of the G20 summit both in backroom meetings and in public arenas French and German finance ministers pressed for specific limits on bankersrsquo bonuses measures neither the US or the UK could endorse The US having seen the dismal failure of efforts to cap executive pay more than a decade ago urged another approach seconded by the UK

The group agreed a set of principles on bonuses that stop short of full caps but which require a substantial percentage to be deferred available for clawback should activities that looked profitable in one year go badly wrong It also agreed that bank regulators in each country should be able to veto the overall size of the bonus pool should it prove too big relative to the risks posed by each institution The Financial Stability Forum group of finance ministers and supervisors was asked to come up with specific rules for bonuses by the time of the Pittsburgh G20 summit last month

Alistair Darling UK chancellor sought to underplay differences between countries on bonuses describing these as ldquoa symptomrdquo of the problem not the core issue Indeed at the heart of the broad reforms agreed by G20 finance ministers are elements that when added together make risk-taking by financial institutions much more expensive In theory that should make banks less able to pay big bonuses for taking risk in the first place

These include requirements for more and higher-quality capital to be held by banks ldquoonce recovery is assuredrdquo and the introduction of countercyclical buffers so that banks set aside more reserves in good times to be drawn upon in bad In particular it will require systemically significant financial institutions ndash those whose failure could pose a risk to the entire system ndash to hold more capital than others ldquoCapital is a shock absorber for the futurerdquo Mr Geithner says One of the more controversial proposals ndash not fleshed out fully in the G20 statement but also discussed in a concurrent statement from the Basel Committee on Banking Supervision ndash calls for an overall leverage ratio setting out the maximum borrowing a bank can have relative to the capital base

In an eight-point plan issued just before the meeting Mr Geithner made clear that the ratio should apply not just to the banking business of each institution but across all its entities and would apply regardless of the risks posed by the assets the bank held This sparked finger-pointing from some European officials who said that US banks have an edge because they already operate under such ratios

But US institutions will also find institution-wide leverage ratios tough currently these apply only to entities included on bank balance sheets Off-balance-sheet vehicles such as structured investment vehicles were not included ndash one reason why banks had so little capital to shield them from their losses

But continental banks weaned on capital requirements that fell and rose with the riskiness of assets they held ndash explaining why these invested so heavily in AAA-rated mortgage-backed securities and collateralised debt obligations ndash were fighting back behind the scenes arguing that the US which has never signed up to the Basel II agreement on capital do so forthwith

Mr Geithner pledged that the US would sign up to a new and improved ldquoBasel IIIrdquo that all banks will be asked to agree on

But even that is unlikely to see a new regulatory regime through First it is likely that any element of the new tougher regime will face pushback from the banking community and in the US from their supporters in Congress who receive substantial campaign contributions from the industry

British bankers for their part are not far behind with the British Bankersrsquo Association arguing that they cannot raise new capital and step up lending to households and businesses at the same time This is despite the fact that the G20 statement makes clear that the rules can wait until the current recession is over

In short an overhaul of international standards of bank regulation remains a clear but highly uncertain goal

It involves curbs on enormously wealthy individuals and institutions whose political influence appears as strong as it was before the credit crisis hit in 2007 Regulation will affect businesses that provide billions in tax revenue and employ significant swathes of workers

But Mr Geithner has an answer for those who argue that regulatory reforms will make banks less profitable to the detriment of all

ldquoThese banksrdquo he says ldquocreated a misleading impression of profitsrdquo In other words the banks thanks to accounting rules and other regulations were never as profitable as they appeared

httpwwwftcomcmss05cf43a1a-b14b-11de-b06b-00144feabdc0dwp_uuid=46272c28-b152-11de-b06b-00144feabdc0html

Smart Grid Technology October 5 2009 818PM EST text size TT

The Coming Energy Revolution Smart-grid technology will bring huge savings to companies as varied as Cisco PGampE and Cargill and to consumers too But who will foot the bill

By Rachael King

Food producer Cargill is taking a carving knife to its electricity bills At a plant in Springdale Ark where the company handles about 50000 turkeys a day electricity bills run more than $2 million a year But Cargill thinks it can cleave $680000 from the total by using its own generators on high-demand days

The secret behind this money-saving plan lies in whats known as the smart gridmdasha wholesale revamp of the system that distributes energy to homes and businesses around the country Government bodies and utility providers are in the early stages of this multibillion-dollar upgrade to transform the existing grid into a two-way network where power and information flow in both directions between the utility and the customer not just from the provider to the user

Done right the revamp will cut bills reduce consumption give users more say in the kinds of energy they use and even let customers produce their own energy and sell it back to power providers Whats going to happen with the smart grid is that were going to create a network thats larger than the Internet says Guido Jouret chief technology officer for the emerging-technologies group at Cisco Systems (CSCO) one of the many companies working on the technology needed to modernize the electric grid

A $20 Billion Market in Five Years The Electric Power Research Institute a nonprofit research and design group estimates that it will cost $165 billion or roughly $8 billion a year for 20 years to create the smart grid The market for the gear needed to overhaul smart-grid communications alone may reach $20 billion a year in five years Cisco estimates Other technology companies developing smart-grid software and hardware include IBM (IBM) Oracle (ORCL) Google (GOOG) and Siemens (SI)

The tech sectors interest is fitting considering the similarities between the energy-grid upgrade and the computing revolution of the 1980s that saw hulking centralized mainframes give way to PCs The existing US power grid dispenses electricity but is limited in its ability to gather intelligence from end usersmdashhence the monthly visit from a meter reader Now utilities are replacing outmoded meters with so-called smart meters that foster a back-and-forth between customer and utility In much the same way PCs opened the door to third-party software and services and use of the Internet smart meters are paving the way for tools and services that make the system more responsive to shifts in energy demands

Cargill is counting on smart-grid tech to lower its bills Many utility vendors set rates for industrial customers based on peak-use patterns So in a common practice known as peak-shaving Cargill taps its own generators to keep its 365000-square-foot Springdale plant cool on summers hottest days rather than use energy from its electricity vendor PowerSecure (POWR) The challenge is determining when peaks occur PowerSecure keeps close tabs on

Cargills generators as well as fluctuating electricity prices and when it can tell that rates are on course to pass certain preset thresholds it fires up Cargills generators remotely

Easier to Opt for Solar or Wind In the future Cargill may choose to run its generators more often and sell power back to the utility when prices are high says PowerSecure CEO Sidney Hinton While Cargills utility provider doesnt currently purchase energy generated by customers other utilities including PGampE (PCG) in California have begun buying solar energy generated by customers on corporate campuses and residential rooftops

Another benefit is that customers may soon get more leeway in determining the nature of the power they purchase more easily opting for renewable energies such as solar and wind says Matthew Trevithick a partner at venture capital firm Venrock Companies that are actively trying to cut their carbon footprints such as Coca-Cola (KO) may be able to specify the percentage of renewable energy they buy opting to pay more for wind for example if it helps them meet go-green targets

But questions abound over who will foot the bill for the grids modernization The American Recovery amp Reinvestment Act has allocated $45 billion in grants and loans through the Energy Dept for the smart grid to enhance security and to ensure reliability of the electric grid to meet growing demand

What of the remaining costs Often capital improvement expenses are passed along to customers Before that though utilities need a green light from state regulators Certain states will go first because of cost says David Leeds an analyst specializing in the smart grid for Greentech Media For instance he says that in California electricity costs 15cent per kilowatt hour compared with about 5cent in Georgia

Discounts for Lower Peak Usage California utilities are leading the way in smart-meter installation Northern Californias PGampE is the leader spending $22 billion to deploy 54 million smart meters according to a Greentech Media report Southern California Edison is No 3 spending $163 billion on 48 million smart meters (Columbus (Ohio)-based American Electric Power (AEP) with a goal of installing 5 million meters lands between the two California utilities)

Utilities stand to benefit from smarter-grid technology toomdashparticularly during high-demand periods When demand for electricity exceeds supply such as on hot summer days when air conditioners are running utilities must find additional power or potentially face blackouts Some are forced to tap expensive natural gas-burning power plants that are kept for just such a purpose Alternatively utilities can buy power on demand from the spot market The problem in either scenario is that rates charged for electricity remain constant even when the cost of supplying it can surge As a result utilities may lose money on hot days even though consumers are using more power

Many utilities have encouraged consumers to voluntarily engage in energy efficiency but changing consumer behavior can be challenging For example Southern California Edison has used the slogan Give your appliances the afternoon off for decades to try to get customers to reduce the strain on the grid from 2 pm to 7 pm when millions of customers turn on large appliances such as clothes washers and dishwashers While energy-efficiency programs have helped reduce consumption the utility stands to make even bigger gains with the installation of smart meters

Plants Can Keep Going During Storms But as information on usage is extended further to the residence or business customers will be able to see just how much energy their lighting air conditioning and appliances use The idea is that electricity costs more at peak-demand times so if you showed those pricing signals to people they can choose to shift usage to off-peak times says Jeffrey Taft global smart-grid chief architect at Accenture (ACN) The smart grid will also give utilities the ability to automatically turn down business and consumer appliances on peak days Customers would probably be given some sort of discount in exchange for letting the utility cut power to certain systems at key times of the day

In Springdale Ark the local utility once faced a high-demand day and called and asked Cargill to fire up its generators and separate from the gridmdashand paid the company to do so In the long run it netted out a lower cost for us says Cargill Engineering Manager Jim Edwards Those generators have come in handy at other times too When there was a big ice storm in Northwest Arkansas this past winter Cargill ran the generators for six days straight to keep producing turkey meat We were the only facility in this area to continue processing products says Edwards If the plant had been closed for those six days it would have lost about $12 million

King is a writer for BusinessWeekcom in San Francisco

Cover Story October 9 2009 600PM EST text size TT

The Lost Generation The continuing job crisis is hitting young people especially hardmdashdamaging both their future and the economy

By Peter Coy

Bright eagermdashand unwanted While unemployment is ravaging just about every part of the global workforce the most enduring harm is being done to young people who cant grab onto the first rung of the career ladder

Affected are a range of young people from high school dropouts to college grads to newly minted lawyers and MBAs across the developed world from Britain to Japan One indication In the US the unemployment rate for 16- to 24-year-olds has climbed to more than 18 from 13 a year ago

For people just starting their careers the damage may be deep and long-lasting potentially creating a kind of lost generation Studies suggest that an extended period of youthful joblessness can significantly depress lifetime income as people get stuck in jobs that are beneath their capabilities or come to be seen by employers as damaged goods

Equally important employers are likely to suffer from the scarring of a generation The freshness and vitality young people bring to the workplace is missing Tomorrows would-be star employees are on the sidelines deprived of experience and losing motivation In Japan which has been down this road since the early 1990s workers who started their careers a decade or more ago and are now in their 30s account for 6 in 10 reported cases of depression stress and work-related mental disabilities according to the Japan Productivity Center for Socio-Economic Development

When todays unemployed finally do get jobs in the recovery many may be dissatisfied to be slotted below people who worked all alongmdashespecially if the newcomers spent their downtime getting more education says Richard Thompson vice-president for talent development at Adecco Group North America which employs more than 300000 people in temporary positions Says Thompson Youre going to have multiple generations fighting for the jobs that are going to come back in the recovery

Whats more the baby boom generation is counting on a productive young workforce to help fund retirement and health care Instead young people risk getting tracked into jobs that dont pay as well says Lisa B Kahn of the Yale School of Management That would mean lower tax payments for Social Security and Medicare

Only 46 of people aged 16-24 had jobs in September the lowest since the government began counting in 1948 The crisis is even hitting recent college graduates Ive applied for a whole lot of restaurant jobs but even those nobody calls me back says Dan Schmitz 25 a University of Wisconsin graduate with a bachelors degree in English who lives in Brooklyn NY Every morning I wake up thinking todays going to be the day I get a job Ive not had a job for months and its getting really frustrating

ANXIETY AND FEAR The case for action is strong Governments should act now before the damage gets even worse argues David G Blanchflower an economist at Dartmouth College who recently served on the Monetary Policy Committee of the Bank of England Hes not sure what will work but he favors trying everything from subsidizing education and training to cutting minimum wages for young people and trainees It has to be now says Blanchflower It cant be in two years time

Most analyses of youth employment focus on people aged 16 to 24 which includes everyone from high school dropouts to wet-behind-the-ears college grads But in this era of rising educational requirements some people dont start their careers until their mid or late 20smdashand these young college grads are taking it on the chin as well

According to a BusinessWeek analysis college graduates aged 22 to 27 have fared worse than their older educated peers during the downturn Two years ago 844 of young grads had jobs only somewhat lower than the 868 figure for college graduates aged 28 to 50 Since then the employment gap between the two groups has almost doubled

Robert I Sutton author of The No Asshole Rule a management book says hes seeing more anxiety and fear among his students at Stanford University At Northwestern University Law School at least three-quarters of students who graduated in May had their employment deferred in some cases up to a year says Bill Chamberlain head of the schools career center

But the situation is most severe for job seekers who lack college diplomas and thus have fewer options My friends tell me Go fill this out Go do that says Charlie Black 26 of Manhattan who was out one recent weekend shopping for a Halloween costume for his 2-year-old daughter Bree Black has been a union extra in several TV shows and movies and for a year he worked the overnight shift at an Abercrombie amp Fitch (ANF) store Now jobless for almost a year he would be happy to work as a janitor But no jobs have been calling back says Black

It seems strange at first blush that young people are the biggest victims of the current economic slump One could easily imagine that companies in a recession would prefer to hire young people who are cheap and slough off older workers who are expensive But both employers and older workers are sitting tight taking as few risks as possible in an uncertain environment With no openings employers are refusing even to look at the reacutesumeacutes of those on the outside looking in

The sense of stasis in many Western countries is reminiscent of Japan where talk of a lost generation has been around since as long ago as 1995 Some 31 million Japanese aged 25 to 34 work as temps or contract employeesmdashup from 2 million 10 years ago according to the Ministry of Internal Affairs Many Japanese blame the young people themselves saying they are spoiled alienated freetersmdasha term meaning job-hopping part-timers But economist Souichi Ohta of Nagoya University argues that a big part of the problem is Japanese employers who value long experience at their companiesmdashwhich newcomers by definition dont have

Europe offers different lessons about what to avoid In Spain employers generally put older workers on long-term contracts that are hard to break When demand slumps they get rid of the younger workers notes Alfredo Pastor an economist at Spains IESE Business School and former Spanish Secretary of State for the Economy Thats one reason Spains unemployment rate for 16- to 24-year-olds is a sky-high 39 The rate is 24 in France and 19 in Britain

Economists in several countries have studied the damage such high unemployment can cause Kahn of Yale found that graduating from college in a bad economy has a long-lasting negative effect on wages For each percentage-point rise in the unemployment rate those who graduated during the recession earned 6 to 7 less in their first year of employment than their more fortunate counterparts Even 15 years out of school the recession graduates earned 25 less than those who began working in more prosperous times

SUBMINIMUM WAGE What can be done For one thing companies should keep hiring young people even if theyre doing layoffs Thats how General Electric (GE) operates says Susan P Peters the companys vice-president for executive development She says GE learned from the mistake of its aviation business which froze hiring and training during a downturn years ago and found its talent pipeline dry when business recovered We tell our businesses Tough you have to hire Peters says

Free-market economists favor removing obstacles to employment of the young such as high minimum wages The government in some ways is contributing to this problem says Kristen Lopez Eastlick senior research analyst for the employer-backed Employment Policies Institute She points out that the 40 hike in the federal minimum wage over the past two years made it less appealing to hire young workers One possibility Some US states and European countries have enacted subminimum wages just for young people or people enrolled in apprenticeships

More job training would help as well In April the British government guaranteed that starting next January all people under age 25 who have been unemployed for more than a year will have a job offer training or a paid workplace experience

The US has been slower to beef up job programs for the young partly because of massive budget deficits The Obama Administration is again considering a plan proposed during the campaign to give $3000 tax credits to employers for each new hire although an Administration spokesman says talks with Congress are only preliminary An argument in favor of action The current generation of young people is larger than the one that follows Dartmouths Blanchflower points out that even if programs are left in place after the recession ends they will serve fewer people and therefore become less costly

One possible example for the US to follow is Germanys apprenticeship program which guides young people from high school into skilled blue-collar jobs Young-adult unemployment in Germany has risen less than in most other developed countries

Young people have figured out how to avoid horrid blanks on their reacutesumeacutes Enrollments are breaking records at such schools as Cincinnati State Technical amp Community College and LaGuardia Community College in New York With no job in sight Shireen Rahjou 23 of Boca Raton Fla is working toward a masters degree in public relations She recently landed a paid internshipmdashOK not a job but a foot in the doormdashat a PR firm in Miami

With jobs scarce Stanfords Sutton says some of his students plan to start their own businesses Schools should encourage that instead of churning out passive regurgitators argues Kate McKeown an adjunct professor of entrepreneurship at Fordham Universitys College of Business Administration

Meanwhile though the tide of youth unemployment keeps rising Were seeing further deterioration says Stefano Scarpetta who heads the employment-analysis division of the Organization for Economic Cooperation amp Development a forum for rich countries

The unemployment crisis among the young is not as dramatic as the financial crisis of a year ago But it may turn out to have longer-lasting effects

With Mark Scott in London Ellen Gibson and Lindsey Gerdes in New York Carol Matlack in Paris and Kenji Hall in Tokyo

Business Exchange Read save and add content on BWs new Web 20 topic network Tackling the Job Crisis

The system for moving young people into the workforce was functioning poorly in many nations even before the global economic downturn began says a new report from the Organization for Economic Cooperation amp Development The 26-page report called Helping Youth to Get a Firm Foothold in the Labour Market was prepared for an OECD meeting in Paris on Sept 28-29 The most urgent priority is to prevent unskilled dropouts from losing touch with the workforce altogether according to the report For disadvantaged youth lacking basic education the document says a failure in their first experience on the labor market is often difficult to make up

To view the report go to httpbxbusinessweekcomunemploymentreference

Coy is BusinessWeeks Economics editor

Worlds Best Companies 2009 October 1 2009 200PM EST text size TT

Spanish Insurer Mapfre Goes Global to Thrive

The nonlife insurer finds a buffer against Spains woes by building positions in Latin America Turkey and the US

By Mark Scott

The worst of the Great Recession may be over but much of the world isnt out of the woods just yet Thats particularly true for Spain where unemployment borders on 20 and the countrys gross domestic product is expected to contract 32 in 2009 after years of record growth

Yet despite that dire domestic outlook some of Spains largest companies continue to grow Take Mapfre (MAPF) the countrys biggest insurance company with annual sales of $26 billion and operations in 45 countries including the US Over the first half of 2009 the Madrid outfit boosted revenues to $146 billion up 129 from the same period last year No wonder then that Mapfre is the highest-ranking finance firm in AT Kearneys 2009 league table of global champions

Expanded US Presence So how has Mapfre succeeded when others in the financial services industry have floundered There are a couple of reasons In recent years the insurer which specializes in nonlife products such as home and auto insurance has aggressively expanded into new international markets like Turkey and the US while investing millions to shore up its 25-year presence across Latin America The global push has been coupled with cost-cutting moves at home to offset lackluster growth in the Spanish market which still represents 66 of the insurers profits The recession has hit Mapfre like everyone else but its international size and shrewd business approach have offset many of the problems says Joatildeo Pena AT Kearneys managing partner for Spain and Portugal Right now the companys strategy is looking very attractive

Mapfre first entered Latin America in the mid-1980s but its emphasis has shifted to the non-Spanish speaking world In March 2007 the company bought an 80 stake in Turkish insurer Genel Sigorta for $375 million Months later Mapfre forked out $22 billion for Webster (Mass)-based Commerce Group which helped ramp up the companys previously negligible US presence Analysts expect Mapfre to use its growing footprint in the Northeast US to expand into other states The international markets where were present have much more growth potential than our Spanish business says Alberto Manzano Mapfres vice-president

The global push has come at just the right time While Mapfres first-half profits from its sluggish Spanish operations fell 103 annually to $538 million the international businesss profits jumped 326 to $273 million The insurers share price has more than doubled since global stock markets hit their lows in early spring and has jumped 185 since the beginning of the year

Cross-Marketing Advantage While global expansion has provided most of Mapfres recent growth squeezing out efficiencies from the domestic business also has played a role Like fellow financial services giant Banco Santander (STD) the Spanish insurer has world-class software that allows Mapfre to cross-sell products to its Spanish clients Customers with car insurance for instance can be offered household coverage and other services through Mapfres 3200 branches across the country That according to Standard amp Poors analyst Angelo Sacca gives Mapfre a distinct advantage over smaller rivals which dont have the same product range

Analysts stress Mapfre must continue its overseas expansion since the Spanish market will remain in dire straits for some time to come Historically the domestic nonlife insurance business represented around 60 of the companys annual net income That meant bumper profits when the Spanish economy was booming But with Spains home and car sales near 10-year lows those easy profits are gone Its up to Mapfres customers in Turkey the US and elsewhere to pick up the slack

Scott is a reporter in BusinessWeeks London bureau

httpwwwbusinessweekcomglobalbizcontentsep2009gb20090930_144885htmcampaign_id=mag_Oct8amplink_position=link51

Portada CD 90 Anexo III

CD 90 Anexo III

BACKGROUND PAPERS

1 Too Little of a Good Thing The New York Times by Paul Krugmanhellip11

2 Growth And jobs the lesson of the Clinton years The Conscience of a Liberal hellip12

3 If a deficit falls in the forest The Conscience of a Liberal hellip 13

4 Supply-side ideas turned upside down The New York Times by Gregory Markiwhellip14

5 Can Citigroup carry its own weight The New York Times by Andrew Martin and Gretchen Morgensonhellip16

6 Depression diary when the banks went dark by Benjamin Rothhellip22

7 Vienna Initiative Western European Banks pledge continued support to eastern European subsidiaries in hardest hit countries RGE Monitorhellip25

8 Game over for Blair Eurointelligencehellip27

9 US economy returned to positive growth in Q3 2009 as policy measures boosted private demand RGE Monitorhellip29

10 Regulatory reform in the US assessing the draft law on systemically important institutions RGE Monitorhellip33

11 Contingent debt-to-equity swaps against too-big-to fail a viable tool RGE Monitorhellip35

12 Raise interest rates to increase lending Financial Times by FThellip37

13 Norwayrsquos Central Bank first to raise interest rates in Europe Bank signals steeper rate path RGE Monitorhellip34

14 El siglo maacutes largo El Paiacutes por Joaquiacuten Estefaniacuteahellip42

15 Banesto pone a la venta 1200 viviendas con rebajas del 40 El Paiacutes- EFEhellip45

16 Bruselas exige a Espantildea que suprima las ayudas fiscales a las fusiones El Paiacutes por Andreacute Misseacutehellip45

17 El Santander afirma que Espantildea es la mayor amenaza para su negocio El Paiacuteshellip46

18 Los impagos en el alquiler suben un 12 entre enero y junio El Paiacutes Agenciashellip48

19 Nouriel Roubini RGE Monitorhellip49

20 Noticias de Espantildea y el mundo Para salir de la encrucijada econoacutemica ABC por Joseacute Manuel Gonzaacutelez-Paacuteramohellip51



23 Too big to fail is too dumb an idea to keep FTcom by John Kayhellip62

24 Economy is kick-started but can it motor ahead The Washington Post by Neil Irwinhellip64

25 Fears of a New Chill in home sales The New York Times by David Streitfeldhellip66

26 Bill seeks to shift rescue costs to big banks The New York Times by Stephen Labaton hellip68

27 ING to be broken up in wake of bail-out FTcom by Michael Steenhellip70

28 Reserve accumulation and easy money helped to cause the subprime crisis A conjecture in search of a theory Vox by Guillermo Calvo 72

29 Paulson says crisis sown by imbalance FTcom by Krishna Guhahellip76

30 Causes Hank Paulson The Baseline Scenariohellip76

31 Causes Too much debt The Baseline Scenariohellip78

32 Schaumluble at finance and a euro25bn rise in the structural deficit ndashan interesting start for Germanyrsquos centre-right coalition Eurointelligencehellip79


34 Do not ignore the need for financial reform FTcom by George Soroshellip82

35 After reform passes The New York Times by Paul Krugmanhellip84

36 A cornucopia of numbers to pick through The Washington Posthellip87

37 Chamber of commerce criticizes Obama team The Washington Post by Michael D Shearhellip92

38 US considers reining in Too big to fail institutions The New York Times by Stephen Labatonhellip90

39 If lenders say the dog ate your mortgage The New York Times by Gretchen Morgensonhellip91

40 The state of financial reform The New York Times hellip96

41 La transicioacuten inmobiliaria en Espantildea El Paiacutes por Joseacute A Herce y Pep Ruizhellip99

42 La generacioacuten Peter Pan estaacute hipotecada El Paiacutes por Josep Garrigahellip102

43 Cinco erres para mover la economiacutea El Paiacutes por Antoacuten Costashellip1066

44 Stock options y despido improcedente El Paiacutes por Joseacute Mariacutea Lastrashellip108

45 Un rebote que da que pensar El Paiacutes por David Fernaacutendezhellip109

46 El riesgo es que el creacutedito vuelva a descontrolarse El Paiacutes por Alicia Gonzaacutelezhellip114

47 El Ibex se desmarca del PIB El Paiacutes por David Fernaacutendezhellip116

48 Perspectivas econoacutemicas El Paiacutes por Miguel Boyer Salvadorhellip120

49 Wall Street on the lam The Washington Post by Eugene Robinsonhellip121

50 The Chinese Disconnect The New York Times by Paul Krugmanhellip123

51 Adjustment and the dollar The Conscience of a Liberalhellip124

52 Whatrsquos in a namehellip126

53 Is Japan on the fiscal brinkhellip127

54 Financial Regulation and supervision after the crisis the role of the Federal Reserve Board of Governos of the Federal Reserve System by Chairman Ben S Bernankehellip128

55 Gloves are coming off in the fight to stop Blair Eurointelligence hellip136

56 Swedish bansk could they get burned by heavy Baltic exposure RGE Monitorhellip138

57 ECB warns Brussels on hedge fund rules FTcom by Ralph Atkinshellip140

58 Rally fuelled by cheap money brings a sense of foreboding FTcom by Gillian Tetthellip141

59 John Meriwether is back risk must be too Naked capitalism by John Meriwtherhellip143

60 Government at a Glance 2009hellip145

61 Fed announces measures to regulate financial sector compensation RGE Monitorhellip152

62 EM forex will the rally continue RGE Monitorhellip156

63 Whorsquos looking at the Fedrsquos books The New York Times hellip158

64 High-frequency trading and dark liquidity pools in equity markets SEC pushes for transparency RGE Monitorhellip159

65 Will Germany finance tax cuts through off-balance sheet vehicles RGE Monitorhellip162







72 A speech stuck on ldquorepeatrdquo The Washington Post by Dana Milbankhellip186

73 euro150 again Eurointelligence Carlo lbertohellip188

74 The growing case for a jobless recovery Economic research and datahellip190

75 Top China banker warns on asset bubbles FTcom by Geoff Dyer hellip191

76 Finance ministers concerned about the eurorsquos strength Eurointelligence hellip192

77 Mervyn King calls for banks to split as public finances take record hit Times Onlinehellip194

78 Demand for ECB liquidity at six-year low FTcom by Ralph Atkins hellip196

79 Brussels to clamp down on derivatives market Euractivhellip197

80 Easterns Europe Out of the Danger Zone RGE Monitor by Mary Stoker and Jelena Vukotichellip199

81 Volkerrsquos voice fails to sell a Bank Strategy The New York Times by Louis Uchitellehellip201

82 Rising debt a threat to Japanese economy The New York Times by Hiroko Tabuchihellip204

83 Will the Brazilian Real Continue to appreciate despite the tax on capital inflows RGE Monitorhellip207

84 Holding off disaster the race to save Lehman The New York Times by Andrew Ross Sorkinhellip210

85 FDP seems to prevail in coalition negotiations Eurointelligence hellip215

86 Europe securities defaults set to depen FTcom by Jennifer Hugheshellip216





91 The banks are not alright The New York Times by Paul Krugmanhellip235

92 Ahip Ahip hooray The Conscience of a Liberalhellip236

93 In Dollarrsquos fall upside for US exports The New York Times by Nelson D Schwartzhellip238

94 Global recession raises unemployment around the world RGE Monitorhellip241

95 Fight over Klaus says he cannot stop Lisbon Treaty Eurointelligence hellip246

96 Central banks fuel risky assets FTcom by Michael Mackenziehellip248

97 Ralph Atkins eurozone exports tumble sharply FTcom by Ralph Atkinshellip250

98 Wolfgang Muumlnchau FTcomhellip251

99 A Lifeline not made in the USA The New York Times by Micheline Maynardhellip253

100 Who is afraid of the global rebalancing RGE Monitor by Aurelio Maccariohellip253

101 Time for the ECB to get serious about the overvalued euro Financial Times hellip259

102 Todo el dinero para el alquiler El Paiacutes porLuis Doncel hellip267

103 Siacute a la filosofiacutea del texto no a la letra El Paiacuteshellip268

104 Un periacuteodo transitorio El Paiacuteshellip268

105 La liga de salida El Paiacutes por Joseacute A Herce y Alvaro Lissoacutenhellip269

106 A vueltas con la deflacioacuten El Paiacutes por Angel Labordahellip270

107 El matemaacutetico que agitoacute la Bolsa El Paiacutes por David Fernaacutendezhellip271

108 Record-High deacuteficit may dash big plans The Washington Post by Lori Montgomery and Neil Irwinhellip273




112 De beta a alfa El Paiacutes por David Fernaacutendezhellip284

113 Sarkozy says Klaus must sign or else Eurointelligence hellip285

114 The winnerrsquos curse Eurointelligence by Jean-Pisani Ferryhellip287

115 Google da por finalizada la recesioacuten y vuelve a elevar sus ingresos Cinco Diacuteashellip289

116 Is There too mucho r too Little liquidity a contrarian view RGE Monitorhellip291

117 OTC Derivatives regulation house financial services committee votes on draft bill RGE Monitorhellip293

118 A Hatchet job so bad Itrsquos good The New York Times by Paul Krugmanhellip294

119 Smart guys and Wall Street The Conscience of a Liberalhellip296

120 Title The global economy One Asia by Paul Krugmanhellip297

121 Whatever happened to imbalances FTcom by Samuel Brittanhellip300

122 Un Mercado de la vivienda que no funciona El Mundohellip302

123 Los institutos econoacutemicos considerar superado el bache de la crisis mundial Cinco Diacuteashellip305

124 Espantildea uacutenico paiacutes del euro con PIB negativo en 2010 seguacuten los sabios alemaneshellip306

125 US Banks Q3 earnings strong trading weak banking results among large Banks RGE Monitorhellip308

126 Renminbi politics US starting to toughen on RMB RGE Monitorhellip310

127 Bailed-Out banks raking in big profits The Washington Post by Binyamin Appelbaumhellip312

128 Lobbyists mass to try to shape financial reform The New York Times by Stephen Labatonhellip314

129 Dancing again Eurointelligencehellip316





134 How healthy are Spanish Bankshellip324

135 Wall Street smarts The New York Times by Calvin Trillinhellip326

136 Global central banks are diversifying Eurointelligencehellip328

137 Stop ou encore Les Echoshellip330

138 Nouvelle monnaie de reacuteserve mondiale proposition chioise Les Echos hellip331

139 The rumours of the dollarrsquos death are much exaggerated FTcom by Martin Wolfhellip332

140 Sterling falls on weak inflation data FTcom by Neil Dennishellip330

141 Posturing Klaus FTcomhellip336

142 Moodyrsquos avisa de que la banca espantildeola oculta el deterioro de sus activos El Paiacutes por C Peacuterezhellip337

143 Moodyrsquos still negative on Spanish Banks Financial Times by Stacy Marie Ishmaelhellip339

144 Inversores extranjeros toman el 90 de los bonos corporativos espantildeoles Cinco Diacuteas by Tania Juaneshellip344

145 Global macroeconomic imbalances G20 leaders must back up their rhetoric with deeds Financial Times by Eswar Prasadhellip346

146 The Bank lending channel Economistrsquos viewhellip348

147 Disgruntled consumers organize a run on a Dutch bank and win Eurointelligencehellip350

148 La debacle du dollar serait un desastre pour la planegravete Le Mondehellip352

149 Who speaks for Europe in the G-whatever Financial Timeshellip349

150 BBC world financial crisis not over the real economy still looks very weak BBC by Michelle Fleuryhellip355










160 Seoul feud The Conscience of a Liberalhellip377

161 Glenn Rudebush vs John Taylor on the right value for the Right value for the interest ratehellip383

162 The Fedrsquos monetary policy response to the current crisis Federal Reserve Bank of San Francisco by Glenn D Rudebuschhellip384

163 Asset bubbles and economic activity Derivative Dribble Charles Davihellip388

164 Global imbalances and the financial crisis products of common causes Economist Viewhellip390

165 New way to tap gas may expand global supllies The New York Times by Clifford Krausshellip393

166 Tort reform could save euro54 billion CBO says The Washington Post by Lori Montgomeryhellip395

167 Crisis leaves Europe in slow lane The New York Times by Nelson D Schwartzhellip396

168 Exit strategies for the Fed testing reverse repurchases RGE Monitorhellip399







175 ECG Benchmark rate left at 1 RGE Monitorhellip419

176 The Federal Reserversquos balance sheet an update Board of Governos of the Federal Reserve Systemhellip431

177 A new season starts in the Berlusconi soap opera Eurointelligencehellip432

178 Wasting a crisis Eurointelligence by Richard Porteshellip434

179 US regulators probe mainframes market Ftcom by Richard Watershellip438

180 WWIIrsquos unclaimed treasure The Washington Post by David Chohellip439

181 How can congress fix the OTC derivatives market RGE Monitorhellip441

182 Will unsecured bank creditors take a haircut eventually Or secured ones RGE Monitorhellip443

183 What do german factory orders suggest about the strength of the recovery RGE Monitorhellip444

184 Q and A Joseph Stiglitz sees welcome change at the IMF The Wall Street Journalhellip446

185 Obama under fire over falling dollar FTcom by Edward Luce and Krishna Guhahellip448

186 Stocks and gold gain as investors shun the dollar The New Yokr Times by Jack Healy and Keith Bradherhellip450

187 Paralysis in the debt markets is deepening the credit drought The New York Times by Jenny Andersonhellip452

188 Still chasing shadows The Conscience of a Liberal by Paul Krugmanhellip455

189 RGE Monitorrsquos Newsletter hellip456

190 Ask Paul Krugman Questions about the economy The Conscience of a Liberal by The New York timeshellip459

191 How the fed can avoid the next bubble RGE Monitor by Nouriel Roubini and Ian Bremmerhellip469

192 Ganging up on the dollar Could oil exporters move away from dollar pricing RGE Monitorhellip470

193 How healthy are Spanish banks RGE Monitorhellip472

194 John Hempton on the (hidden) Losses of Spanish Bansk Alpha Sourceshellip474

195 Are the Spanish banks hiding their losses Looking at the American data Bronte Capital hellip476

196 The perfect storm in the Spanish banking teacup clausvistesensquarespacecom by Edward Hughhellip484

197 Are Spanihs banks hiding their losses FTcom by Izabella Kaminskahellip485

198 Toward a wider wireless world The Washington Post by Cecilia Kanshellip490

199 Regulation doubts over political resolve for reform FTcom by Norma Cohemhellip491

200 The Coming energy revolution BusinessWeek by Rachael Kinghellip493

201 The lost generation BusinessWeek by Peter Coyahellip496

202 Spanish insurer Mapfre goes global to thrive BusinessWeek by Mark Scotthellip500

Too Little of a Good Thing

Growth and jobs the lesson of the Clinton years


Supply-Side Ideas Turned Upside Down

Can Citigroup Carry Its Own Weight

Game over for Blair

Raise interest rates to increase lending

by FT

Ronald McKinnon Raise interest rates to increase lending October 29 2009httpblogsftcomeconomistsforum200910raise-interest-rates-to-increase-lending

Norways Central Bank First to Raise Interest Rates in Europe Bank Signals Steeper Rate Path Oct 28 2009 httpwwwrgemonitorcom683Nordicscluster_id=8029

El siglo maacutes largo

La actual Gran Recesioacuten pertenece a la loacutegica del siglo XX y las ideas que la alimentaron son las culpables de las secuelas que dejaraacute La llamada nueva economiacutea era una ideologiacutea destinada a beneficiar a unos pocos


Bruselas exige a Espantildea que suprima las ayudas fiscales a las fusiones

Informacioacuten adicional

El Santander afirma que Espantildea es la mayor amenaza para su negocio

El Santander gana un 3 menos con 6740 millones para aumentar su colchoacuten y cae en Bolsa con fuerza

Los impagos en el alquiler suben un 12 entre enero y junio

Madrid tiene la tasa maacutes elevada y junto a Murcia es la uacutenica comunidad que supera la media espantildeola- Les sigue Baleares Paiacutes Vasco y Cataluntildea

Nouriel Roubini|Balanced Global Diet Oct 28 2009

Para salir de la encrucijada econoacutemica

Having done such a great job at the eurogroup Juncker now recommends himself as EU president

The proposed European Systemic Risk Board is overweight central bankers

lsquoToo big to failrsquo is too dumb an idea to keep

Fears of a New Chill in Home Sales

Bill Seeks to Shift Rescue Costs to Big Banks

ING to be broken up in wake of bail-out

EDITORrsquoS CHOICE

Analysis Payback time - Oct-26

How ING will be forced to go back to basics - Oct-26

ING move a warning to UK banks - Oct-26

Lex ING - Oct-26

Gapper blog A bank is made to pay for misdemeanours - Oct-26

Video Sharlene Goff assesses the implications for UK banks - Oct-26

httpwwwftcomcmss0681ffe72-c200-11de-be3a-00144feab49ahtml vox

Reserve accumulation and easy money helped to cause the subprime crisis A conjecture in search of a theory

Footnotes


Causes Hank Paulson


Causes Too Much Debt


A polite discourse on bankers and bubbles

Do not ignore the need for financial reform

After Reform Passes

A cornucopia of numbers to pick through

US Considers Reining In lsquoToo Big to Failrsquo Institutions

If Lenders Say lsquoThe Dog Ate Your Mortgagersquo

The State of Financial Reform

A Step Forward on Pay

Too Little Regulation for Derivatives

Some Protection for Consumers


La transicioacuten inmobiliaria en Espantildea

La generacioacuten peter pan estaacute hipotecada



Cinco erres para mover la economiacutea


Stock options y despido improcedente



Un rebote que da que pensar

La subida bursaacutetil aviva el debate sobre la fina liacutenea roja entre optimismo y burbuja


El riesgo es que el creacutedito vuelva a descontrolarse

El perfil internacional de las cotizadas lleva a la Bolsa espantildeola a liderar las alzas

Opinioacuten


Perspectivas econoacutemicas

MIGUEL BOYER SALVADOR 23102009

Pese a los deacuteficit y el endeudamiento los Gobiernos no deben relajar todaviacutea sus esfuerzos para restablecer la salud del sector financiero y el apoyo a la demanda global con poliacuteticas de expansioacuten macroeconoacutemica

Wall Street on the lam

The Chinese Disconnect



Whatrsquos in a name

Is Japan on the fiscal brink

Speech

Chairman Ben S Bernanke


October 23 2009


EDITORrsquoS CHOICE

FSA warns on cost of new EU hedge fund rules - Oct-15

Tough EU timetable for fund regulation - Oct-06

EU plans for hedge fundthinsprules lsquoflawedrsquo - Sep-12

In depth hedge funds - Dec-20

Rally fuelled by cheap money brings a sense of foreboding

John Meriwether is back risk must be too

Whorsquos Looking at the Fedrsquos Books

$150 again

October 21 2009


EDITORrsquoS CHOICE

In depth China - Jul-28

Opinion China must keep its eyes on the exit - Oct-21

Optimism returns for Chinarsquos jobseekers - Oct-21

Asean struggles to sway world opinion - Oct-21

China bank lending still on rise - Oct-14

Scramble to manage wealth in Asia - Oct-21





EDITORrsquoS CHOICE

ECB chief warns on lsquofinancial gamblingrsquo - Oct-15 ECB challenged by rising euro - Oct-13

ECB presses for fiscal exit plan - Oct-08 ECB chief signals concerns on euro - Oct-02

ECB nets euro900m from crisis lending - Sep-14 ECB plans policy revamp to tackle bubbles - Sep-07

Brussels to clamp down on derivatives market

Next steps

Background

More on this topic

Links

Volckerrsquos Voice Fails to Sell a Bank Strategy

October 21 2009

Rising Debt a Threat to Japanese Economy

Holding Off Disaster The Race to Save Lehman


Europe securities defaults set to deepen

Thin Line Separates Insider Trading and Research

Asia Said to Be Leading the Globe Out of Crisis

Speech



October 19 2009

Exhibit 1 Global Merchandise Exports

Exhibit 2 Trade Openness and GDP Growth (2008Q4-2009Q1)

Exhibit 3 Financial Openness and GDP Growth (2008Q4-2009Q1)


Why the euro is not the next global currency

The Banks Are Not Alright

AHIP AHIP hooray

Samuel Brittanrsquos recipe for recovery

Optimal fiscal policy in a liquidity trap (ultra-wonkish)

In Dollarrsquos Fall Upside for US Exports




Ralph Atkins Eurozone exports tumble sharply




A Lifeline Not Made in the USA

httpwwwnytimescom20091018business18excerpthtmlthampemc=th Europe EconoMonitor

Who is Afraid of the Global Rebalancing


Willem Buiter

Time for the ECB to get serious about the overvalued euro

Todo el dinero para el alquiler

Varios expertos proponen eliminarla vivienda protegida en propiedad

EL GOBIERNO

Siacute a la filosofiacutea del texto no a la letra

LAS INMOBILIARIAS

Un periodo transitorio

NEGOCIOS

TRIBUNA JOSEacute A HERCE Y AacuteLVARO LISSOacuteN

La liga de salida

Negocios

TRIBUNA coyuntura nacional AacuteNGEL LABORDA

A vueltas con la deflacioacuten

NEGOCIOS

El matemaacutetico que agitoacute la Bolsa

El adioacutes del guruacute de la gestioacuten cuantitativa James Simons coincide con las criacuteticas a la proliferacioacuten de sistemas inteligentes por distorsionar el mercado


Bailout Helps Fuel a New Era of Wall Street Wealth

De beta a alfa

Goldman Sachs cree que es hora de discriminar en Bolsa



The winners curse

Google da por finalizada la recesioacuten y vuelve a elevar sus ingresos

Lo peor de la crisis ya ha pasado al menos para el gigante de internet Google que ayer se congratuloacute de haber aumentado un 27 su beneficio del tercer trimestre y un 7 sus ingresos estancados desde comienzos de antildeo De esta forma ha superado las expectativas del consenso de los analistas

A Hatchet Job So Bad Itrsquos Good

Smart guys and Wall Street

Jim Rogers makes my head hurt


Whatever happened to imbalances

Un mercado de la vivienda que no funciona

Los institutos econoacutemicos consideran superado el bache de la crisis mundial

Los ocho institutos econoacutemicos que asesoran al Gobierno alemaacuten consideran superado el bache de la mayor recesioacuten econoacutemica desde la II Guerra Mundial y que existen muchos indicios de que se ha iniciado una recuperacioacuten coyuntural a nivel global

Espantildea uacutenico paiacutes del euro con PIB negativo en 2010 seguacuten los sabios alemanes

Los ocho institutos de estudios econoacutemicos que asesoran al Gobierno alemaacuten calculan que Espantildea registraraacute en 2010 un retroceso de su Producto Interior Bruto de probablemente un 03 seguacuten su informe de otontildeo presentado hoy en Berliacuten

Bailed-Out Banks Raking In Big Profits

Lobbyists Mass to Try to Shape Financial Reform

Dancing again

Eurozone rising like lsquoa phoenix from the ashesrsquo

Economiacutea


La agencia rebaja el riesgo de un mayor deterioro por el desplome inmobiliario

Les Echosfr

Avec le Creacutedit Agricole toutes les banques franccedilaises sont en passe de se deacutefaire des aides de lEtat




How Healthy are Spanish Banks

Wall Street Smarts


FRANCOIS VIDAL

Stop ou encore


Nouvelle monnaie de reacuteserve mondiale proposition chinoise

Proposition

La Chine deacutependante du dollar

The rumours of the dollarrsquos death are much exaggerated


Sterling falls on weak inflation data


Posturing Klaus


Moodys avisa de que la banca espantildeola oculta el deterioro de sus activos

El impacto del pinchazo inmobiliario dejaraacute 108000 millones de peacuterdidas

Financial Times

ftcomalphaville

Moodyrsquos still negative on Spanish banks

Moodys Questions Spanish Banks

Report Casts Doubt on Reserves for Bad Loans at Least $160 Billion in Losses

OCTOBER 14 2009

By THOMAS CATAN and CHRISTOPHER BJORK

Not Concealing Losses

A $370 Billion Loss View

httponlinewsjcomarticleSB125545053140882671html Mercados Madrid - 13102009

Inversores extranjeros toman el 90 de los bonos corporativos espantildeoles

La fuerte acogida que el mercado estaacute dando a las emisiones realizadas por las compantildeiacuteas espantildeolas se debe casi en su totalidad a la demanda de inversores institucionales extranjeros que han tomado cerca del 90 de los de casi 17000 millones de euros lanzados al mercado en este antildeo

Mejorar el perfil financiero


Global macroeconomic imbalances G20 leaders must back up their rhetoric with deeds

October 13 2009 1003am by FT


Economists View

Oct 13 2009

The Bank Lending Channel


Who speaks for Europe in the G-whatever



Who Needs Big Banks

MISHSGlobal EconomicTrend Analysis

Thoughts on the Economy Problems and Solutions

Posted by Michael Shedlock Tuesday October 13 2009 at 1236


Making the case for a weaker dollar

Economists View

Oct 12 2009

Will Stimulating Nominal Aggregate Demand Solve our Problems

Paul Romer 12 October 2009| Skyhooks versus Cranes The Nobel Prize for Elinor Ostrom

Opinion

Misguided Monetary Mentalities

Seoul feud

Ben ldquoChaunceyrdquo Bernanke

Fed Chairman Chauncey Gardiner You Must Believe In Spring

An institutional economics prize

When should the Fed raise rates (even more wonkish)

Peter Temin corrects my history

The madness of the monetary hawks (wonkish)

Beware the dollar hawks

Modified goldbugism at the WSJ

httpkrugmanblogsnytimescom J Bradford DeLongs Grasping Reality with All Eight Tentacles

25 July 2009

Glenn Rudebusch vs John Taylor on the Right Value for the Interest Rate

Derivative Dribble Charles Davigrave

Asset Bubbles and Economic Activity

Economists View

Oct 10 2009

Global Imbalances and the Financial Crisis Products of Common Causes

New Way to Tap Gas May Expand Global Supplies

Crisis Leaves Europe in Slow Lane

Going Solo

Outflanking Wall Street

Analysts Marginalized

Curbing Excesses

lsquoConflict-Free Researchrsquo

Break From the Pack

Main Street Left Behind

No Exclusivity

Shrinking Industry

A Frenetic Pace

Mounting Foreclosures

Private Network

Premature Rally

Rapidly Expanding

lsquoMarket Share Countsrsquo

Tough First Year

Top Pick

A Traderrsquos Metabolism

China Correction

Fed Is Split Over Timing of Rate Rise

US Mortgage Backer May Need Bailout Experts Say

By DAVID STREITFELD and LOUISE STORY

The Uneducated American

ECB Benchmark Rate Left at 1

The Federal Reserves Balance Sheet An Update

Speech Chairman Ben S Bernanke At the Federal Reserve Board Conference on Key Developments in Monetary Policy Washington DC



Slide 1 Federal Reserve Balance Sheet

Slide 2 Assets Short-Term Lending Programs for Financial Institutions

Slide 3 Assets Targeted Lending Programs

Slide 4 Assets Securities Holdings

Slide 5 Assets Emergency Lending

Slide 6 Liabilities

Slide 7 Exit Strategy


Wasting a crisis

US regulators probe mainframes market


Obama under fire over falling dollar

EDITORrsquoS CHOICE






Blog Money supply - Oct-07

Stocks and Gold Gain as Investors Shun the Dollar

By JACK HEALY and KEITH BRADSHER

Paralysis in the Debt Markets Is Deepening the Credit Drought

Still chasing shadows

RGE Monitors Newsletter

mieacutercoles 07102009 901

Ask Paul Krugman Questions About the Economy

By The New York Times

Is This the Wile E Coyote Moment

Oct 6 2009 From The Wall Street Journal


How the Fed Can Avoid the Next Bubble


John Hempton on the (hidden) Losses of Spanish Banks

Bronte Capital

MONDAY OCTOBER 5 2009

Are the Spanish banks hiding their losses Looking at the American data

Differing Views on the Spanish Banking Sector

The Perfect Storm In The Spanish Banking Teacup

ftcomalphavilleFinancial Times


Are you a member of the lsquoWorldrsquos Safest Banksrsquo

Regulation Doubts over political resolve for reform

The Coming Energy Revolution

Smart-grid technology will bring huge savings to companies as varied as Cisco PGampE and Cargill and to consumers too But who will foot the bill

A $20 Billion Market in Five Years

Easier to Opt for Solar or Wind

Discounts for Lower Peak Usage

Plants Can Keep Going During Storms

The Lost Generation

The continuing job crisis is hitting young people especially hardmdashdamaging both their future and the economy

ANXIETY AND FEAR

SUBMINIMUM WAGE

Business Exchange Read save and add content on BWs new Web 20 topic network

Tackling the Job Crisis



Expanded US Presence

Cross-Marketing Advantage