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Global Financial and Economic Crises

Commentaries of Note on Global Economic Issues

Project: Global Financial and Economic Crisis 2007-Present
Open-Content project managed by KJF, mtuck

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US banker Douglas McDermott says of the US-backed Venezuelan dictator Marcos Perez Jimenez, “You have the freedom here to do what you want with your money, and to me, that is worth all the political freedom in the world.” [Hunt, 9/1/2009, pp. 9]

Entity Tags: Marcos Perez Jimenez, Douglas McDermott

Timeline Tags: US International Relations, US-Venezuela (1948-2005)

Category Tags: Commentaries on Economic Issues, Other Events in Economic History

The British financial website “This is Money” warns about the stability of the Kaupthing Edge banking product. Kaupthing Edge is a brand used to attract depositors by the Icelandic Kaupthing Bank. In response to a reader’s question about the brand’s soundness, correspondent Alan O’Sullivan points out that the rating agency Moody’s has recently described Icelandic banks as “fragile” and that its borrowing costs have increased 400% in the last year. For this reason, analysts think it is far more likely to default than any other European bank. As a result, O’Sullivan recommends that savers do not maintain balances on accounts with the bank in excess of the maximum limit on deposit insurance. [This is Money, 2/22/2008] Kaupthing Bank will collapse seven and a half months later. [Reuters, 10/9/2008]

Entity Tags: Kaupthing Edge, Alan O’Sullivan, This is Money, Kaupthing Bank

Category Tags: Commentaries on Economic Issues, Iceland

The Royal Bank of Scotland (RBS) predicts “a full-fledged crash in global stock and credit markets over the next three months as inflation paralyzes the major central banks.” RBS credit strategist Bob Janjuah says, “A very nasty period is soon to be upon us—be prepared.” Bolstering Janjuah’s dire predictions, the RBS bank research team warns that the Wall Street equities index, Standard & Poor’s (S&P) 500 index is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from what the Daily Telegraph describes as “the excesses of the global boom, with contagion spreading across Europe and emerging markets. Such a slide on world [markets] would amount to one of the worst bear markets over the last century.” Janjuah also warned of the credit crisis in 2007. RBS predicts that Wall Street would rally a little in early July before quickly fizzling out. “Globalization was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point,” Janjuah says. RBS debt market chief Kit Jukes says Europe will not be immune from the problems: “Economic weakness is spreading and the latest data on consumer demand and confidence are dire.” [Daily Telegraph, 6/19/2008]

Entity Tags: Bob Janjuah, Royal Bank of Scotland, Kit Jukes

Category Tags: Britain, Commentaries on Economic Issues

The US’s two most popular conservative radio hosts, Rush Limbaugh and Sean Hannity, are repeatedly labeling the current economic collapse the “Obama recession,” even though the recession has started already, and President-elect Barack Obama was only elected on November 4 and will not assume the presidency until January 20, 2009.
Blaming Obama for Wall Street Plunge - According to reports by progressive media watchdog site Media Matters, Hannity’s guest Dick Morris, a conservative political operative, tells a Fox News audience on November 6 that the stock market plunge is directly attributable to Obama’s election and his intention to “raise the capital gains tax.” Hannity calls the stock market plunge “the Obama tanking.” On the same day, Limbaugh says on his show: “We have the largest market plunge after an election in history. Thank you, man-child Barack Obama.” [Media Matters, 11/7/2008] Hannity says on November 11 that Obama’s election is directly responsible for plunging stock market performances, telling his listeners: “Wall Street keeps sinking. Could it be the Obama recession: The fear that taxes are gonna go up, forcing people to pull out of the market?” On November 12, Limbaugh echoes Hannity’s characterization, telling his listeners that, as reported by MSNBC’s Chris Matthews, “the recession isn’t President Bush’s fault. It’s the fault, catch this, of the president who hasn’t yet taken office. It’s an ‘Obama recession’; that’s what he’s calling it.” Matthews, clearly impatient with Limbaugh’s characterization, calls the host’s statement an example of “the bitter sore loser’s rhetoric we are hearing from the right these days.” [Media Matters, 11/12/2008]
Experts Credit Obama with Wall Street Stabilization - Experts refute Limbaugh’s and Hannity’s attribution of the nation’s economic calamity to Obama, with the Wall Street Journal giving Obama credit for a post-election upturn in the stock market and blaming “lame economic data” and the continuing “drumbeat of bailouts, potential bailouts, and worries about other bailouts” for the stock market’s poor performance. [Wall Street Journal, 11/12/2008] Fox News business commentator Eric Bolling credits Obama’s election with stabilizing the stock market until a dismal national employment report caused the market to drop again. And Fox Business Channel’s vice president, Alexis Glick, tells her audience on November 7: “I so did not believe that the market reaction over the past two days was about Obama. Wednesday morning we walked in, we saw the Challenger and Gray [planned layoff] numbers, we saw the ADP numbers, the weekly jobless claim numbers—yeah, well, they were basically in line, but we knew two days ago that this was going to be a bloody number. Frankly, we probably knew several months ago that it was going to be a bloody number.” The Wall Street Journal and New York Times both agree with Glick’s assessment. [Media Matters, 11/7/2008; New York Times, 11/7/2008]

Entity Tags: Alexis Glick, Media Matters, Barack Obama, Fox Business Channel, Eric Bolling, Dick Morris, New York Times, Chris Matthews, Fox News, Rush Limbaugh, Sean Hannity, Wall Street Journal

Timeline Tags: Domestic Propaganda, 2008 Elections, 2010 Elections

Category Tags: Commentaries on Economic Issues, USA, Commentaries and Criticisms, Bush Policies and Actions, Obama Policies and Actions

The financial industry may cut as much as $2 trillion in credit card account lines over the next 18 months, according to Oppenheimer & Co analyst Meredith Whitney. This is in an effort to reduce damage risks from increasing customer delinquencies and defaults. “[W]e expect available consumer liquidity in the form of credit-card lines to decline by 45 percent,” she adds. According to Whitney, all three remaining major banks—Bank of America, Citigroup, and JP Morgan Chase—are planning or considering reducing credit lines across the board. Credit cards are the second source of liquidity available to consumers, behind wages from work. She criticizes the banking industry for offering ever fewer choices at a time when consumers need credit more than ever: “Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view.” [Consumer Affairs.com, 12/1/2008; Reuters, 12/1/2008]

Entity Tags: Meredith Whitney, Oppenheimer & Co.

Category Tags: Commentaries on Economic Issues, USA

According to Jim Rogers, the co-founder of the Quantum Fund along with billionaire financier George Soros, the federal government’s efforts to fix the sector are “wrongheaded.” During a teleconference at the Reuters Investment Outlook 2009 Summit, Rogers says that the government’s $700 billion rescue package for the sector doesn’t address how banks manage their balance sheets, and rewards weaker lenders with new capital. More than two dozen banks have received infusions from the Troubled Asset Relief Program (TARP), and some TARP funds are being used for acquisitions. [White House, 10/3/2008] “Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,” says Rogers, now a private investor. “What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,” he continues. “What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.” [Reuters, 12/11/2008]

Entity Tags: Jim Rogers, Quantum Fund, George Soros

Category Tags: Commentaries on Economic Issues, USA

According to a report published in February 2009 by the Japanese government, Japan’s economy—the world’s second largest—suffers the biggest monthly drop since records began more than half a century ago, with January marking the fourth successive month that factory output has fallen. Officials conclude that the country is in its worst recession in decades. The figures are published days after government reports that exports plunged nearly 46 percent in comparison to a year ago, reportedly suffering from a fall in foreign product demand. A preliminary report by the Ministry of Economy, Trade, and Industry predicts that output will further fall to 8.3 percent in February, but increase in March by 2.8 percent. The report concludes that a 17.3 percent production drop in transport equipment, including cars and trucks, had the largest negative impact on the overall output decline, and that electronic parts and devices was down 21.8 percent from December, followed next by general machinery and steel, with all 16 industrial areas cutting their output. According to the Japan Automobile Manufacturers’ Association, the country’s car production plunges a record 41 percent in January and vehicle productions decrease by nearly 50 percent to 576,539 vehicles produced in January 2009 compared with 976,975 in January 2008. “Fearful of losing their jobs in the global turndown, consumers no longer want to buy Japanese electronic gadgets and cars,” says Roland Buerk of BBC Tokyo. “The Japanese are shopping less and average household spending fell 5.9 percent in January compared with the same month a year ago.” Jobs are also being slashed, with unemployment rising by more than 200,000 in January 2009. “Japan was once seen as relatively immune to the global crisis because its banks were not as exposed to bad loans as those in the US and Europe,” Buerk will say. “Their reliance on foreign markets to drive its economy out of a long slump in the 1990s has left it painfully exposed.” “The recession is having an increasing impact on the real economy,” Finance Minister Kaoru Yosano will say. [BBC, 2/27/2009; Xinhua News Agency (Beijing), 2/27/2009]

Entity Tags: Roland Buerk, Kaoru Yosano, British Broadcasting Corporation, Japan Automobile Manufacturers’ Association

Category Tags: Commentaries on Economic Issues, Other

Washington Post economics columnist Steven Pearlstein criticizes Mary Schapiro, President-Elect Barack Obama’s pick to chair the Securities and Exchange Commission (SEC), a financial market regulator. Pearlstein says that the selection of Schapiro, who has a long background in regulating the industry, is “as safe and predictable as it is disappointing.” He adds that Schapiro has some good qualities and would be a sound pick at another time. However, “The problem is that there is nothing in her record to suggest that she is likely to clean house at the agency and launch a brutal and sustained assault on Wall Street culture.”
Unethical Practices - Pearlstein adds: “Remember the good old days when corporations would routinely manipulate earnings so that they came out just as the analysts expected? Or when analysts used to issue buy recommendations for stocks they knew were lousy just because it helped their firms win investment-banking business? Or when brokerage firms would routinely put clueless customers in mutual funds that offered high commissions, not the best results? Or when investment banks would put aside shares in the hottest IPOs for the personal accounts of corporate chief executives who steered underwriting business their way? These practices weren’t secrets—to anyone even vaguely familiar with the industry, they were hidden in plain view. And yet for years, no regulator, including Schapiro, was willing to risk being demonized by the industry, criticized by Congress and overturned by the courts to do what was necessary to stop these practices.”
'Show Trials' - He then sets out his vision for what the new chairman should do, what he thinks Schapiro will not do: “We need an SEC chairman who is willing to move beyond narrow enforcement actions and no-fault consent decrees to stage a series of regulatory show trials that will expose in graphic detail how people think and behave at all levels of Wall Street firms. We need a chairman who will use the commission’s broad powers to fine and debar from the industry big-name directors, top executives, ratings agency officials and other gatekeepers whose nonfeasance resulted in significant losses for investors, customers and taxpayers. We need a chairman who will make effective use of the bully pulpit to expose other well-known industry practices that put the interests of Wall Street ahead of those of its customers.” [Washington Post, 1/7/2009]

Entity Tags: Barack Obama, Steven Pearlstein, Mary Schapiro, US Securities and Exchange Commission

Category Tags: Commentaries on Economic Issues, USA, Commentaries and Criticisms

New York University economist Nouriel “Dr. Doom” Roubini and Western Europe Finance and Banking analyst Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on US originated securitizations:
bullet Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.
bullet Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached $1.92 trillion. According to flow-of-funds data, about 40% of these securities (and losses) are foreign-held. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.
bullet US-originated assets’ total loan losses and securities writedowns are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or about $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns).
bullet As of the third quarter of 2008, Federal Deposit Insurance Corporation-insured banks’ capitalization is $1.3 trillion; as of the same period, investment banks had $110bn in equity capital. Roubini and Parisi-Capone say that past recapitalization through the first release of the TARP funds for $230bn, and private capital of $200bn leaves the US banking system very nearly insolvent, should loss estimates materialize.
bullet In order to restore safe lending, additional private and/or public capital of approximately $1 to 1.4 trillion is needed, thus calling for a comprehensive solution along the lines of a “bad bank” proposed by policymakers, or an outright restructuring through a new resolution trust corporation (RTC).
bullet In September 2008, Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines an RTC to deal with toxic assets, a homeowners loan corporation to reduce homeowners’ debt, and a reconstruction finance corporation to recapitalize viable banks.
They concluded that total financial system losses will likely hit $3.6 trillion, half of which, according to Roubini, “will be borne by US firms,” and that the losses will overwhelm the US financial system which, in the third quarter of 2008, had a capitalization of $1.3 trillion in commercial banks and $110 billion in investment banks. [Bloomberg, 1/20/2009; AFP Reporter, 1/22/2009] Since September 7, 2006, Dr. Roubini, an economics professor at New York University, has been known as “Dr. Doom” after telling an audience of economists at the International Monetary Fund that an economic crisis was brewing in the coming months and years. He warned that the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession, and laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. [New York Times Magazine, 8/15/2008]

Entity Tags: Nouriel Roubini, Elisa Parisi-Capone, RGE Monitor

Category Tags: USA, Commentaries on Economic Issues

“The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part,” says Guardian City editor Julia Finch, who lists individuals who led the world into its current economic crisis (see June 2008). These individuals include:
bullet Alan Greenspan, US Federal Reserve chairman, 1987-2006: “[B]lamed for allowing the housing bubble to develop as a result of his low interest rates and lack of regulation in mortgage lending. Backed sub-prime lending; urged homebuyers to swap fixed-rate mortgages for variable rate deals, leaving borrowers unable to pay when interest rates rose. Defended the booming derivatives business, which barely existed when he took over the Fed, but which mushroomed from $100tn in 2002 to more than $500tn five years later.”
bullet Mervyn King, governor of the Bank of England: “His ambition was that monetary policy decision-making should become ‘boring.’”
bullet Bill Clinton, former US president: “Beefed up the 1977 Community Reinvestment Act to force mortgage lenders to relax their rules to allow more socially disadvantaged borrowers to qualify for home loans. Repealed the 1999 Glass-Steagall Act, prompting the era of the superbank; the year before the repeal, sub-prime loans were just 5 percent of all mortgage lending. By the time the credit crunch blew up it was approaching 30 percent.” [Guardian, 1/26/2009]

Entity Tags: Mervyn King, William Jefferson (“Bill”) Clinton, Alan Greenspan, The Guardian, Julia Finch

Category Tags: Commentaries on Economic Issues, Britain, USA, Pre-2001 Policies and Actions, Bush Policies and Actions

Depending on the extent and length of the economic crisis, the International Labor Organization (ILO) predicts in its annual Global Employment Trends Report that global unemployment could increase from 33 million to 51 million people, up 18 million from 2007 figures. The ILO urges global governments to emphasize job creation in their fiscal stimulus packages and improve social protection systems for the unemployed and the employed. “We are now facing a global jobs crisis,” Juan Somavia, ILO director general says. “Progress in poverty reduction is unraveling, and middle classes worldwide are weakening. The political and security implications are daunting.” The ILO is a United Nations organization that has painted three 2009 global unemployment scenarios, ranging from bad to worst. “In all scenarios, there will be a global unemployment rate increase in 2009, particularly the developed economies,” the ILO report says. Its most optimistic scenario is based on the International Monetary Fund’s November 2008 world economic growth projection, which indicates that there would be a global unemployment rate at 6.1 percent. This scenario has 18 million more people unemployed by the end of 2009, in comparison to the end of 2007, with a global unemployment rate of 6.1 percent. Under the ILO’s second and third scenarios, the numbers could rise by 30 million or even 51 million, with a much slower economic recovery, with unemployment reaching higher levels in developed countries. Under the ILO’s third scenario, approximately 200 million workers could be pushed into extreme poverty with incomes as low as $1.25 a day; 140 million would be in Asia. “The world is facing an unprecedented crisis that calls for creative solutions,” the organization says. [Deutsche Presse-Agentur (Hamburg), 1/28/2009]

Entity Tags: Juan Somavia, International Labor Organization (ILO), International Monetary Fund

Category Tags: Other, Commentaries on Economic Issues

Yale economist Robert Schiller reflects on the genesis of the economic recession, tracing it back in part to policies pursued by the Bush administration for the 2004 presidential election effort. At that time, Schiller warned of a “housing bubble” caused by a plethora of bad loans and toxic debt, and called for re-regulation of the housing markets. His warnings were ignored. Schiller says: “The Bush strategists were aware of the public enthusiasm for housing, and they dealt with it brilliantly in the 2004 election by making the theme of the campaign the ownership society. Part of the ownership society seemed to be that the government would encourage home ownership and, therefore, boost the market. And so Bush was playing along with the bubble in some subtle sense. I don’t mean to accuse him of any—I think it probably sounded right to him, and the political strategists knew what was a good winning combination. I don’t think that he was in any mode to entertain the possibility that this was a bubble. Why should he do that? Attention wasn’t even focused on this. If you go back to 2004, most people were just—they thought that we had discovered a law of nature: that housing, because of the fixity of land and the growing economy and the greater prosperity, that it’s inevitable that this would be a great investment. It was taken for granted.” John C. Dugan, the comptroller of the currency since 2005, says he believes a lack of regulation caused the “housing bubble.” Dugan says: “A lot of mortgages got made to people who could not afford them and on terms that would get progressively worse over time, and that created the seeds of an even bigger problem. As the whole market became even more dependent on house-price appreciation, when house prices flattened and then started to decline the whole situation began to unravel. The question you have to ask yourself: Why did credit become so easy? Why would lenders make mortgages that became increasingly less likely to be repaid? Part of the answer is that there was a huge chunk of the mortgage market that was not regulated to any significant extent. The overwhelming proportion of subprime loans were being done in entities that were not banks and not regulated as banks—I’m talking here about mortgage brokers and non-bank mortgage lenders that could originate these mortgages and then sell them to Wall Street firms that could package them into new kinds of mortgage securities, which arguably could take into account the lower credit risks and still be salable to investors worldwide. Unfortunately, the theory was not in accord with the reality. Although they thought they had accurately gauged that risk, they too were in fact depending—when you get to the bottom of it—on house prices continuing to go up and up and up. And they did not.” [Vanity Fair, 2/2009]

Entity Tags: Robert Schiller, Bush administration (43), John C. Dugan

Category Tags: Commentaries on Economic Issues, Bush Policies and Actions

Henry Paulson, the former secretary of the treasury, explains how the recession and market destruction came about on his watch. Part of his problem was his admitted lack of knowledge about regulation and regulatory authorities. “I easily could imagine and expected there to be financial turmoil,” he says. “But the extent of it, okay, I was naive in terms of—I knew a lot about regulation but not nearly as much as I needed to know, and I knew very little about regulatory powers and authorities. I just had not gone into it in that kind of detail. This’ll be the longest we’ve gone in recent history without there being turmoil, and given all the innovation in the private pools of capital and the over-the-counter derivatives and the excesses around the world, we figured that when there was turmoil, and these things were tested for the first time by stress, it would be more significant than anything else. I said at the time, I have a concern that every rally we’re going to have in the financial markets will be a false rally until we break the back of the price correction in real estate. And these things are never over until you have a couple of institutions go that surprise everyone. Bear Stearns can hardly be a shock (see March 15, 2008). But having said that, it’s one thing to see it intellectually and it’s another to see where we are.” [Vanity Fair, 2/2009]

Entity Tags: Bear Stearns, Henry Paulson, US Department of the Treasury, Bush administration (43)

Category Tags: Commentaries on Economic Issues, USA, Bush Policies and Actions

The new Director of National Intelligence (DNI), Dennis Blair, tells the Senate Intelligence Committee that the economic crisis, not global terrorism, is the biggest national security issue facing the US today. “The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications,” Blair says. If the crisis continues for more than two years, Blair says, governments could topple, with all the unrest that would entail. About 25 percent of the world’s governments, mostly in Europe and among former Soviet Union client states, have already experienced “low-level instability,” including government changes, because of the economic climate (see February 1, 2009). Blair also warns of “high levels of violent extremism” as seen during the downturn in the 1920s and 1930s, along with “regime-threatening instability.” He explains, “Besides increased economic nationalism, the most likely political fallout for US interests will involve allies and friends not being able to fully meet their defense and humanitarian obligations.” US allies in Europe are angry over the Obama stimulus bill’s provision to “Buy American,” Blair notes, and says the provision is being used to question the US’s leadership in shoring up the global economy and international financial structure. The biggest beneficiary of this global chaos, Blair says, could be China, if that nation’s government can “exert a stabilizing influence by maintaining strong import growth and not letting its currency slide.” Global coordination is essential to rebuild trust in the financial system and to ensure that the crisis does “not spiral into broader geopolitical tensions,” Blair recommends. [EUObserver, 2/13/2009]

Entity Tags: Dennis C. Blair, Senate Intelligence Committee

Category Tags: Commentaries on Economic Issues, USA

According to economists and other finance experts, most of the major US banks are broke, awash in losses from bad bets that overwhelm the banks’ assets. [Link TV, 2/10/2009; Financial Times, 2/10/2009] None of the experts focus on individual banks, and there are exceptions among the 50 largest banks in the country. Consumers and businesses do not need to fret about their federally insured deposits, and even banks that are technically insolvent can continue operating, and could recover their financial health once the economy improves. Until there is a cure for banks’ bad assets, the credit crisis that is dragging down the economy will linger, since banks cannot resume the lending needed to restart commerce.
Suggested Response - Economists and experts say that the answer is a larger, more direct government role than the recently-unveiled Treasury Department plan. The Obama-Geithner plan leans heavily on sketchy public-private investment funding to buy up the banks’ troubled mortgage-backed securities. Experts say that the government needs to delve in, weed out the weakest banks, inject capital into surviving banks and sell off bad assets. “The historical record shows that you have to do it eventually,” said Adam Posen, a senior fellow at the Peterson Institute for International Economics. “Putting it off only brings more troubles and higher costs in the long run.” The Obama administration’s recovery plan could help spur a timely economic spurt, and the value of the banks’ assets could begin to rise. Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed range from $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.
Pessimism - In a new report Nouriel Roubini, professor of economics at the Stern School of Business at New York University, estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion. [Global Economic Monitor, 2/10/2009] Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad. “The United States banking system is effectively insolvent,” Roubini says. [International Herald Tribune, 2/13/2009]

Entity Tags: Peterson Institute for International Economics, James K. Galbraith, Nouriel Roubini

Category Tags: Bailouts and Other Government Aid, USA, Commentaries on Economic Issues

Less than one month after his inauguration, President Barack Obama signs into law a $787 billion recovery package, stating that this will “set our economy on a firmer foundation.” However, Obama reiterates during the bill’s signing ceremony at the Denver Museum of Nature and Science that he will not pretend “that today marks the end of our economic problems, nor does it constitute all of what we have to do to turn our economy around. Today marks the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs.” The legislative battle on the bill ended with only three Republican votes in the Senate and none in the House. As president-elect, Obama initially expected to spend between $675 billion and $775 billion on the recovery package, and the final number is almost exactly that. However, Congress included $70 billion worth of tax cuts in the bill they approved, although more than a few economists say $70 billion in tax cuts won’t create as many new jobs as $70 billion in spending would. According to the government’s Recovery (.gov) Web site, the 2009 American Recovery and Reinvestment Act:
bullet Saves and creates more than 3.5 million jobs over the next two years;
bullet Takes a big step toward computerizing Americans’ health records, reducing medical errors, and saving billions in health care costs;
bullet Revives the renewable energy industry and provides the capital over the next three years to eventually double domestic renewable energy capacity;
bullet Undertakes the largest weatherization program in history by modernizing 75 percent of federal building space and more than one million homes;
bullet Increases college affordability for seven million students by funding the shortfall in Pell Grants, increasing the maximum award level by $500, and providing a new higher education tax cut to nearly four million students;
bullet Enacts the largest increase in funding of the nation’s roads, bridges, and mass transit systems since the creation of the national highway system in the 1950s;
bullet Provides an $800 “Making Work Pay” tax credit for 129 million working households, and cuts taxes for the families of millions of children through an expansion of the Child Tax Credit;
bullet Requires unprecedented levels of transparency, oversight, and accountability.
White House press secretary Robert Gibbs says Obama will seek additional stimulus/recovery funding if needed. [New York Times, 2/17/2009; recovery.gov, 2/17/2009]

Entity Tags: Obama administration, Barack Obama, Robert Gibbs

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, USA, Obama Policies and Actions

CNBC commentator Rick Santelli ‘rants’ about the Obama economic policies.CNBC commentator Rick Santelli ‘rants’ about the Obama economic policies. [Source: CNBC / Media Matters]In what is purportedly an impromptu on-air “rant,” CNBC financial commentator Rick Santelli exhorts viewers to join in what he calls a “Chicago tea party” to oppose the Obama administration’s plans to bail out several large financial institutions. Santelli’s rant comes during CNBC’s Squawk Box broadcast. [CNBC, 2/19/2009; CNBC, 2/19/2009] Santelli’s “impromptu rant” is actually preceded by a number of “tea party” protests and activities, and some of the protests’ organizers claim to have given Santelli the idea for his on-air “tea party” statement (see After November 7, 2008, February 1, 2009, and February 16-17, 2009).
'It's Time for Another Tea Party' - Broadcasting from the Chicago Mercantile Exchange, Santelli tells viewers in part: “The government is promoting bad behavior. We certainly don’t want to put stimulus pork and give people a whopping $8 or $10 in their check and think that they ought to save it.… I have an idea. The new administration is big on computers and technology. How about this, Mr. President and new administration. Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages? Or would they like to at least buy buy cars, buy a house that is in foreclosure… give it to people who might have a chance to actually prosper down the road and reward people that can carry the water instead of drink the water? This is America! How many people want to pay for your neighbor’s mortgages that has an extra bathroom and can’t pay their bills? Raise their hand! President Obama, are you listening?… It’s time for another tea party. What we are doing in this country will make Thomas Jefferson and Benjamin Franklin roll over in their graves.” Santelli also compares the US to Cuba: “Cuba used to have mansions and a relatively decent economy,” he says. “They moved from the individual to the collective. Now they’re driving ‘54 Chevys.” [RightPundits, 2/19/2009] Santelli’s “tea party” metaphor is in reference to the Boston Tea Party, a Revolutionary War protest against taxation by America’s British rulers. [New York Daily News, 2/20/2009]
Financial Traders Are the 'Real Americans' - Santelli tells viewers that the “real” Americans are not the working-class citizens trying to pay mortgages larger than they can handle, but the stock traders and other members of the Chicago Mercantile, New York Stock Exchange, and other members of the financial industry. [Business Insider, 2/19/2009] Santelli says, “We’re thinking of having a Chicago Tea Party in July (see After November 7, 2008), all you capitalists that want to show up to Lake Michigan, I’m gonna start organizing.” [Institute for Research & Education on Human Rights, 8/24/2010]
Cheers and Applause - Behind Santelli, traders erupt in cheers and applause at his comments. [College News, 2/20/2009]
Active Promotion of the Video - Within hours, CNBC begins promoting the video of Santelli’s comments, calling it “the rant of the year” and posting it on YouTube and its own website. [CNBC, 2/20/2009]
Protests, Organizations Begin Forming - Within minutes of Santelli’s broadcast, “tea party” organizations and groups begin forming (see February 19, 2009 and After).
More Studied Response - Three days later, Santelli will explain the thinking behind his comments, saying: “America is a great country and we will overcome our current economic setbacks. The issues that currently face us and the solutions to correct them need to be debated, vetted, and openly studied. This should not be an issue about the political left or right. This is an issue of discourse on a topic that affects the foundation and principles that make our country great… free speech, contract law, freedom of the press, and most of all the legacy we leave our children and grandchildren.” [CNBC, 2/22/2009]
Human Rights Organization: 'Racial' Component to Santelli's Rhetoric - In 2010, a report by the Institute for Research & Education on Human Rights (IREHR) will say that “[a]n unstated racial element colored Santelli’s outrage over the Obama administration’s home mortgage rescue plan.” The report will explain that many of the “losers” responsible for the “bad loans” Santelli is criticizing were made by banks that “disproportionately targeted communities of color for subprime loans.” Santelli’s “losers” are largely African-American or Hispanic borrowers who had “been oversold by lenders cashing in on the subprime market. Their situations were worsened by derivatives traders, like Santelli, who packaged and re-packaged those loans until they were unrecognizable and untenable.” [Institute for Research & Education on Human Rights, 8/24/2010]

Entity Tags: CNBC, Chicago Mercantile Exchange, Barack Obama, Rick Santelli, Institute for Research & Education on Human Rights, New York Stock Exchange, Obama administration

Timeline Tags: Domestic Propaganda, 2010 Elections

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, Commentaries and Criticisms

The European Commission announces that an index of euro-region executive and consumer sentiment has dropped to 65.4 from 67.2. This is a record low and is caused by the global economic crisis. Responding to this and other bad news Jacques Cailloux, chief euro area economist at Royal Bank of Scotland in London, says, “Today’s data has dashed any hope of a tentative stabilization” in the economy. He also predicts a change in policy by the European Central Bank (ECB): “Any sense that the ECB may pause after a March rate cut can be thrown out the window. They will go very low and they will have to start embarking on additional measures.” [Bloomberg, 2/26/2009]

Entity Tags: Royal Bank of Scotland, Jacques Cailloux

Category Tags: Commentaries on Economic Issues, Britain

According to a survey of factories released by Credit Lyonnais South Asia (CLSA), a brokerage firm that monitors Asia-Pacific markets, although Chinese manufacturing contracted in January and February, the rate was slower in February than the previous month. The survey is issued as China’s legislature and a top government advisory body meet in Beijing. It is expected that the meeting will yield additional measures to stimulate the economy. In a statement released with the survey, CLSA declares, “The rate of contraction remained marked, reflecting a reduction in global demand and an uncertain economic outlook.” Manufacturing is reportedly 40 percent of China’s economic output. A drop in exports demand has led to thousands of factory closures, prompting protests by laid-off workers. Chinese leaders are concerned that additional job losses may fuel unrest. According to the CLSA survey, production and new orders fell in February, and manufacturers continued to shed jobs in an effort to cut costs. “Manufacturing activity is still contracting, only at a more moderate pace than at the end of 2008,” says Eric Fishwick, the head of CLSA’s economic research. China is one of the few major economies still growing, although growth fell to a seven-year low of 6.8 percent in the final quarter of 2008, compared with the same period a year earlier. Last November, the government announced a $586 billion plan to boost domestic consumption in an attempt to assist in cushioning the impact of the global slowdown. Officials say that the effects of public works spending will be slow. Quoting Premier Wen Jiabao, Xinhua News Agency reports that some indicators, such as recent upturns in power demand and rising steel output, suggest that the economy is stabilizing. However, trends remain dismal in the US and around the globe. “China cannot expect to recover just by spending its way out of the slowdown,” says Jing Ulrich, JP Morgan’s chairwoman of China equities in a report issued today. “While early signs of economic stabilization are encouraging, it remains to be seen if this uptrend is sustainable.” [International Herald Tribune, 3/2/2009]

Entity Tags: JP Morgan Chase, Credit Lyonnais South Asia, Jing Ulrich, Eric Fishwick, Xinhua News Agency, Wen Jiabao

Category Tags: Commentaries on Economic Issues, Other

Regulatory reports on Bank of America, Citibank, HSBC Bank USA, JP Morgan Chase, and Wells Fargo indicate that, as loan defaults of every kind soar, the institutions face “catastrophic losses” should economic conditions “substantially worsen.” Already suffering as a result of what the banks term “exotic investments,” the reports disclose that, as of December 31, 2008, current net loss risks from derivatives—quasi-insurance bets tied to loans or other underlying assets—have swelled to $587 billion. According to McClatchy journalists Greg Gordon and Kevin G. Hall, obscured in the year-end regulatory reports that they reviewed were figures reflecting a jump of 49 percent net loss in just 90 days.
Bailout Money Shoring Up Reserves - Taxpayer bailout money has already shored up four of the five banks’ reserves, with Citibank receiving $50 billion and Bank of America $45 billion, in addition to a $100 billion loan guarantee. According to their quarterly financial reports as of December 31:
bullet JP Morgan had potential current derivatives losses of $241.2 billion, overrunning its $144 billion in reserves, and future exposure of $299 billion.
bullet Citibank had potential current losses of $140.3 billion, outstripping its $108 billion in reserves, and future losses of $161.2 billion.
bullet Bank of America reported $80.4 billion in current exposure, lower than its $122.4 billion reserve, but $218 billion in total exposure.
bullet HSBC Bank USA had current potential losses of $62 billion, over three times its reserves, and potential total exposure of $95 billion.
bullet San Francisco-based Wells Fargo, which took over Charlotte, N.C.-based Wachovia in October 2008, reported current potential losses totaling almost $64 billion, below the banks’ combined reserves of $104 billion, but total future risks of about $109 billion. [McClatchy Newspapers, 3/9/2009; Idaho Statesman.com, 3/9/2009]

Entity Tags: Kevin G. Hall, Citibank, Greg Gordon, Bank of America, HSBC Bank USA, Wells Fargo Bank, N.A., Wachovia Bank, N.A., JP Morgan Chase

Category Tags: Bailouts and Other Government Aid, Failing Companies, Commentaries on Economic Issues

Republican Representative Paul Ryan (R-WI) admits that the “budget proposal” offered the previous week by the GOP in response to President Obama’s own budget proposal (see March 26, 2009) was never anything more than a “marketing document.” On MSNBC’s “Morning Joe,” Ryan says, “The thing you saw last week was not the alternative budget, this is our alternative budget.” Ryan is referring to a budget the GOP intends to release later today. The “budget” touted on the floor of the House by Minority Leader John Boehner (R-OH) was a “marketing document,” Ryan says. “Somewhere along the line there was a misimpression given that that was our budget.” In the Wall Street Journal, Ryan says the GOP budget will include the following:
bullet A five-year non-defense spending freeze;
bullet Cutting the deficit 50 percent more than Obama’s proposal by 2019;
bullet More oil exploration and fewer regulations on pollution;
bullet A revamping of Medicare for those currently below age 55;
bullet Making permanent the Bush administration’s tax cuts for wealthy Americans, and a simplified tax code that taxpayers could choose to use.
Of President Obama’s budget, Ryan says, “If this agenda comes to pass, it will mark this period in history as the moment America turned European.” [The Hill, 4/1/2009] The Center for American Progress, a progressive think tank, says that a spending freeze as advocated by the GOP budget would be calamitous for the American economy. The freeze would negate the entirety of the Obama administration’s multi-billion stimulus package, and would rely entirely on economic recovery generated by supply-side tax cuts. MSNBC’s Chris Matthews compares the idea to the economic ideas that led to the Great Depression: “[I]t sounds very much like [former President Herbert] Hoover. This is a doctrine which was tried in 1932 and failed. In a period of international deflation, the worst thing you can do is join in the deflation by cutting spending.” [Think Progress, 4/1/2009]

Entity Tags: Paul Ryan, Chris Matthews, Center for American Progress, Barack Obama, John Boehner

Category Tags: Commentaries on Economic Issues, Commentaries and Criticisms

In its May 2009 Global Employment Trends Update, the United Nation’s International Labor Organization (ILO) revises its 2009 unemployment projections to levels ranging from 210 million to 239 million unemployed, with corresponding global unemployment rates of 6.5 and 7.4 percent respectively. The ILO specifically cautions that youth around the globe are hardest hit, and warns that the world was headed for an “impending labor crisis.” Describing the global unemployment crisis as “unprecedented,” ILO Director General Juan Somavia says that despite reports of a 2010 global economic recovery, “On average, it can take four to five years after a crisis starts for pre-crisis unemployment levels to be recuperated.” Somavia warns of political unrest should unemployment increase with little or no safety nets in place, and states that more workers are at risk of losing their jobs and falling into poverty. The report is released one week ahead of the June 3-19 Annual International Labor Conference in Geneva, Switzerland, where at least 10 heads of state, including US Secretary of Labor Hilda Solis, France’s Nicolas Sarkozy, and Brazil’s Luiz Inacio Lula da Silva, are expected to attend. Somavia also says that attendees will consider an emergency “global jobs pact” designed to promote a coordinated policy response to the global jobs crisis. “We are seeing an unprecedented increase in unemployment and the number of workers at risk of falling into poverty around the world this year,” he says. “To avoid a global social recession, we need a global jobs pact to address this crisis, and mitigate its effects on people. The choice is ours and the time to act is now.” [Thaindian News, 5/28/2009; International Labour Organisation, 5/28/2009]

Entity Tags: Juan Somavia, Hilda Solis, International Labor Organization (ILO), Nicolas Sarkozy, United Nations, Luiz Inacio Lula da Silva

Category Tags: Commentaries on Economic Issues, Other

According to a recent Manpower, Inc. survey, US employers’ plans to hire for the third quarter of 2009 are at a record low, and the jobless will have to wait many months more before finding a job. The agency reported that after they adjusted results for seasonal employment variations, its employment gauge for July through September 2009 was negative. In a statement released to media, Jonas Prising, president of Americas for Manpower, says employers are “treading slowly and watching with guarded optimism, hoping a few quarters of stability will be the precursor to recovery.” The report underlines economists’ predictions that unemployment will continue to climb even if layoffs subside. Recent Labor Department statistics reported a loss of 345,000 US jobs in May. Although less than the job losses recorded in the last eight months, the May 2009 jobless rate surged to its highest level in nearly 26 years. In a repeat of results from the two previous periods, 67 percent of employers anticipated zero change in third quarter 2009, Manpower says. Those who expected to boost their payrolls remained at 15 percent for a second time in a row, while those projecting additional job cuts fell to 13-14 percent. “While the numbers may not be as optimistic as we would like, it is positive to see no further deterioration,” says Jeffrey Joerres, Manpower’s chairman and chief executive officer. Six of 13 industries employers surveyed estimated better employment conditions than in the second quarter, with gains in leisure, hospitality, wholesale, and retail trades, while those in construction stated they would add staff for the first time in a year. The biggest hiring corrosion occurred in education, health services, and at government agencies. In three of four regions, the net employment gauge measured negative, and was zero in the Northeast. The measurement improved in the South, dropped in the West, and was little changed in the Northeast and Midwest. Net employment gauge figures are tallied by subtracting the percentage of employers that predict an employment decrease from those that foresee an increase. Manpower’s global outlook survey demonstrated that the net employment gauge for third quarter 2009 improved in 12 countries from the previous three months. Plans for hiring were strongest in India, Norway, and Poland. The Manpower Inc. survey is a quarterly measurement with a margin of error of plus or minus 0.49 percentage point in the US. The employment agency interviewed over 28,000 US employers for its national outlook and surveyed 70,000 companies for its third quarter global measurement. Manpower Inc. is billed as the largest temporary workers employment agency in the world. [Bloomberg, 6/9/2009]

Entity Tags: US Department of Labor, Jonas Prising, Jeffrey Joerres, Manpower Inc.

Category Tags: Commentaries on Economic Issues, Other, USA

In an interview with Bill Moyers, Robert Reich, former labor secretary under President Clinton, says: “I believe that there’s no doubt that we’re going down to government intervention everywhere, government ownership unprecedented in this country. And it’s a long road and a slippery slope. Essentially, capitalism has swamped democracy. The Bush administration started the bank bailouts because the financial system had overreached with wild speculation and was on the verge of breaking down. Tim Geithner and [President] Obama are continuing these big bank bailouts, and I happen to think the bailouts have not worked very well, except as a kind of socialism for big corporations. There’s no such thing as pure capitalism without rules and regulations that set limits on profit making, because otherwise it’s everybody out for themselves. Otherwise, nobody can trust anybody. Otherwise, it’s the law of the jungle.… We rely upon government to set the boundaries—this can’t happen because it’s fraud, that can’t happen because you’re stealing something, this can’t happen because you’re imposing a huge burden on other people. Unless you have a democratic system that allows the rules to be created not by the companies but by the people and the people’s representatives reflecting what the public needs—not what the corporations need—you’re going to have a system that is not a democracy and not democratic capitalism. It’s super capitalism without the democracy. People pressuring their individual Congress members and Obama standing up to the banking industry will force real regulation. There will be no recovery in the sense of going back to where we were because the old path was unsustainable. If we don’t lift middle class wages, if we don’t get some control over Wall Street, if we don’t have genuine health care reform, if we don’t do something about the environment and global warming, we will not have a recovery. The next downturn is going to be worse than the downturn we just had, so there’s no going backwards. In every conversation I’ve participated in with the president, I was left with the impression that he understood this very, very well. I think most of the people around him understand this. The question is can he pull this off? Can he overcome the vested interests? It will be a clear indication of his toughness with regard to the willingness to twist arms and demand that the public interest be foremost.” [Bill Moyers Journal, 6/12/2009]

Entity Tags: Timothy Geithner, Bill Moyers, Robert Reich, Barack Obama

Category Tags: Commentaries on Economic Issues, Commentaries and Criticisms, Bush Policies and Actions, Obama Policies and Actions

The World Bank predicts a 2.9 percent contraction in the global economy and adds that unemployment and poverty will continue to rise in developing nations in 2009. The revised previous estimate of a 1.7 percent decline causes a slide in US and European stocks and commodities. Three months ago, the World Bank issued a new estimate of 2 percent in 2010. Although the S&P 500 remains up 33 percent from its 12-year low in March, since June 12, the index has fallen 5.1 percent. Last week, the S&P 500 lost 2.6 percent, as a turndown in crude oil wounded fuel producers and Standard & Poor’s rating agency downgraded 18 banks’ credit ratings. Speaking in Paris today, economics professor Nouriel Roubini—who predicted the current financial crisis as early as 2006—says the global economy could suffer another slump due to higher oil prices and increasing budget deficits. “I see the worry of a double whammy” because of energy costs and fiscal burdens, thus increasing the risk of a setback in the economic recovery. He says that oil might rise to $100 a barrel. The increase in the value of the dollar blunted the appeal of commodities as an alternative investment, and sent copper, gasoline and oil prices lower. Amid the resignations of two more board members, bringing the total of departing directors to seven since April, Bank of America stock falls 6.1 percent to $12.41, the bank’s steepest intraday decline since May 15. It is expected that at the end of their two-day meeting on June 24, Federal Reserve officials might announce that the US is showing signs of surfacing from the worst recession in 50 years, although, after their last meeting in April, they announced that the economy would “remain weak for a time.” It is anticipated that central bankers will keep the benchmark interest rate in the range of zero to 0.25 percent. [Bloomberg, 6/22/2009]

Entity Tags: World Bank, Bank of America, Nouriel Roubini, US Federal Reserve, Standard & Poor’s

Category Tags: Commentaries on Economic Issues

On his website “Roubini Global Economics (RGE) Monitor,” New York University economics professor Nouriel Roubini interprets June’s unemployment report as a strong indication that any economic recovery indicators are “alleged green shoots” that are “mostly yellow weeds that may eventually turn into brown manure.” Known as “Dr. Doom” for his prescient 2006 speech to the International Monetary Fund warning fellow economists that the housing bubble would eventually lead to major global recession, Roubini analyzed June’s loss of 460,000 jobs as a strong indication that conditions in the labor market remain “extremely weak.” He also predicts that unemployment could reach 10 percent by the end of summer and that, by the end of 2009, the jobless rate “may well be at 10.5 if not 11 percent.” Roubini cites numerous reasons that an economic recovery, stumped by record high joblessness, is not likely to occur until unemployment falls below 8.5 percent in late 2013.
Roubini June 2009 Jobs Report Analysis -
bullet Details of the unemployment report are worse than reported since, not only are there presently large job losses, but firms are inducing workers to reduce their hours and their hourly wages. According to Roubini, when observing the effect of the labor market on labor income, include three important elements in the total value of labor income—jobs, hours, and average hourly wages. Roubini says all three elements are currently falling, making their effects on labor income much more significant than job losses alone.
bullet Job losses continue to exceed those in the last two recessions, and the unemployment rate has been rising steadily in the current cycle.
bullet Rising unemployment will raise default on consumer loans and further pressure bank balance sheets.
bullet Without home equity or easy credit, ongoing job losses and slower income growth will also keep up the pressure on consumer spending.
bullet Large unemployment, underutilization of labor, and sharp slowdown in wages will add to deflationary pressures in the coming quarters.
bullet Bank losses and tight lending are impacting households who already face wealth losses from housing and equity markets.
bullet Impact of financial sector problems on the real economy are intensifying job losses and leading to lower work hours and wage growth. This puts further pressure on consumer spending while raising mortgage, credit card, and other debt defaults (the unemployment rate is highly correlated with delinquencies on credit cards and auto loans), also putting additional pressure on financial and corporate sector balance sheets.
bullet US labor market aspects are worsening. Factor discouraged and partially-employed workers into jobless statistics, and the true and current unemployment rate is above 16 percent.
bullet Temporary jobs are falling sharply, also an indicator that labor market conditions are becoming worse.
bullet The average unemployment duration is at an all-time high, indicating that people are not only losing jobs, they’re finding it much more difficult to find new jobs.
bullet Based on the birth/death model, the Bureau of Labor Statistics (BLS) continues to add approximately 150,000 to 200,000 jobs, distorting downward the number of job losses. However, based on the initial claims for unemployment benefits, job losses are closer to 600,000 per month rather than officially reported figures such as the 467,000 in the June report.
bullet Should unemployment rates peak at or around 11 percent in 2010, expected bank loans and securities losses will be much higher than estimated in recent stress tests.
bullet While there was a retail sales boost and a boost in real consumer spending during January and February 2009, the numbers from April, May, and now June remain extremely weak in real terms.
bullet The significant increase in real personal income in April and May occurred only because of tax rebates and unemployment benefits.
bullet There was a sharp fall in real personal spending in April, with only a marginal increase in May, suggesting that, just as in 2008, most tax rebates were saved rather than spent. In 2008, people expected the tax rebate to stimulate consumption through September, yet the personal spending increase in April, May, and June 2008 fizzled out by July.
bullet Expect further significant reduction in consumer spending in the fall after the effects of the tax rebates fade since, according to Roubini, 2009 households are much more worried about jobs, income, credit cards, and mortgages than they are in personal consumption and spending. Roubini suggests that only approximately 20 cents on the dollar—rather than the 30 cents of 2008—is going to be spent in the fall of 2009.
bullet By the end of 2010 and in 2011, large budgets and their monetization will eventually increase expected inflation, leading to a further increase in 10-year treasuries, long-term government bond yields, and mortgage and private-market rates. Combined with higher oil prices partly driven to increase by the treasuries, bonds, mortgage, and private market wall of liquidity, as opposed to fundamentals alone, this “could produce a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011, so the outlook ahead for the US and global economy remains extremely weak.”
bullet The unemployment rate is already over 10 percent in approximately 13 states—and steadily rising. The ISM Employment Index for manufacturing and non-manufacturing has been contracting at a slower pace in recent months. Manpower Survey shows most employers plan to hold head count steady in the third quarter of 2009 relative to the second quarter of 2009. Online job vacancies fell in June, but have shown some improvement since March. JOLTS: The job openings level in April was at its lowest point since the series began in 2001. The hiring and job openings rates were unchanged and remained low (see June 9, 2009).
Nobel Laureate Agrees - Economist Paul Krugman, 2008 Nobel laureate, comments: “Workers at any one company can help save their jobs by accepting lower wages and helping make the company more competitive. But when employers across the economy cut wages at the same time, the result is higher unemployment and lower wages in the economy. This will keep pressure on paying off debt and on consumer spending and the real economy.” [RGE Monitor, 7/2/2009]

Entity Tags: US Department of Labor, Paul Krugman, Nouriel Roubini, International Monetary Fund, Bureau of Labor Statistics

Category Tags: Commentaries on Economic Issues, USA

Eighteen consecutive months of job losses and an economy on the verge of collapse have left record numbers of US consumers either unable to pay their debts or chronically late in payments during the first quarter of 2009. According to the American Bankers Association, home equity loan delinquencies rose to 3.52 percent, from 3.03 percent of all accounts in the last quarter of 2008. Late payments on home equity credit lines climbed a record 1.89 percent, and an index of eight types of loans rose to 3.23 percent from 3.22 percent for a fourth consecutive quarter. In a telephone interview with Bloomberg, the American Bankers Association’s chief economist, James Chessen says: “The number one driver of delinquencies is job losses, which we’ve seen build and build. Delinquencies won’t come down without a dramatic improvement in the economy, and businesses will have to start hiring again.” For the first quarter of 2009, the US economy lost an average of 691,000 jobs in each of the quarter’s three months. According to a Bloomberg survey of 61 economists, since the recession began in December 2007, more than 6.5 million jobs have been cut, and the US economy will shrink in 2009 the most since 1946. Outstanding debt on bank card delinquencies rose a record 6.60 percent in first quarter 2009, from 5.52 percent in the fourth quarter of 2008, indicating that unemployed borrowers are relying on bank cards, as housing prices corrode their home equity. The ABA stated that more borrowers are using cards to meet daily expenses following their job losses. US banks distributed 9.8 million credit cards from January through April 2009, a 38 percent decline from the same period a year earlier, with the average limit for a new bank card falling 3 percent to $4,594, according to data released by credit reporting agency Equifax. “There is less equity to draw on and certainly financial institutions have been scaling back the available lines of credit,” Chessen says. [Bloomberg, 7/7/2009; American Bankers Association, 7/7/2009]

Entity Tags: James Chessen, American Bankers Association (ABA)

Category Tags: Commentaries on Economic Issues, Other, Bush Policies and Actions, Obama Policies and Actions

While California grapples with budget problems as a result of the havoc wreaked by the global recession, a collection of banks—Bank of America, Citigroup, Wells Fargo, and JP Morgan Chase among them—say that commencing Friday, July 10, they will not accept state IOUs, adding pressure for the state to close its $26.3 billion budget gap.
IOUs Result of Credit Crisis - The banks initially made a commitment to accept IOU payments when the economically devastated state announced that it would issue more than $3 billion in IOUs beginning on or around July 1. Since the beginning of the year, state leaders have tried and failed to agree on a budget, and Governor Arnold Swarzenegger imposed monthly one to three-day monthly furloughs on at least 200,000 state employees; the furloughs are still in effect. The state began issuing IOUs—‘individual registered warrants’—to hundreds of thousands of creditors one day after the end of the 2009 fiscal year. John Chiang, California state controller, said, “Without IOUs, California will run out of cash by the end of July.” California’s annual budget is the eighth largest in the world. If the state continues issuing warrants, creditors will be forced to hold them until their maturity on October 2 or find other banks willing to honor them before maturity. The maturity of the IOUs will allow the state to pay back creditors directly at a 3.75 percent annual interest rate.
Response by California Bankers Association - California Bankers Association spokeswoman Beth Mills says that some banks might work with creditors to develop a short-term resolution, such as extending lines of credit to creditors. Mills says the banks were concerned that there aren’t processes in place to accept IOUs; she said that some of the banks were also worried about fraud issues, and notes that the July 10 deadline was not set by all banks. She adds that dozens of state credit unions would continue to accept IOUs.
Significance of California's Problems - Twelve percent of the nation’s gross domestic product comes from California and the state has the largest share of retail sales of any state. Retail consultant Burt P. Flickinger, managing director of Strategic Resource Group, explains, “California is the key catalyst for US retail sales, and if California falls further you will see the US economy suffer significantly.” Flickinger warns of more national retail chain and brand suppliers bankruptcies. At one dollar for every 80 cents, the state sends more in tax revenues to the federal government than it receives in return. Although California’s deep recession primarily only affects the state itself, it could make it harder for a national economic recovery since, because of its size—38.3 million people—it affects businesses from Texas to Michigan. Even if lawmakers solve the state’s deficit swiftly, there will likely be more government furloughs and layoffs with tens of billions of dollars more in spending cuts. This could cause a ripple effect throughout the state’s economy and fear of even more job losses. Jeff Michael, director of the Business Forecasting Center for the University of the Pacific at Stockton, predicts that one million jobs are expected to be lost in the state in two years, with unemployment estimated to peak at 12.3 percent in early 2010. In 2008, for the first time since the Great Depression, personal income of Californians declined. Income revenue fell 34 percent for the first five months of 2009. [Associated Press, 6/29/2009; Wall Street Journal, 7/7/2009]

Entity Tags: California Bankers Association, Bank of America, Arnold Schwarzenegger, Beth Mills, California, John Chiang, JP Morgan Chase, Jeff Michael, Wells Fargo Bank, N.A., Burt P. Flickinger, Citigroup, Strategic Resource Group

Category Tags: Commentaries on Economic Issues, Other, USA

Group of 8 (G-8) leaders from across the globe release a statement from their meeting in L’Aquila, Italy, saying that economic recovery from the worst recession since World War II is too frail for them to consider repealing efforts to infuse money into the economy. US President Barack Obama, British Prime Minister Gordon Brown, European Commission President Jose Barroso, German Chancellor Angela Merkel, Canadian Prime Minister Stephen Harper, French President Nicolas Sarkozy, Japanese Prime Minister Taro Aso, Italian Prime Minister Silvio Berlusconi, and Russian President Dmitriy Medvedev assembled for the annual gathering where Obama pressed to maintain an open door for additional stimulus actions. A new drop in stocks generated global concern that, to date, the $2 trillion already sunk into economies had not provided the economic bump that would bring consumers and businesses back to life. “The G-8 needed to sound a second wakeup call for the world economy,” Brown told reporters after the gathering’s opening sessions. “There are warning signals about the world economy that we cannot ignore.” A G-8 statement embraces options ranging from a second US stimulus package—advocated by some lawmakers and economists—to an emphasis by Germany on shifting the focus to deficit reduction.
What Next? - Disagreements over what to do next, as well as calls from developing nations to do more to counteract the slump, emphasize that the Group of 8 has little if any room to maneuver, since the largest borrowing binge in 60 years has, so far, failed to stop rising unemployment and has left investors doubting the potency of the recovery. Even as G-8 leaders held their first meeting, the Morgan Stanley Capital International (MSCI) World Index of stocks continued a five-day slide, and the 23-nation index had dropped 8 percent since its three-month rally that ended on June 2. The International Monetary Fund (IMF) upgraded its 2010 growth forecast, saying the rebound would be “sluggish,” and urged governments to stay the course with economic stimuli. The IMF also said that emerging countries such as China would lead the way, with an expansion of 4.7 percent in 2010, up from their April prediction of 4 percent. “It’s a very volatile situation,” said European Commission President Barroso in a Bloomberg Television interview from L’Aquila. “We are not yet out of the crisis, but it seems now that the free fall is over.”
Exit Strategems Discussion - “Exit strategies will vary from country to country depending on domestic economic conditions and public finances,” the leaders conclude, but deputy US National Security Adviser Mike Froman tells reporters, “There is still uncertainty and risk in the system.” Froman says that although exit strategies should be drawn up, it’s not “time to put them into place.” The IMF forecasts that, in 2014, the debt of advanced economies will explode to at least 114 percent of US gross domestic product because of bank bailouts and recession-battling measures. German Chancellor Merkel, campaigning for re-election in September and the leading opponent of additional stimulus, warned against burgeoning budget deficits, which the IMF has predicted will rise to an average of 6 percent of the EU’s 2009 gross domestic product, from 2.3 percent in 2008. At last month’s European Union summit, Merkel pushed through a statement that called for “a reliable and credible exit strategy,” and insisted, “We have to get back on course with a sustainable budget, but with the emphasis on when the crisis is over.” [G8 Summit 2009, 7/2/2009; Bloomberg, 7/9/2009]

Entity Tags: Morgan Stanley Capital International (MSCI) World Index, Mike Froman, Jose Manuel Barroso, International Monetary Fund, Taro Aso, National Security Council, Nicolas Sarkozy, Silvio Berlusconi, Angela Merkel, Gordon Brown, Barack Obama, Standard & Poor’s, Stephen Harper, Dmitriy Medvedev

Category Tags: Britain, USA, Commentaries on Economic Issues

Since implementing a program to help millions of homeowners restructure their mortgages to prevent foreclosure, only 235,247 loans have actually been modified, according to the US Treasury Department in its first progress report. After the plan was announced in February, the first banking institutions began accepting applications in April. Between now and 2012, the Obama administration says it is on track to assist 4 million homeowners. The report occurs a week after the administration summoned institutions to Washington to discuss speeding up the program after large numbers of borrowers’ complaints that assistance was barely occurring. The Obama administration plans 500,000 modifications by November 1, and hopes to hold the institutions responsible for their performance with the release of monthly reports that allow consumers to see which banks are slow to implement the plan. So far, institutions have extended offers to 15 percent or 406,542 homeowners in danger of losing their homes, with uneven performances by 38 participating servicers. Morgan Stanley’s subsidiary, Saxon Mortgage Services, tops the list with 25 percent of its delinquent loans placed in trial modifications. Saxon is followed by Aurora Loan Services, a Lehman Brothers Bank subsidiary, with 21 percent. GMAC Mortgage, partially owned by the US government, has put 20 percent of its troubled loans into trial modifications, while major banks JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America have late loan trial modifications of 20 percent, 15 percent, 6 percent, and 5 percent respectively. The lenders acknowledge that they must improve their performance, and say that they are committed to President Obama’s foreclosure prevention plan, stressing that they were already performing modifications prior to the administration’s program. Wells Fargo says that it will soon have the ability to send eligible borrowers trial modification agreements within 48 hours. “We set a high bar for ourselves in terms of customer service, and we didn’t hit that bar in all cases in the first seven months of this year,” says Mike Heid, co-president of Wells Fargo Home Mortgage, “We have added 4,000 employees to our loan workout division this year. JPMorgan Chase says it has another 150,000 applications in need of processing and is currently training an extra 950 workout specialists hired earlier in 2009, bringing its modification staff to 3,500 people. “We know we’ve got more work to do,” says Chase spokesman Tom Kelly. “But the bank is pleased with its performance to date.” CitiGroup’s mortgage agency, CitiMortgage, added 1,400 staffers to its modification team, with 800 dedicated to loss mitigation at its recently opened Tucson, AZ call center. It began placing troubled borrowers in trial modifications in early June. “In the next quarter, one can expect the pace will be even higher,” Sanjiv Das, CitiMortgage head, says. Bank of America says it needs to improve its reach out efforts, while noting that it holds nearly one in four trial modifications offered under the Obama plan and has extended nearly 100,000 offers, although only 28,000 trial modifications are in process. Bank of America purchased mortgage giant Countrywide Financial last year, and has the largest number of eligible delinquent loans with almost 800,000. Borrowers have been pressuring the Obama administration as well as servicers and are complaining that servicers are not responding to applications and calls, are losing their paperwork, and are not making timely decisions. Servicers say they are increasing their staffing and upgrading their computer systems to handle the hefty increase in applications. Says Michael Barr, assistant US Treasury secretary for financial institutions, “We are working with servicers to ensure that they can adequately implement the program and servicers are increasing staff and training, but they must also treat borrowers more respectfully and respond in a much timelier manner.” [CNN News, 8/9/2009]

Entity Tags: Countrywide Financial, Wells Fargo Bank, N.A., Bank of America, Aurora Loan Services, US Department of the Treasury, Citigroup, Tom Kelly, Sanjiv Das, GMAC, JP Morgan Chase, CitiMortgage, Lehman Brothers, Morgan Stanley, Michael Barr, Saxon Mortgage Services

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, Failing Companies, Obama Policies and Actions

In their new report, “The State of Working America 2008-2009,” two economists at leading US think tank Economic Policy Institute (EPI) issue warnings that US workers will face harsh challenges as what they term “the Great Recession of 2007” draws to a close.
Unemployment - Heidi Shierholz and Lawrence Mishel, co-authors of the report, say that the extent of the huge global crash would have been much worse without President Obama’s American Recovery and Reinvestment Act of 2009. “The disaster would have been even worse without the stimulus law President Obama pushed through earlier this year,” Shierholz says. “Job losses would have been so high that the July unemployment figures would have been 9.6 percent or 9.7 percent, not 9.4 percent. We expect a steady climb in the unemployment rate up and over 10 percent by the end of the year. And it’ll rise slightly above 10 percent for a few months in 2010 before turning downwards. Until the economy is adding 122,000 jobs per month to take care of the people coming into the job market, unemployment will stay high. We still have a long way to go.”
Human Cost - Both economists speak of the human penalty. “This is more than a bunch of dry numbers,” Mishel declares. “One-third of the jobless—a record—have been out of work at least six months. Many have exhausted their unemployment benefits, which translate into bankruptcies, lost homes, no medical care, and more ills afflicting workers—even employed workers. This recession is much more than just the numbers of unemployed and underemployed, which is also setting a record,” he says. “Employed workers are seeing their hours cut, there’s an implosion in wage growth, and about 17 percent of large private employers have resorted to unpaid furloughs to save money.” Mishel explains that a one-week furlough is the equivalent of a 2 percent pay cut for a worker and his or her family.
Media Coverage Poor - In their report, the economists also criticize major media’s coverage of the crisis, urging workers not to fall for the usual chatter that things will automatically improve once productivity rises. “In the popular media, economic experts endlessly debate dynamics and causes of the downturn but most of these debates have very little to do with the real economic challenges facing working families today. The men and women of the workforce have worked harder and smarter to make the US a world-class economy and the mantra among economists and policy makers is that ‘as grows productivity, so shall living standards improve.’ Would that it was so.”
'YOYO Economics' - Prior to the crash, the report says, workers faced “rising inequality and lower real incomes for all but the richest 5 percent, diminished bargaining power, less health coverage, riskier pensions if any at all, income constraints that prevent workers’ kids from getting college educations to better themselves, and fewer high-paying jobs for those college grads, due to off-shoring and outsourcing.” The report nicknames it “YOYO (‘You’re on your own’) economics.” “We are in a unique position to judge the results of this experiment in reduced worker bargaining power and YOYO economics,” write the two economists. “The macro-economy is in serious disrepair and policymakers must move beyond temporary patches to fundamentally remake the economy so that it works for workers.”
Effect of Stimulus - The two offer praise for the Obama administration’s move to correct economic imbalances with the $787 billion stimulus package, the “cash for clunkers” program, initiatives to help the Detroit auto industry, and the $500 million “green jobs” initiative that have “partially staunched the bleeding.” Mishel predicts that, in conjunction with these programs, Congress will pass a second federal extension of unemployment benefits. They also argue that there should be fundamental restructuring away from “free market” policies that give corporations and financiers free sovereignty while the masses are forced to tighten their belts. [People's Weekly World Newspaper, 9/4/2009]

Entity Tags: Lawrence Mishel, Economic Policy Institute, Heidi Shierholz

Category Tags: Commentaries on Economic Issues, Bush Policies and Actions, Obama Policies and Actions

Having received what the Obama administration calls “exceptional assistance,” American International Group (AIG), Citigroup, Bank of America, General Motors (GM), GMAC, Chrysler, and Chrysler Financial are now meeting with executive pay czar, Kenneth Feinberg, and must submit 2009 pay plans for their top 25 executives. In turn, Feinberg must perform a 60-day assessment while working with the seven companies on their salary configurations. Plans for the other 75 executives of the seven corporations are due later. Exorbitant executive pay and bonuses has its critics, with many outraged that the companies are collecting taxpayer money only to pay out expensive bonuses during a massive recession. Others fear that the feds have insinuated themselves too deeply into private business affairs. Feinberg himself admits that his job has built-in conflicts. “Historically, the American people frown on the notion of government insinuating itself into the private marketplace,” he says in an interview, one day after his appointment. “My answer to those critics is I understand that concern, I share that concern, and the question is how do you strike a balance between that legitimate concern and the populist outrage at prior industry compensation practices?” The Obama administration has already seen and experienced taxpayers’ fury; Feinberg hopes to avoid such outrage. Corporations must prove to him that they are rewarding good performance and discouraging undue risk-taking. “We are not going to provide a running commentary on that process, but it’s clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance,” say US Treasury Department spokespersons, while noting that Feinberg can’t force companies to renege on contract obligations executed prior to February 12, 2009. However, this hasn’t prevented cries of foul play by critics upset over excessive government interference in private businesses. “No matter which way I turn, you’re facing criticism either from those who are appalled at what these companies did versus those who question the value of the government getting involved,” Feinberg says. The recently appointed executive compensation czar is used to dealing with contentious sides having served as compensation fund chairman for the families of victims of the September 11 attacks. [ABC News, 8/12/2009]

Entity Tags: Chrysler Financial, AIG (American International Group, Inc.), Bank of America, Citigroup, Chrysler, General Motors, GMAC, US Department of the Treasury

Category Tags: Bailouts and Other Government Aid, Commentaries on Economic Issues, Obama Policies and Actions

“The global recession is now over and a recovery has begun,” says Olivier Blanchard, chief economist of the International Monetary Fund (IMF). However, he says, the global recession has not been typical, so neither will the economic revival be. Writing in an article released by the IMF, Blanchard states: “One should not expect very high growth rates in the recovery. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come.” The word “recovery” has a precise technological meaning—that the economy is again growing but, essentially, has not returned to previous levels of output, wealth, and employment. In other words, the economy is healing, yet is not yet healed. According to Blanchard, “The recession has been so destructive that we may not go back to the old growth path [and] potential output may be lower than it was before the crisis.” Blanchard says that growth is coming for most countries, for at least the next few quarters, but will not be sturdy enough to decrease unemployment. He says growth is still dependent on fiscal and monetary government stimulus policies. “To sustain growth will require delicate rebalancing acts, both within and across countries,” he says. “Sustained recovery in the United States and elsewhere eventually requires rebalancing from public to private spending.” He also says that big fiscal deficits orchestrated to rouse the economy must be unwound. “The United States can’t rely on low interest rates to sustain the recovery, nor can it rely on consumer spending or investment filling the gap. Consumers are likely to save more in coming years. Businesses don’t need to invest much for the next few years, because so much of their capacity is idle. Sustained recovery is likely to require an increase in US net exports and a corresponding decrease in the rest of the world, coming mainly from Asia. China, for one, should increase its domestic demand,” he adds. [Marketwatch, 8/18/2009]

Entity Tags: International Monetary Fund, Olivier Blanchard

Category Tags: Commentaries on Economic Issues

Joydeep Mukherji, the senior director for the credit firm Standard & Poor’s, says that one of the key reasons the US lost its AAA credit rating (see August 5, 2011) was because many Congressional figures expressed little worry about the consequences of a US credit default, and some even said that a credit default would not necessarily be a bad thing (see May 20, 2011). Politico notes that this position was “put forth by some Republicans.” Mukherji does not name either political party, but does say that the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default. That a country even has such voices, albeit a minority, is something notable. This kind of rhetoric is not common amongst AAA sovereigns.” Since the US lost its AAA credit rating, many Republicans have sought to blame the Obama administration (see August 6-9, 2011), even though House Speaker John Boehner (R-OH) said that he and his fellow Republicans “got 98 percent” of what they wanted in the debt ceiling legislation whose passage led to the downgrade (see August 1, 2011). Representative Michele Bachmann (R-MN), running for the Republican presidential nomination in 2012, led many Republican “tea party” members in voting against raising the nation’s debt ceiling, and claimed that even if the US did not raise its debt ceiling, it would not go into default, a statement unsupported by either facts or observations by leading economists (see April 30, 2011, June 26, 2011, July 13, 2011, and July 14, 2011). “I want to state unequivocally for the world, as well as for the markets, as well as for the American people: I have no doubt that we will not lose the full faith and credit of the United States,” she said. Now, however, one of Bachmann’s colleagues, Representative Tom McClintock (R-CA), says that the media, and S&P, misinterpreted the Republican position. “No one said that would be acceptable,” McClintock says of a possible default. “What we said was in the event of a deadlock it was imperative that bondholders retain their confidence that loans made to the United States be repaid on schedule.” Treasury Secretary Timothy Geithner says of S&P’s response to the default crisis: “They, like many people, looked at this terrible debate we’ve had over the past few months, should the US default or not, really a remarkable thing for a country like the United States. And that was very damaging.” [Politico, 8/11/2011] TPMDC reporter Brian Beutler recalls: “For weeks, high-profile conservative lawmakers practically welcomed the notion of exhausting the country’s borrowing authority, or even technically defaulting. Others brazenly dismissed the risks of doing so. And for a period of days, in an earlier stage of the debate, Republican leaders said technical default would be an acceptable consequence, if it meant the GOP walked away with massive entitlement cuts in the end.” He accuses McClintock of trying to “sweep the mess they’ve made down the memory hole” by lying about what he and fellow Republicans said in the days and weeks before the debt ceiling legislation was passed. Beutler notes statements made by House Budget Committee chairman Paul Ryan (R-WI) and House Majority Leader Eric Cantor (R-VA), where they either made light of the consequences of a possible credit default or said that a default was worthwhile if it, as Cantor said, triggered “real reform.” Representative Louis Gohmert (R-TX), one of the “tea party” members, accused the Obama administration of lying about the consequences of default; Beutler writes, “This was a fairly common view among conservative Republicans, particularly in the House” (see July 14, 2011). [TPMDC, 8/11/2011]

Entity Tags: Michele Bachmann, Eric Cantor, Brian Beutler, Joydeep Mukherji, US Congress, Standard & Poor’s, Timothy Geithner, Paul Ryan, Obama administration, John Boehner, Tom McClintock, Politico

Category Tags: USA, 2011 US Credit Default, Commentaries on Economic Issues

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