From Bloomberg:
May 7 (Bloomberg) — The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.
“This is the most difficult period of humanity that we’re going through today because governments have no control,” Taleb, 49, told a conference in Singapore today. “Navigating the world is much harder than in the 1930s.”
The International Monetary Fund last month slashed its world economic growth forecasts and said the global recession will be deeper than previously predicted as financial markets take longer to stabilize. Nouriel Roubini, 51, the New York University professor who predicted the crisis, told Bloomberg News yesterday that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic.”
“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” Roubini said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”
Federal Reserve Chairman Ben S. Bernanke told lawmakers May 5 that the central bank expects U.S. economic activity “to bottom out, then to turn up later this year.” Another shock to the financial system would undercut that forecast, he added.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=avf2KVFwU8xQ
The United States treasury’s plan to deal with “toxic assets” relies on the very financial institutions that created the economic whirlwind. The young presidency is already in a vice, says Godfrey Hodgson.
President Barack Obama joked in his press conference on 24 March 2009 that the euphoria of his inauguration two months earlier had lasted only a single day. The hope he had the audacity to proclaim is not yet dead. But – even as he prepares to leave for a trip to Europe that will encompass the G20 summit in London (2 April), the Nato anniversary summit jointly hosted by France and Germany (3-4 April), and visits to the Czech Republic (4-5 April) and Turkey (6-7 April) – the future prospects of his presidency are already in the balance.
Among openDemocracy’s articles on the economic crisis:
Willem Buiter, “The end of American capitalism (as we knew it)” (17 September 2008)
Ann Pettifor, “The week that changed everything” (22 September 2008)
Will Hutton, “Wanted: a fairer capitalism” (6 October 2008)
Avinash Persaud, “Europe’s financial crisis: the integration lesson” (7 October 2008)
Paul Rogers, “A world in flux: crisis to agency” (16 October 2008)
Andre Wilkens, “The global financial crisis: opportunities for change” (10 November 2008)
Simon Maxwell & Dirk Messner, “A new global order: Bretton Woods II…and San Francisco II” (11 November 2008)
Larry Elliott, “From G8 to G20: the end of exclusion” (16 November 2008)
Krzysztof Rybinski, “A new world order” (4 December 2008)
Paul Rogers, “A world in revolt” (12 February 2009)
Katinka Barysch, “The real G20 agenda: from technics to politics” (16 March 2009)
Krzysztof Rybinski, “There is no zombie free lunch” (18 March 2009)
Sue Branford, “The G20′s missing voice” (26 March 2009)
Will Hutton, “A G20 deal: power bends to protest” (29 March 2009)
With great courage, Obama has insisted that he would stick to his promises to tackle long-term failings in American society, even as he struggled to heal the economic crisis. He continues to press for these reforms – in climate-change policy, healthcare, public education, dependence on imported oil, and growing inequality – even as he grapples with the blocking of credit and the terrible unemployment that is one of its consequences.
The week of 23-29 March saw a new twist: the emergence of a deadly dilemma that the president has to resolve. He has learned that he cannot unblock credit without going a long way to appease the interests of the bankers who caused the problem in the first place. At the same time he has become aware of the rising fury among everyday Americans triggered by the huge bonuses paid to executives at AIG, the giant insurance company that in 2008 posted the biggest losses in American business history.
Everyone agrees that the knot that has to be cut is the astronomical quantity of “toxic assets” poisoning the balance sheets of American banks – as well as those European banks (the Royal Bank of Scotland, Paribas, Deutsche Bank and UBS among them), which thought it was clever to copycat every Wall Street fashion.
The plan unveiled by Obama’s treasury secretary Timothy Geithner on 23 March hands to the banks the juiciest of “sweetheart” deals to persuade them to buy up what Geithner calls “legacy assets” (the financial crisis has given free rein to American public life’s culture of euphemism).
The president’s vice
Geithner’s plan distinguishes between securities based on truly valueless loans and those whose value has simply been depressed by the economic downturn. It proposes that the treasury and “private investors” – which in practice can only mean the investment banks, commercial banks and hedge-funds which created and invested in the toxic assets in the first place – will buy equal amounts of the unsaleable assets. But private investors will only be able to do so thanks to a far larger injection of money to be lent by a government agency, the Federal Deposit Insurance Corporation (FDIC).
Altogether it is calculated that private investors will contribute 6% or 7% of the money to clean up the banks’ balance-sheets. The taxpayer, in the shape of the treasury and FDIC, will put up more than 90%. That, in the good old days before Wall Street collapsed, used to be called “leverage” of perhaps thirteen-to-one. With government standing behind them to that extent, why wouldn’t the banks buy trash at prices kited with government money?
Timothy Geithner makes much of the importance of keeping the rescue in the private sector, which it patently is not. He also speaks warmly of the professional skills that will be devoted to the task by the very speculators who brought the economy to its knees.
The liberal economic intelligentsia don’t like it. Jeffrey Sachs calls it a “massive transfer of wealth from taxpayers to bank shareholders”. In a deadly back-of-the-envelope calculation he estimates that the plan will hand $276 billion – even today a not inconsiderable sum – directly from the taxpayers to bank shareholders (see Jeffrey Sachs, “Will Geithner and Summers Succeed in Raiding the FDIC and Fed?“, VoxEU, 25 March 2009).
The Nobel laureate and New York Times columnist Paul Krugman dismisses the plan as not much more than a revival of the George W Bush administration’s plan to absorb the banks’ toxic assets: just more “cash for trash”. The economist and former labour secretary, Robert Reich, and the Columbia University scholar Joseph Stiglitz are equally acerbic (see Edward Luce, “America’s liberals lay into Obama“, Financial Times, 27 March 2009).
The co-editor of The American Prospect and respected commentator, Robert Kuttner, says the Obama administration has chosen “the most expensive and risky way of trying to recapitalise the banks, and the least likely to succeed”. Kuttner also identifies a point that is likely to be the target of much angry criticism, namely that the president has turned to “the same Wall Street crew” who failed to handle the situation under the Bush administration, and indeed who were largely responsible for what went wrong in the first place: Robert Rubin, Laurence Summers, and their protégés (see Robert Kuttner, “Geithner’s last stand“, Huffington Post, 22 March 2009).
If anyone had any doubts about who would benefit from the Geithner “public-private partnership”, they had only to watch how the stock market responded. Bank shares overall rose by 10% in the aftermath, but the biggest banks that have survived did better than that. Citigroup was up 19%; Bank of America shot up 26% in heavy trading; Wells Fargo’s shares rose by 24%, and J.P. Morgan Chase‘s by 25%. A day later, however, the wave of market enthusiasm had subsided.
The truth is that Obama now finds himself in a new vice. He feels he needs people from Wall Street to solve the street’s problems. That is one reason why it has taken him so long to fill the key jobs at the treasury under Geithner. At the same time he clearly underestimated the rage Main Street citizens feel both at the AIG bonuses and the broader proposition: that while they face losing their jobs and their homes because of the folly and greed of the financial sector, the only people who walk away laughing are the folks who caused the disaster in the first place.
No wonder that questions are being asked about the ubiquitous presence of present and former executives of Goldman Sachs in the Obama administration, just as in the ranks of its precedessor.
A time to choose
Barack Obama showed in his long campaign for the presidency that he is a very skilled politician. He is also by temperament cautious, even conservative. His instinct is to “reach across the aisle” in order to cure what he sees as the excessive partisanship of the years since the “Reagan revolution“. He is too a patient man. But now he understands that he has got to move fast if he is to save the hopes of his presidency (see “Barack Obama: don’t waste the crisis“, 6 February 2009).
In this the president is both beneficiary and victim of larger historic forces. The same event that cleared his way to the White House, the financial crisis symbolised by the fall of Lehman Brothers on 15 September 15 2008, may have made it impossible to govern; or at the least, may mean that he will have to sacrifice at least some of his hopes of long-term reform (see “The week that democracy won“, 29 September 2008).
In the short term, in order to heal the financial crisis it looks as though he has had to put the fate of his administration in the hands of the men from Wall Street.
Amid the stock-market panic of 1907, the financier JP Morgan was surprised that President Theodore Roosevelt didn’t “send your man to fix things up with my man”. It couldn’t be done like that then, and it can’t be done now. But the young president and his even younger treasury secretary have nonetheless been taught a hard lesson in political economy.
To govern is to choose, as Aneurin Bevan – the Welsh architect of Britain’s post-1945 national healthcare system – said. It is now clear that inviting the poachers to act as gamekeepers was a mistake. Many Americans long accepted the conservative contention that government was the problem, not the solution. That phase of history seems to have ended, and a progressive president finds himself coping with a new wave of populism of a kind that seemed to have disappeared from America politics for generations. He means to govern, and he will have to choose.
Godfrey Hodgson was director of the Reuters’ Foundation Programme at Oxford University, and before that the Observer’s correspondent in the United States and foreign editor of the Independent. His books include The World Turned Right Side Up: a history of the conservative ascendancy in America (Houghton Mifflin, 1996); More Equal Than Others: America from Nixon to the New Century (Princeton University Press, 2006), and A Great and Godly Adventure: The Pilgrims and the Myth of the First Thanksgiving (PublicAffairs, 2007)
At Open Democracy: http://www.opendemocracy.net/article/barack-obama-end-of-the-beginning
http://news.bbc.co.uk/1/hi/in_pictures/7969802.stm
Commentary by Matthew Lyn
The stage couldn’t be more ominous. While the Group-of-20 leaders gather in London, angry protesters are preparing their verbal assault.
Their words will fall on deaf ears.
Many of the presidents and prime ministers at tomorrow’s summit are already on political death row. The fallout from the global recession is about to claim some leadership victims.
U.K. Prime Minister Gordon Brown, who hosts the summit, has trailed the Conservatives in every opinion poll since January 2008. Brown’s Labour Party is more than 10 points behind.
The British electorate has taken a good look at him and decided it doesn’t much like what it sees. The U.K. is in a deep recession from which there is no obvious escape. As chancellor for 10 years, Brown can hardly shift the blame. His attempts to avoid the rap just make him look ridiculous. At next year’s election, he’s history.
Few of the other summit attendees are in better shape. French President Nicolas Sarkozy has lost what little momentum for economic renewal he had. He has faced mass strikes, supported by a majority of the French, who don’t believe he is doing enough to fix the financial crisis.
German Chancellor Angela Merkel looks a bit steadier, and her grip on economic logic has been firmer, but the poll ratings for her Christian Democratic Union party stand at only 34 percent. She stays in the lead only because the left-wing opposition parties remain hopelessly split.
Unpopular Leaders
Japanese Prime Minister Taro Aso has a popularity rating of just 22 percent, even with his main opposition in disarray. And Mexico’s President Felipe Calderon is expected to suffer heavy losses in this year’s mid-term Congressional elections.
Czech Prime Minister Mirek Topolanek already resigned last month after failing a no-confidence vote. The Czech Republic currently holds the presidency of the European Union.
With China, Brazil and India still excluded from the core G-7 group of countries, the only leader of any real strength will be U.S. President Barack Obama, and he’s too busy trying to repair the reputation of his country so it can be taken seriously again.
The G-20 meeting is unlikely to achieve much. Participants aim to fix the global financial architecture when there isn’t much evidence that it was broken. The credit crunch was caused by loose monetary policy and the ensuing financial bubble. It had little to do with the International Monetary Fund, the World Bank, the World Trade Organization or any of the bodies the G-20 might want to overhaul. Summit leaders will just waste time on tax havens and the inevitable onset of protectionism.
No Agreement
The size of the grouping is also absurd. A G-3 — the U.S., China and the EU — might have a chance of agreeing on something meaningful. A group of 20 people won’t even agree on what to have for lunch, never mind fixing the global economy. The leaders will just use the event for photo opportunities to appease voters back at home.
Lastly, with the possible exception of Obama, few of the leaders have enough authority to implement any serious changes to the way their economies work. We are going to see a lot of anger among voters in the next two or three years. They are likely to desert those in office when the music stopped.
There will be a solution to the credit crunch eventually, but it is unlikely to come from the G-20 leaders. By pushing an agenda that suggests there is a single global fix to the economic crisis, they are just making the problem worse.
“The only real hope appears to be that the eminent pragmatism of the likes of Merkel and Brazilian President Lula might come to the fore, given that the Browns and the Obamas appear to be full of vacuous grandstanding rhetoric,” Marc Ostwald, a fixed-income strategist at Monument Securities in London, said in a note to investors.
An exaggerated faith in summits will be one of the reasons for the demise of some leaders. They should have just admitted it will be a long, hard slog to revive the global economy and then canceled this week’s powwow.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.
Why this will not be a normal cyclical recovery
AT THE FINANCIAL TIMES: http://www.ft.com/cms/s/0/3d89a930-220d-11de-8380-00144feabdc0.html?nclick_check=1
The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out, as are nations such as Japan and Mexico that depend on US demand. The implications for US policy include a likely second round of stimulus, much more federal capital for the banking system and stunning budget deficits that will slow key initiatives for President Barack Obama, such as healthcare and energy reform.
What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.
In contrast, most postwar recessions had a different sequence – rising inflationary pressures, a monetary tightening to counter them and, then, a slowdown in response to higher interest rates. This was the pattern of the sharp 1980-81 slowdown.
None of that happened here. Instead, we saw a housing and credit market collapse that caused enormous losses among households and banks. The result was a steep drop in discretionary consumer spending and a halt to lending. To see why recovery will be slow, we can look at the balance sheet damage. For households, net worth peaked in mid-2007 at $64,400bn (€47,750, £43,449bn) but fell to $51,500bn at the end of 2008, a swift 20 per cent fall. With average family income at $50,000, and falling in real terms since 2000, a 20 per cent drop in net worth is big – especially when household debt reached 130 per cent of income in 2008.
This debt derived from Americans spending more than their income, reflecting the positive wealth effect. Households felt wealthier, despite pressure on incomes, because home and financial asset values were rising. Now that wealth effect has reversed with a vengeance. The crisis and unemployment have frightened households into raising savings rates for the first time in years. They had been stagnant at 1-2 per cent of income but have surged to nearly 5 per cent. With reduced incomes, only cutting discretionary spending can produce higher savings. This explains why personal consumption expenditures fell at record rates at the end of 2008.
Consumer spending, however, has approximated 70 per cent of US gross domestic product for the past decade and dominates our economy. But household balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011. This alone mandates a drawn-out, weak recovery.
The second key sector is the financial one. According to the International Monetary Fund, western financial institutions, mostly in the US, have realised $1,000bn of losses on US-originated assets since the crisis began. The IMF has estimated that unrealised losses may amount to another $1,000bn. With residential and commercial real estate steadily declining, this is possible. This is why the banking sector cannot make new loans. These losses are eating into banks’ capital and shrinking their capacity to add assets. Funds from the Troubled Asset Relief Program are only replacing lost capital, not increasing it. When might they end? With key categories of toxic assets still losing value, the answer is: not soon. The scale of lending needed to support a normal cyclical recovery will not materialise.
A third constraint on recovery may involve the federal balance sheet. The fiscal and monetary engines are currently on full throttle. But, within two years, concerns over budget deficits and inflation may revive, compelling the Federal Reserve to raise interest rates and Congress to adopt deficit reduction steps. These actions, contractionary by definition, could occur before a full recovery has asserted itself. On that basis, the federal balance sheet would also limit a full recovery.
This weak outlook is likely to force a second injection of spending rises and tax cuts in 2010 to prod demand. Despite public opposition, substantially more federal capital will be required for banks. The deficit outlook will worsen, perhaps to $1,000bn annually over 10 years. That will force a slowing of Mr Obama’s investment plans. That is a shame, because those investments are needed, but this balance sheet recession will be too deep.
The writer is chairman and CEO of Evercore Partners and former deputy Treasury secretary in the Clinton Administration