US President's Address to the Nation
State Floor
In Focus: Economy
9:01 P.M. EDT
THE PRESIDENT: Good evening. This is an extraordinary period for America's economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration. We've seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money.
We're in the midst of a serious financial crisis, and the federal government is responding with decisive action. We've boosted confidence in money market mutual funds, and acted to prevent major investors from intentionally driving down stocks for their own personal gain.
Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets. Financial assets related to home mortgages have lost value during the housing decline. And the banks holding these assets have restricted credit. As a result, our entire economy is in danger. So I've proposed that the federal government reduce the risk posed by these troubled assets, and supply urgently-needed money so banks and other financial institutions can avoid collapse and resume lending.
9:01 P.M. EDT
THE PRESIDENT: Good evening. This is an extraordinary period for America's economy. Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration. We've seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money.
We're in the midst of a serious financial crisis, and the federal government is responding with decisive action. We've boosted confidence in money market mutual funds, and acted to prevent major investors from intentionally driving down stocks for their own personal gain.
Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets. Financial assets related to home mortgages have lost value during the housing decline. And the banks holding these assets have restricted credit. As a result, our entire economy is in danger. So I've proposed that the federal government reduce the risk posed by these troubled assets, and supply urgently-needed money so banks and other financial institutions can avoid collapse and resume lending.
This rescue effort is not aimed at preserving any individual company or industry -- it is aimed at preserving America's overall economy. It will help American consumers and businesses get credit to meet their daily needs and create jobs. And it will help send a signal to markets around the world that America's financial system is back on track.I know many Americans have questions tonight: How did we reach this point in our economy? How will the solution I've proposed work? And what does this mean for your financial future? These are good questions, and they deserve clear answers.
First, how did our economy reach this point?
Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions -- along with low interest rates -- made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition -- some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.
Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit -- combined with the faulty assumption that home values would continue to rise -- led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.
Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected -- along with mortgage payments they could not afford. As a result, many mortgage holders began to default.
These widespread defaults had effects far beyond the housing market. See, in today's mortgage industry, home loans are often packaged together, and converted into financial products called "mortgage-backed securities." These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.
The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.
With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all.
I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There's been a widespread loss of confidence. And major sectors of America's financial system are at risk of shutting down.The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:
More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.
Fellow citizens: We must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem -- and to make improvements to the proposal my administration sent to them. There is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration. In that spirit, I've invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.
I know that an economic rescue package will present a tough vote for many members of Congress. It is difficult to pass a bill that commits so much of the taxpayers' hard-earned money. I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street. But given the situation we are facing, not passing a bill now would cost these Americans much more later.
Many Americans are asking: How would a rescue plan work?
After much discussion, there is now widespread agreement on the principles such a plan would include. It would remove the risk posed by the troubled assets -- including mortgage-backed securities -- now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses. Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan's implementation. And it should be enacted as soon as possible.
In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday. First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system. In the short term, this will free up banks to resume the flow of credit to American families and businesses. And this will help our economy grow.Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.
A final question is: What does this mean for your economic future?
The primary steps -- purpose of the steps I have outlined tonight is to safeguard the financial security of American workers and families and small businesses. The federal government also continues to enforce laws and regulations protecting your money. The Treasury Department recently offered government insurance for money market mutual funds. And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000. The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit -- and this will not change.
Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we've seen how one company can grow so large that its failure jeopardizes the entire financial system.
Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability. There are other good ideas, and members of Congress should consider them. As they do, they must ensure that efforts to regulate Wall Street do not end up hampering our economy's ability to grow.
In the long run, Americans have good reason to be confident in our economic strength. Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised. It has unleashed the talents and the productivity, and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.
Our economy is facing a moment of great challenge. But we've overcome tough challenges before -- and we will overcome this one. I know that Americans sometimes get discouraged by the tone in Washington, and the seemingly endless partisan struggles. Yet history has shown that in times of real trial, elected officials rise to the occasion. And together, we will show the world once again what kind of country America is -- a nation that tackles problems head on, where leaders come together to meet great tests, and where people of every background can work hard, develop their talents, and realize their dreams.
Thank you for listening. May God bless you.
END 9:14 P.M. EDT
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$The fundamental problem with the Paulson scheme, as proposed, is then that it is neither a necessary nor an efficient solution. It is not necessary, because the Federal Reserve is able to manage illiquidity through its many lender-of-last resort operations. It is not efficient, because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.
Furthermore, these assets are illiquid precisely because they are so hard to value. The government risks finding its coffers stuffed with huge amounts of overpriced junk even if it tries not to do so. Also objectionable, though more in design than in the fundamentals, were the unchecked powers for the Treasury. Such a fund should be operated professionally, under independent oversight. Finally, if the US government is to bail out incompetent investors it should surely also provide more help to the poor and often ill-informed borrowers.
By Martin Wolf
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
Fraud inquiry
Fraud inquiry
The FBI has said at least 24 "large corporations" may face allegations of misstated assets.
Fannie Mae, Freddie Mac, Lehman Brothers and AIG, are the latest companies to be investigated for corporate mortgage fraud, according to US media reports.
Fannie Mae, Freddie Mac, Lehman Brothers and AIG, are the latest companies to be investigated for corporate mortgage fraud, according to US media reports.
Aljazeera
£££££££££££££££££££££££££££££££££££££££££££££££
Paulson’s plan was not a true solution to the crisis
Paulson’s plan was not a true solution to the crisis
By Martin Wolf
FT.com Published: September 23 2008 19:38 Last updated: September 23 2008 19:38
Desperate times call for desperate measures. But remember, no less, that decisions taken in haste may shape the financial system for a generation. Speed is essential. But it is no less essential to get any new regime right.
No doubt, the crisis has long passed the stage when governments could leave the private sector to save itself, with just a little help from central banks. For the US, the rescue of Bear Stearns was the moment when that option evaporated. But the events of the past two and a half weeks – the rescues of Fannie Mae and Freddie Mac, the failure of Lehman Brothers, the sale of Merrill Lynch, the rescue of AIG, the flight to safety in the markets and the decisions by Morgan Stanley and Goldman Sachs to become regulated bank holding companies – have made a comprehensive solution inevitable.
The US public expects action. The question is whether it will get the right action. To answer it, we must agree on the challenge the US financial system faces and the criteria for judging how it should be met.
What then is the challenge? The answer given by Hank Paulson, the all-action US Treasury secretary, last Friday, in announcing his “troubled asset relief programme”, is that “the underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy.” The core challenge, then, is viewed as illiquidity, not insolvency. By creating a market for the toxic assets, Mr Paulson hopes to halt the spiral of falling prices and bankruptcies.
I suggest we should take a broader view of events. The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas, works both ways.
Since US net international debt was 39 per cent of GDP at the end of 2007, virtually all of this debt is an asset of another domestic entity and would net out to zero. But when the gross debt stock is huge and economic conditions difficult, the chances that many entities are bankrupt is high. When people fear mass insolvency, lenders stop lending and the indebted stop spending. The result can be the “debt deflation”, described by the American economist, Irving Fisher, in 1933 and experienced by Japan in the 1990s.
Given the recent explosion in leverage, the challenge is unlikely to be one of mispricing of the toxic mortgage-backed securities alone. Many people and institutions made leveraged bets that have since gone sour. Their debt cannot be repaid. Creditors are responding accordingly.
Now turn to the criteria to be used in judging the intervention. First, it would deal with the systemic threat. Second, it would minimise damage to incentives. Third, it would come at minimum cost and risk to the taxpayer. Not least, it would be consistent with ideas of social justice.
The fundamental problem with the Paulson scheme, as proposed, is then that it is neither a necessary nor an efficient solution. It is not necessary, because the Federal Reserve is able to manage illiquidity through its many lender-of-last resort operations. It is not efficient, because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.
Furthermore, these assets are illiquid precisely because they are so hard to value. The government risks finding its coffers stuffed with huge amounts of overpriced junk even if it tries not to do so. Also objectionable, though more in design than in the fundamentals, were the unchecked powers for the Treasury. Such a fund should be operated professionally, under independent oversight. Finally, if the US government is to bail out incompetent investors it should surely also provide more help to the poor and often ill-informed borrowers.
Yet, above all, a scheme for dealing with the crisis must be able to remedy the looming decapitalisation of the financial system in as targeted a manner as possible. A fascinating debate on how to do this is under way in the economists’ forum on FT.com. To the contributions, including Tuesday’s Comment page article by Dominique Strauss-Kahn, managing director of the International Monetary Fund, I would add one by Luigi Zingales of Chicago University’s graduate school of business.*
The simplest way to recapitalise institutions is by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.
The advantage of these schemes is that they would require not a penny of public money. Their drawback is that they would be disruptive and highly unpopular: banking institutions would have to be valued, whereupon undercapitalised entities would have to adopt one of the ways to improve their capital positions.
If, as seems plausible, a scheme that imposes such pain on the financial sector would be rejected out of hand, the next best alternative would be injection of preference shares by the government into decapitalised institutions, on the lines proposed by Charles Calomiris of Columbia University. This would be a bail-out, but one that constrained the behaviour of beneficiaries, not least on payment of dividends. That would make it far better than dropping benefits on the unworthy, via mass purchases of overpriced toxic paper.
What then do I conclude? Yes, there may well be a place for intervention in the market for toxic securities. But this is a costly and ineffective way of meeting today’s deepest challenge. What is needed, still more, is a clear and effective way of deleveraging and recapitalising the financial sector, ideally without using taxpayer funds. If such funds are to be used, they must also be injected in as carefully targeted and controlled a way as possible. Comprehensive action is essential, as Mr Paulson has decided. But let the US take the time to make that comprehensive action right.
September 23, 2008Op-Ed Contributor
FT.com Published: September 23 2008 19:38 Last updated: September 23 2008 19:38
Desperate times call for desperate measures. But remember, no less, that decisions taken in haste may shape the financial system for a generation. Speed is essential. But it is no less essential to get any new regime right.
No doubt, the crisis has long passed the stage when governments could leave the private sector to save itself, with just a little help from central banks. For the US, the rescue of Bear Stearns was the moment when that option evaporated. But the events of the past two and a half weeks – the rescues of Fannie Mae and Freddie Mac, the failure of Lehman Brothers, the sale of Merrill Lynch, the rescue of AIG, the flight to safety in the markets and the decisions by Morgan Stanley and Goldman Sachs to become regulated bank holding companies – have made a comprehensive solution inevitable.
The US public expects action. The question is whether it will get the right action. To answer it, we must agree on the challenge the US financial system faces and the criteria for judging how it should be met.
What then is the challenge? The answer given by Hank Paulson, the all-action US Treasury secretary, last Friday, in announcing his “troubled asset relief programme”, is that “the underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy.” The core challenge, then, is viewed as illiquidity, not insolvency. By creating a market for the toxic assets, Mr Paulson hopes to halt the spiral of falling prices and bankruptcies.
I suggest we should take a broader view of events. The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007 (see charts). The balance sheets of the financial sector exploded, as did the sector’s notional profitability. But leverage, alas, works both ways.
Since US net international debt was 39 per cent of GDP at the end of 2007, virtually all of this debt is an asset of another domestic entity and would net out to zero. But when the gross debt stock is huge and economic conditions difficult, the chances that many entities are bankrupt is high. When people fear mass insolvency, lenders stop lending and the indebted stop spending. The result can be the “debt deflation”, described by the American economist, Irving Fisher, in 1933 and experienced by Japan in the 1990s.
Given the recent explosion in leverage, the challenge is unlikely to be one of mispricing of the toxic mortgage-backed securities alone. Many people and institutions made leveraged bets that have since gone sour. Their debt cannot be repaid. Creditors are responding accordingly.
Now turn to the criteria to be used in judging the intervention. First, it would deal with the systemic threat. Second, it would minimise damage to incentives. Third, it would come at minimum cost and risk to the taxpayer. Not least, it would be consistent with ideas of social justice.
The fundamental problem with the Paulson scheme, as proposed, is then that it is neither a necessary nor an efficient solution. It is not necessary, because the Federal Reserve is able to manage illiquidity through its many lender-of-last resort operations. It is not efficient, because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.
Furthermore, these assets are illiquid precisely because they are so hard to value. The government risks finding its coffers stuffed with huge amounts of overpriced junk even if it tries not to do so. Also objectionable, though more in design than in the fundamentals, were the unchecked powers for the Treasury. Such a fund should be operated professionally, under independent oversight. Finally, if the US government is to bail out incompetent investors it should surely also provide more help to the poor and often ill-informed borrowers.
Yet, above all, a scheme for dealing with the crisis must be able to remedy the looming decapitalisation of the financial system in as targeted a manner as possible. A fascinating debate on how to do this is under way in the economists’ forum on FT.com. To the contributions, including Tuesday’s Comment page article by Dominique Strauss-Kahn, managing director of the International Monetary Fund, I would add one by Luigi Zingales of Chicago University’s graduate school of business.*
The simplest way to recapitalise institutions is by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.
The advantage of these schemes is that they would require not a penny of public money. Their drawback is that they would be disruptive and highly unpopular: banking institutions would have to be valued, whereupon undercapitalised entities would have to adopt one of the ways to improve their capital positions.
If, as seems plausible, a scheme that imposes such pain on the financial sector would be rejected out of hand, the next best alternative would be injection of preference shares by the government into decapitalised institutions, on the lines proposed by Charles Calomiris of Columbia University. This would be a bail-out, but one that constrained the behaviour of beneficiaries, not least on payment of dividends. That would make it far better than dropping benefits on the unworthy, via mass purchases of overpriced toxic paper.
What then do I conclude? Yes, there may well be a place for intervention in the market for toxic securities. But this is a costly and ineffective way of meeting today’s deepest challenge. What is needed, still more, is a clear and effective way of deleveraging and recapitalising the financial sector, ideally without using taxpayer funds. If such funds are to be used, they must also be injected in as carefully targeted and controlled a way as possible. Comprehensive action is essential, as Mr Paulson has decided. But let the US take the time to make that comprehensive action right.
September 23, 2008Op-Ed Contributor
The $700 Billion Question
By ANIL K KASHYAP and JEREMY C. STEINHENRY PAULSON,
The Treasury secretary, has opened the government checkbook and is poised to spend $700 billion to end the financial crisis. What comes next depends on the precise mission and operating powers he and Congress assign the new Treasury agency that will oversee the bailout. We see four broad possibilities.
First, the agency could act as a deep-pocketed private investor that sees a bargain buying opportunity — Warren Buffett on steroids. This strategy makes sense if one believes that the crisis has caused the prices of mortgage-backed securities to fall far below their fundamental worth, and that pushing them back up to their real value will be enough to restore the health of the financial sector. Under this “fire sale” view, government involvement is needed because no private actor has enough money to be the market-maker of last resort.
If this is Mr. Paulson’s idea, the employees of the new agency should be investment analysts; indeed, we have heard that the government might even outsource some of the work to private bond managers. One virtue of this approach is that it makes the mission of the agency relatively clear cut: it wants to buy low and (eventually) sell high.
Beyond just buying and holding, a second job for the agency might be to restructure the mortgages it acquires. For example, it could reduce required interest payments so that fewer homeowners default on their loans. Done well, this could avoid costly foreclosures, thereby benefiting homeowners while also raising the value of the securities that the government has bought. This sort of restructuring has been difficult until now, because individual mortgages have been sliced and diced, and the pieces widely scattered. However, if the new agency winds up owning a majority of all problem mortgages, reconfiguring them so that interest payments are lower may become practical.
These first two tasks are probably the easiest for skeptics of government intervention to embrace — or at least tolerate. Unfortunately, they may not be enough. The financial sector is now seriously undercapitalized — struggling institutions simply don’t have enough equity to absorb potential losses — and normal lending within the financial system will not resume until this changes.
Consider Merrill Lynch. It found itself in dire straits because it was having difficulty borrowing to finance its holdings of mortgages and other investments. With options running out, it agreed to merge with Bank of America. Upon the announcement of the merger, the borrowing money problem disappeared, even though Merrill was going to use the borrowed money in exactly the same way as before. What was new was that Bank of America had put its substantial capital base on the line.
Accordingly, a third job for the new agency might be to directly subsidize financial firms to increase their capital. One way to accomplish this would be the agency’s purposefully overpaying — relative to underlying fundamental values — for the mortgages it acquires. Mr. Paulson initially said he wanted to buy mortgages only from American companies; although he apparently changed his mind about foreign banks over the weekend, his original thinking seemed to suggest that he envisions some sort of a subsidy program.
While injecting more money into the financial sector is clearly necessary, doing it this way raises several concerns. For one thing, overpaying for the mortgages would help the banks’ current debt and stock holders. This kind of gift to existing investors (with no upside for the taxpayers providing the money) sets a terrible precedent, surpassing the Bear Stearns and American International Group bailouts, where at least shareholders saw their stakes largely wiped out.
In addition, there would be considerable scope for corruption in distributing the subsidies. Which types of mortgages would get the sweetest deals? What if some banks own disproportionately more of these high-subsidy mortgages? Designing a coherent mission and organizational structure for the agency to minimize these problems will be challenging, to say the least.
If the agency is to get into the direct subsidy business, which may be inevitable, we prefer that it also take on the role of a bankruptcy judge. The government should refuse to buy any toxic mortgage assets from a bank unless it first reaches an agreement with its long-term debt holders to erase some of the debt it owes, perhaps in exchange for stock.
Beyond the principle involved, eliminating some of the existing debt in this way would help to strengthen the bank’s balance sheet. If, in addition, the government received some preferred shares of the bailed-out bank as part of the process (as it did in the A.I.G. rescue), taxpayers might eventually share in some of the gains. Together, these steps would at least partly limit the gift element of the program.
For now, all we can do is make educated guesses at what Mr. Paulson has in mind. But Congress, which has to sign that check for him, should demand some clear answers.
Anil K Kashyap is a professor of economics and finance at the University of Chicago Graduate School of Business. Jeremy C. Stein is a professor of economics at Harvard.
First, the agency could act as a deep-pocketed private investor that sees a bargain buying opportunity — Warren Buffett on steroids. This strategy makes sense if one believes that the crisis has caused the prices of mortgage-backed securities to fall far below their fundamental worth, and that pushing them back up to their real value will be enough to restore the health of the financial sector. Under this “fire sale” view, government involvement is needed because no private actor has enough money to be the market-maker of last resort.
If this is Mr. Paulson’s idea, the employees of the new agency should be investment analysts; indeed, we have heard that the government might even outsource some of the work to private bond managers. One virtue of this approach is that it makes the mission of the agency relatively clear cut: it wants to buy low and (eventually) sell high.
Beyond just buying and holding, a second job for the agency might be to restructure the mortgages it acquires. For example, it could reduce required interest payments so that fewer homeowners default on their loans. Done well, this could avoid costly foreclosures, thereby benefiting homeowners while also raising the value of the securities that the government has bought. This sort of restructuring has been difficult until now, because individual mortgages have been sliced and diced, and the pieces widely scattered. However, if the new agency winds up owning a majority of all problem mortgages, reconfiguring them so that interest payments are lower may become practical.
These first two tasks are probably the easiest for skeptics of government intervention to embrace — or at least tolerate. Unfortunately, they may not be enough. The financial sector is now seriously undercapitalized — struggling institutions simply don’t have enough equity to absorb potential losses — and normal lending within the financial system will not resume until this changes.
Consider Merrill Lynch. It found itself in dire straits because it was having difficulty borrowing to finance its holdings of mortgages and other investments. With options running out, it agreed to merge with Bank of America. Upon the announcement of the merger, the borrowing money problem disappeared, even though Merrill was going to use the borrowed money in exactly the same way as before. What was new was that Bank of America had put its substantial capital base on the line.
Accordingly, a third job for the new agency might be to directly subsidize financial firms to increase their capital. One way to accomplish this would be the agency’s purposefully overpaying — relative to underlying fundamental values — for the mortgages it acquires. Mr. Paulson initially said he wanted to buy mortgages only from American companies; although he apparently changed his mind about foreign banks over the weekend, his original thinking seemed to suggest that he envisions some sort of a subsidy program.
While injecting more money into the financial sector is clearly necessary, doing it this way raises several concerns. For one thing, overpaying for the mortgages would help the banks’ current debt and stock holders. This kind of gift to existing investors (with no upside for the taxpayers providing the money) sets a terrible precedent, surpassing the Bear Stearns and American International Group bailouts, where at least shareholders saw their stakes largely wiped out.
In addition, there would be considerable scope for corruption in distributing the subsidies. Which types of mortgages would get the sweetest deals? What if some banks own disproportionately more of these high-subsidy mortgages? Designing a coherent mission and organizational structure for the agency to minimize these problems will be challenging, to say the least.
If the agency is to get into the direct subsidy business, which may be inevitable, we prefer that it also take on the role of a bankruptcy judge. The government should refuse to buy any toxic mortgage assets from a bank unless it first reaches an agreement with its long-term debt holders to erase some of the debt it owes, perhaps in exchange for stock.
Beyond the principle involved, eliminating some of the existing debt in this way would help to strengthen the bank’s balance sheet. If, in addition, the government received some preferred shares of the bailed-out bank as part of the process (as it did in the A.I.G. rescue), taxpayers might eventually share in some of the gains. Together, these steps would at least partly limit the gift element of the program.
For now, all we can do is make educated guesses at what Mr. Paulson has in mind. But Congress, which has to sign that check for him, should demand some clear answers.
Anil K Kashyap is a professor of economics and finance at the University of Chicago Graduate School of Business. Jeremy C. Stein is a professor of economics at Harvard.
Scrutiny continues over $700bn plan
Beranke urges Congress to pass the bill or risk 'serious consequences' for the economy [AFP]
US legislators have continued to debate a $700bn plan to rescue the US economic system from a financial meltdown.
The proposed bailout package has proved a hard sell both to American taxpayers, who've balked at having to foot the bill for Wall Street's bad decisions, and to US politicians, who are deeply skeptical about the plan's details.
The US Federal Bureau of Investigation (FBI) has also begun inquiries into possible criminal activity at dozens of American corporations, reportedly including four of the giants behind the recent turmoil in the markets.
US stocks opened modestly higher on Wednesday as Congress continued to hear testimony from Ben Bernanke and Henry Paulson, the architects of the multi-billion dollar rescue package.
Bernanke, the US federal reserve chairman, told the congressional Joint Economic Committee that world markets were under "extraordinary stress", which could impinge business growth.
"Action by Congress is urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," he said, urging legislators to approve the bailouft plan.
The proposed legislation put forward by the Bush administration would largely award Paulson, the US treasurer, broad power to buy the debt of any financial institution for the next two years and would increase US national debt from $10.6 trillion to $11.3 trillion.
Fraud inquiry
The economy has become a major campaign issue in this year's presidential election. Many Congressional seats are also up for grabs and legislators are reluctant to back a plan from an outgoing administration.
Legislators will also have to consider FBI investigations into potential mortgage fraud by firms and senior executives at the heart of the financial crisis.
The FBI has said at least 24 "large corporations" may face allegations of misstated assets.
Fannie Mae, Freddie Mac, Lehman Brothers and AIG, are the latest companies to be investigated for corporate mortgage fraud, according to US media reports.
Goldman investment
On Wall Street, markets reacted positively to news that Warren Buffett's Berkshire Hathaway group is investing $5bn in Goldman Sachs - one of the struggling investment banks.
"It's clearly a positive when Warren Buffett sees value in a company," Richard Sichel, chief investment officer of Philadelphia Trust Co, said.
"Buffett is so highly regarded as an intelligent value investor, if he's putting a lot of money into a company that's been beaten down, it sends a message to the market that maybe not every financial company should be ignored at this point."
The investment came two days after Goldman, along with Morgan Stanley, changed its status to a bank holding company, giving them greater access to credit but placing them under increased regulation.
US stocks opened higher on Wednesday but then seesawed in later trading.
There was also a mixed response to the news in Asia as Japan's Nikkei fell 1.2 per cent in the morning session but the Australia's benchmark S&P/ASX 200 index rose 0.9 per cent and Hong Kong's Hang Seng was up 1.9 per cent.
US legislators have continued to debate a $700bn plan to rescue the US economic system from a financial meltdown.
The proposed bailout package has proved a hard sell both to American taxpayers, who've balked at having to foot the bill for Wall Street's bad decisions, and to US politicians, who are deeply skeptical about the plan's details.
The US Federal Bureau of Investigation (FBI) has also begun inquiries into possible criminal activity at dozens of American corporations, reportedly including four of the giants behind the recent turmoil in the markets.
US stocks opened modestly higher on Wednesday as Congress continued to hear testimony from Ben Bernanke and Henry Paulson, the architects of the multi-billion dollar rescue package.
Bernanke, the US federal reserve chairman, told the congressional Joint Economic Committee that world markets were under "extraordinary stress", which could impinge business growth.
"Action by Congress is urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," he said, urging legislators to approve the bailouft plan.
The proposed legislation put forward by the Bush administration would largely award Paulson, the US treasurer, broad power to buy the debt of any financial institution for the next two years and would increase US national debt from $10.6 trillion to $11.3 trillion.
Fraud inquiry
The economy has become a major campaign issue in this year's presidential election. Many Congressional seats are also up for grabs and legislators are reluctant to back a plan from an outgoing administration.
Legislators will also have to consider FBI investigations into potential mortgage fraud by firms and senior executives at the heart of the financial crisis.
The FBI has said at least 24 "large corporations" may face allegations of misstated assets.
Fannie Mae, Freddie Mac, Lehman Brothers and AIG, are the latest companies to be investigated for corporate mortgage fraud, according to US media reports.
Goldman investment
On Wall Street, markets reacted positively to news that Warren Buffett's Berkshire Hathaway group is investing $5bn in Goldman Sachs - one of the struggling investment banks.
"It's clearly a positive when Warren Buffett sees value in a company," Richard Sichel, chief investment officer of Philadelphia Trust Co, said.
"Buffett is so highly regarded as an intelligent value investor, if he's putting a lot of money into a company that's been beaten down, it sends a message to the market that maybe not every financial company should be ignored at this point."
The investment came two days after Goldman, along with Morgan Stanley, changed its status to a bank holding company, giving them greater access to credit but placing them under increased regulation.
US stocks opened higher on Wednesday but then seesawed in later trading.
There was also a mixed response to the news in Asia as Japan's Nikkei fell 1.2 per cent in the morning session but the Australia's benchmark S&P/ASX 200 index rose 0.9 per cent and Hong Kong's Hang Seng was up 1.9 per cent.
Home repossessions hit 15-year high
By Myra Butterworth, Personal Finance CorrespondentLast Updated: 2:23pm BST 15/08/2008
The scale of Britain's escalating repossession crisis has been revealed as figures show those at risk of losing their home reached a 15-year high - rocketing by nearly a quarter in just one year.
Owners 'living in fear' A total of 28,658 mortgage repossession orders were made in England and Wales during the three months to June, according to figures from the Ministry of Justice. This is a rise of 24 per cent from the same period a year ago.
Charities warned that tens of thousands of homeowners are now "living in fear" of having their homes repossessed as they struggle to meet rising costs.
With the squeeze on household bills likely to persist and unemployment set to rise, experts said more homes will be repossessed.
How to survive repossessionBuy-to-let landlords: avoiding repossessionGas price to hit familiesSeema Shah, a property expert at Capital Economics, said: "The economy is now flirting with recession, unemployment is on course to increase significantly and house prices are falling. The bottom line is that there is nothing in today's figures to suggest that the trend in possessions is anything other than up."
As home owners struggle fail to repay their mortgage debt, mortgage lenders were accused of "aggressively" pursuing borrowers through the courts.
Housing charity Shelter said mortgage lenders were "still using repossession as the first rather than last resort" and said that those coming to the charity for help with mortgage possession actions had increased by 55 per cent in the past six months.
advertisementAdam Sampson, the charity's chief executive, said: "Every day Shelter is seeing more and more ordinary hardworking people who are terrified of losing their homes.
"Tens of thousands are living with the fear of having the home they've worked so hard for being repossessed by lenders with little compassion."
Liberal Democrat Treasury spokesman Vince Cable said lenders were using court action to "pursue their debts in a very aggressive way".
But housing Minister Caroline Flint said: "While we are not seeing repossessions on the same scale as the early 1990s, we are making sure the right advice and support is available for the minority of borrowers who may need it at the moment because of global economic pressures."
The Ministry of Justice said there were 39,078 mortgage possession claims in the second quarter of 2008, an increase of 17 per cent on 2007.
The number of repossession claims reached a 15-year high at 137,591 last year and has continued to climb as the higher cost of mortgages hits homeowners following a series of interest rate rises last year.
The Ministry of Justice's figures relate to court activity which may not result in a possession. As a result, the figures tend to be higher than those published by the Council of Mortgage Lenders (CML), which last week reported 18,900 repossessions - up 48 per cent on the same period last year.
Mortgage brokers advised home owners not to bury their heads in the sand and to seek help as soon as there are signs that they are in trouble financially.
Melanie Bien, director of Savills Private Finance, said: "For many, a repossession order is a wake-up call to make them sort out the situation and avoid actually the finality of actually losing their home."
But she added: "As the credit crunch continues, we expect more people to get into difficulty over their mortgage payments."
David Hollingworth, of London & Country, said: "Those borrowers already facing credit difficulties will have found their options limited at best. Rates are now significantly higher and some borrowers will find it hard to keep up."
The Council of Mortgage Lenders said: "Borrowers should make sure they speak to their lenders at the first opportunity and pay what they can."
The scale of Britain's escalating repossession crisis has been revealed as figures show those at risk of losing their home reached a 15-year high - rocketing by nearly a quarter in just one year.
Owners 'living in fear' A total of 28,658 mortgage repossession orders were made in England and Wales during the three months to June, according to figures from the Ministry of Justice. This is a rise of 24 per cent from the same period a year ago.
Charities warned that tens of thousands of homeowners are now "living in fear" of having their homes repossessed as they struggle to meet rising costs.
With the squeeze on household bills likely to persist and unemployment set to rise, experts said more homes will be repossessed.
How to survive repossessionBuy-to-let landlords: avoiding repossessionGas price to hit familiesSeema Shah, a property expert at Capital Economics, said: "The economy is now flirting with recession, unemployment is on course to increase significantly and house prices are falling. The bottom line is that there is nothing in today's figures to suggest that the trend in possessions is anything other than up."
As home owners struggle fail to repay their mortgage debt, mortgage lenders were accused of "aggressively" pursuing borrowers through the courts.
Housing charity Shelter said mortgage lenders were "still using repossession as the first rather than last resort" and said that those coming to the charity for help with mortgage possession actions had increased by 55 per cent in the past six months.
advertisementAdam Sampson, the charity's chief executive, said: "Every day Shelter is seeing more and more ordinary hardworking people who are terrified of losing their homes.
"Tens of thousands are living with the fear of having the home they've worked so hard for being repossessed by lenders with little compassion."
Liberal Democrat Treasury spokesman Vince Cable said lenders were using court action to "pursue their debts in a very aggressive way".
But housing Minister Caroline Flint said: "While we are not seeing repossessions on the same scale as the early 1990s, we are making sure the right advice and support is available for the minority of borrowers who may need it at the moment because of global economic pressures."
The Ministry of Justice said there were 39,078 mortgage possession claims in the second quarter of 2008, an increase of 17 per cent on 2007.
The number of repossession claims reached a 15-year high at 137,591 last year and has continued to climb as the higher cost of mortgages hits homeowners following a series of interest rate rises last year.
The Ministry of Justice's figures relate to court activity which may not result in a possession. As a result, the figures tend to be higher than those published by the Council of Mortgage Lenders (CML), which last week reported 18,900 repossessions - up 48 per cent on the same period last year.
Mortgage brokers advised home owners not to bury their heads in the sand and to seek help as soon as there are signs that they are in trouble financially.
Melanie Bien, director of Savills Private Finance, said: "For many, a repossession order is a wake-up call to make them sort out the situation and avoid actually the finality of actually losing their home."
But she added: "As the credit crunch continues, we expect more people to get into difficulty over their mortgage payments."
David Hollingworth, of London & Country, said: "Those borrowers already facing credit difficulties will have found their options limited at best. Rates are now significantly higher and some borrowers will find it hard to keep up."
The Council of Mortgage Lenders said: "Borrowers should make sure they speak to their lenders at the first opportunity and pay what they can."
US inflation at highest since 1991
By James Politi in Washington
Published: August 14 2008 14:31 Last updated: August 14 2008 14:31
US consumer prices rose by 0.8 per cent in July, twice as fast as expected, damping hopes that falling crude oil prices and the slowing consumer demand would rapidly ease inflationary pressures.
The surprise jump in the consumer price index on a monthly basis was accompanied by an annual increase of 5.6 per cent, which was more than forecast and the largest jump since 1991.
EDITOR’S CHOICEChina to overtake US as largest manufacturer - Aug-10US unmoved by imminent loss of industry top slot - Aug-10Editorial Comment: US economy needs more help - Aug-10Comment: US decline not easily reversed - Aug-10In depth: The Big Freeze - Aug-07Editorial comment: Credit crunch in a century’s context - Aug-07Meanwhile, core prices – excluding food and energy costs – rose by 0.3 per cent, which was also higher than expected, amid sharp increases in the prices of apparel, tobacco and public transportation.
The soaring consumer price index highlights the dilemma facing the Federal Reserve as its policymakers weigh the risks of the rising cost of living against increasing unemployment, a weak consumer and stress in the financial services industry. The Fed has maintained interest rates steady at 2 per cent over the past two meetings to set monetary policy as it has balanced those dangers.
Speculation had been building that the recent drop in the price of crude oil might alleviate inflationary pressures, making it less likely that the Fed would have to raise interest rates early to tackle rising prices. But Thursday’s CPI report signals that inflation is likely to remain a main source of concern for the Fed.
Economists were on average expecting a 0.4 per cent rise in the July headline index, after it gained 1.1 per cent in June. Energy prices rose by 4 per cent in July, after increasing by 6.6 per cent in June, while food prices rose at a rate of 0.9 per cent last month, which was faster than the 0.8 per cent rate in June.
Published: August 14 2008 14:31 Last updated: August 14 2008 14:31
US consumer prices rose by 0.8 per cent in July, twice as fast as expected, damping hopes that falling crude oil prices and the slowing consumer demand would rapidly ease inflationary pressures.
The surprise jump in the consumer price index on a monthly basis was accompanied by an annual increase of 5.6 per cent, which was more than forecast and the largest jump since 1991.
EDITOR’S CHOICEChina to overtake US as largest manufacturer - Aug-10US unmoved by imminent loss of industry top slot - Aug-10Editorial Comment: US economy needs more help - Aug-10Comment: US decline not easily reversed - Aug-10In depth: The Big Freeze - Aug-07Editorial comment: Credit crunch in a century’s context - Aug-07Meanwhile, core prices – excluding food and energy costs – rose by 0.3 per cent, which was also higher than expected, amid sharp increases in the prices of apparel, tobacco and public transportation.
The soaring consumer price index highlights the dilemma facing the Federal Reserve as its policymakers weigh the risks of the rising cost of living against increasing unemployment, a weak consumer and stress in the financial services industry. The Fed has maintained interest rates steady at 2 per cent over the past two meetings to set monetary policy as it has balanced those dangers.
Speculation had been building that the recent drop in the price of crude oil might alleviate inflationary pressures, making it less likely that the Fed would have to raise interest rates early to tackle rising prices. But Thursday’s CPI report signals that inflation is likely to remain a main source of concern for the Fed.
Economists were on average expecting a 0.4 per cent rise in the July headline index, after it gained 1.1 per cent in June. Energy prices rose by 4 per cent in July, after increasing by 6.6 per cent in June, while food prices rose at a rate of 0.9 per cent last month, which was faster than the 0.8 per cent rate in June.
Europe teeters on the brink of recession
Grainne Gilmore Europe today edged closer to recession for the first time since the single currency was introduced in 1999, after the economy shrank by 0.2 per cent during the second quarter.
Output in the 15-nation eurozone during the three months to June fell from a 0.7 per cent increase in the first quarter. Overall, annual growth in Europe slowed from 2.1 per cent to 1.5 per cent.
It also emerged that European inflation remained at a record high of 4 per cent in July.
Last month's inflation figure was revised down from an initial estimate of 4.1 per cent, but remains at double the European Central Bank's target of close to 2 per cent.
Related LinksTempus analysis: On the brink Germany and France economies face recession Dollar continues to climb as Europe falters MultimediaLatest Eurozone economic growth figuresEurozone GDP was dragged down by the three biggest economies, Germany, France and Italy, which all contracted in the second quarter.
If GDP shrinks again between July and September, it will mean that Europe is in a recession. The technical definition of a full-blown slowdown is two consecutive quarters of contraction.
Earlier this morning, Germany, Europe’s biggest economy, reported a 0.5 per cent fall in output between April and June, which was better than the 0.8 per cent decline that economists had expected.
However, France posted a shock fall of 0.3 per cent, far below economists' forecasts for a 0.2 per cent rise.
Despite the fall, Christine Lagarde, France's Finance Minister, rejected talk of recession this morning, stating that it is "out of the question". Output in Italy fell by 0.3 per cent.
But smaller eurozone members fared better, Eurostat data showed. Greece expanded by 0.6 per cent, Austria and Portugal 0.4 per cent and Belgium 0.3 per cent.
European economy contracts for first time since euro launch
Output in the 15-nation eurozone during the three months to June fell from a 0.7 per cent increase in the first quarter. Overall, annual growth in Europe slowed from 2.1 per cent to 1.5 per cent.
It also emerged that European inflation remained at a record high of 4 per cent in July.
Last month's inflation figure was revised down from an initial estimate of 4.1 per cent, but remains at double the European Central Bank's target of close to 2 per cent.
Related LinksTempus analysis: On the brink Germany and France economies face recession Dollar continues to climb as Europe falters MultimediaLatest Eurozone economic growth figuresEurozone GDP was dragged down by the three biggest economies, Germany, France and Italy, which all contracted in the second quarter.
If GDP shrinks again between July and September, it will mean that Europe is in a recession. The technical definition of a full-blown slowdown is two consecutive quarters of contraction.
Earlier this morning, Germany, Europe’s biggest economy, reported a 0.5 per cent fall in output between April and June, which was better than the 0.8 per cent decline that economists had expected.
However, France posted a shock fall of 0.3 per cent, far below economists' forecasts for a 0.2 per cent rise.
Despite the fall, Christine Lagarde, France's Finance Minister, rejected talk of recession this morning, stating that it is "out of the question". Output in Italy fell by 0.3 per cent.
But smaller eurozone members fared better, Eurostat data showed. Greece expanded by 0.6 per cent, Austria and Portugal 0.4 per cent and Belgium 0.3 per cent.
European economy contracts for first time since euro launch
By Angela MonaghanLast Updated: 12:49pm BST 14/08/2008
Europe's economy contracted in the second quarter - the first time it has shrunk since the launch of the euro almost a decade ago.
Gross domestic product fell by 0.2pc in the eurozone, which comprises the 15 nations that subscribe to the single currency, official statsistics showed today.
The fall compared with GDP growth of 0.7pc in the first quarter, and provides further evidence that the worst of the slowdown in the global economy may not yet be behind us.
advertisementThe decline was prompted by a second-quarter contraction of Europe's two biggest economies - Germany and France - as well as a fall in Italy.
"The question now is, are we close to the bottom?", said Kenneth Broux, European economist at Lloyds TSB. "We take the slightly more optimistic opinion that the economy will improve by the end of the year."
But the second quarter marked a low for the eurozone, following growth in the previous quarter.
The German economy contracted for the first time in almost four years, while the French economy shrank by for the first time in nearly six years.
Germany's fall was the sharpest, with gross domestic product down 0.5pc when seasonally adjusted, compared with a 1.3pc rise in the first quarter.
The French economy contracted by 0.3pc, contrary to the National Institute for Statistics and Economic Studies' (INSEE) expectation that it would grow by 0.2pc. Italy also fell by 0.3pc in the second quarter.
INSEE also revised down its previous estimate for French economic growth in the first quarter to 0.4pc from 0.5pc.
In Germany it was the first contraction of the economy - Europe's largest - since the third quarter of 2004 when GDP fell by 0.2pc, according to the country's Federal Statistical Office.
The struggle in the period was mainly the result of falls in construction activity, consumer spending, and capital investment.
The recent strength of the euro and a lack of business confidence also hit demand for German exports, which have helped power the country's growth in recent years.
"The decline reflects a backlash from the strong first quarter as well as a cyclical economic downturn," Matthias Rubisch, an analyst at Commerzbank told Bloomberg.
"High oil prices, the euro's strength, and the weakness in global demand are all clouding the outlook," he added.
After publication of the figures the euro was flat against the dollar at $1.4930 and little changed against sterling at 79.78p
The German Government forecasts growth will slow to 1.7pc this year from 2.5pc in 2007, slowing further to 1.2pc in 2009.
The data from Germany and France comes a week after Jean-Claude Trichet, the President of the European Central Bank warned that economic growth in the eurozone would be "particularly weak" in the third quarter, prompting investors to increase bets that the ECB will start cutting interest rates next year.
Yesterday the Bank of England gave its clearest indication yet that the UK is likely to enter a recession.
Speaking as the Bank published its quarterly Inflation Report, Governor Mervyn King said that because the central growth projection was for broadly flat output, "it's bound to be the case that there is the possibility of a quarter or two of negative growth." A technical recession occurs when there are two successive quarters of contraction.
Official estimates of how Europe fared in Q2 (percentage of economic growth)
Austria 0.4
Belgium 0.3
Cyprus 0.7
France -0.3
Germany -0.5
Greece 0.6
Italy -0.3
Netherlands 0.0
Portugal 0.4
Spain 0.1
Data is not yet available for Finland, Ireland, Luxembourg, Malta and Slovenia.
Europe's economy contracted in the second quarter - the first time it has shrunk since the launch of the euro almost a decade ago.
Gross domestic product fell by 0.2pc in the eurozone, which comprises the 15 nations that subscribe to the single currency, official statsistics showed today.
The fall compared with GDP growth of 0.7pc in the first quarter, and provides further evidence that the worst of the slowdown in the global economy may not yet be behind us.
advertisementThe decline was prompted by a second-quarter contraction of Europe's two biggest economies - Germany and France - as well as a fall in Italy.
"The question now is, are we close to the bottom?", said Kenneth Broux, European economist at Lloyds TSB. "We take the slightly more optimistic opinion that the economy will improve by the end of the year."
But the second quarter marked a low for the eurozone, following growth in the previous quarter.
The German economy contracted for the first time in almost four years, while the French economy shrank by for the first time in nearly six years.
Germany's fall was the sharpest, with gross domestic product down 0.5pc when seasonally adjusted, compared with a 1.3pc rise in the first quarter.
The French economy contracted by 0.3pc, contrary to the National Institute for Statistics and Economic Studies' (INSEE) expectation that it would grow by 0.2pc. Italy also fell by 0.3pc in the second quarter.
INSEE also revised down its previous estimate for French economic growth in the first quarter to 0.4pc from 0.5pc.
In Germany it was the first contraction of the economy - Europe's largest - since the third quarter of 2004 when GDP fell by 0.2pc, according to the country's Federal Statistical Office.
The struggle in the period was mainly the result of falls in construction activity, consumer spending, and capital investment.
The recent strength of the euro and a lack of business confidence also hit demand for German exports, which have helped power the country's growth in recent years.
"The decline reflects a backlash from the strong first quarter as well as a cyclical economic downturn," Matthias Rubisch, an analyst at Commerzbank told Bloomberg.
"High oil prices, the euro's strength, and the weakness in global demand are all clouding the outlook," he added.
After publication of the figures the euro was flat against the dollar at $1.4930 and little changed against sterling at 79.78p
The German Government forecasts growth will slow to 1.7pc this year from 2.5pc in 2007, slowing further to 1.2pc in 2009.
The data from Germany and France comes a week after Jean-Claude Trichet, the President of the European Central Bank warned that economic growth in the eurozone would be "particularly weak" in the third quarter, prompting investors to increase bets that the ECB will start cutting interest rates next year.
Yesterday the Bank of England gave its clearest indication yet that the UK is likely to enter a recession.
Speaking as the Bank published its quarterly Inflation Report, Governor Mervyn King said that because the central growth projection was for broadly flat output, "it's bound to be the case that there is the possibility of a quarter or two of negative growth." A technical recession occurs when there are two successive quarters of contraction.
Official estimates of how Europe fared in Q2 (percentage of economic growth)
Austria 0.4
Belgium 0.3
Cyprus 0.7
France -0.3
Germany -0.5
Greece 0.6
Italy -0.3
Netherlands 0.0
Portugal 0.4
Spain 0.1
Data is not yet available for Finland, Ireland, Luxembourg, Malta and Slovenia.
Japan on brink of recession as economy shrinks
TOKYO - JAPAN said on Wednesday its economy contracted in the second quarter as falling exports and weak consumer spending sent Asia's largest economy hurtling toward its first recession in six years. The slump reflects the rapidly deteriorating global economic climate, with fears of a recession in the eurozone also mounting as the fallout from the US financial crisis ripples around the world.
Japan's gross domestic product (GDP) shrank by 0.6 per cent in the three months to June from the previous quarter, the Cabinet Office said, marking the first time in a year that the world's second-biggest economy has contracted.
The economy shrank by 2.4 per cent on an annualised basis, matching market expectations.
The slump put Japan on the cusp of outright recession, which is usually defined as two or more straight quarters of economic contraction. The last time that happened in Japan was in 2001, when the recession lasted for three quarters.
Tokyo share prices slumped 2.1 per cent as the weak growth figures added to jitters about problems in the US banking sector.
GDP growth for the first quarter of 2008 was also revised down to 0.8 per cent quarter-on-quarter from 1.0 per cent previously.
Economic growth 'will remain very weak throughout this fiscal year,' said Mamoru Yamazaki, chief economist for Japan at RBS Securities.
'The increase in oil and commodity prices is damaging corporate profits,' while rising inflation is hurting households, he said.
After suffering a series of on-off recessions in the 1990s following the bursting of the economic bubble, Japan had been slowly recovering on the back of brisk exports and business investment.
Japan's government, however, last week effectively declared an end to the country's longest period of economic expansion in postwar times.
Even so, the economy is considered to be in much better shape than it was during previous downturns, particularly the corporate sector which has benefitted from several years of bumper earnings.
'The fundamentals of the economy are much better than in the previous post-bubble cycles,' Lehman Brothers chief Japan economist Kenichi Kawasaki wrote in a note to clients.
'The downside risks remain elevated, but we expect that this cyclical downturn will be a relatively mild one.' Japan is not the only major industrialised nation to have suffered an economic contraction this year - Canada's economy shrank in the first quarter and Italy suffered negative growth in the second quarter.
The US economy also shrank slightly in the fourth quarter last year but has since been bolstered by stimulus measures.
While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3 per cent.
While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3 per cent.
Household spending fell 0.5 per cent as soaring commodity and food prices, coupled with sluggish wages, prompted consumers to tighten their purse strings.
Business investment was another weak spot, dropping 0.2 percent as cautious companies spent less on new equipment and factories.
Reflecting a slowing global economy, Japan's current account surplus plunged 67.4 per cent in June from a year earlier to 493.9 billion yen (S$6.3 billion) as exports to the United States and Europe fell, official data showed on Wednesday.
The trade surplus alone tumbled 81.3 per cent to 252.1 billion yen.
Given the gloomy economic situation, analysts do not expect the Bank of Japan to raise its super-low interest rates from the current level of 0.5 per cent any time soon, despite the highest inflation in a decade.
'It's very hard for the BoJ to move despite the increase in prices,' RBS Securities' Yamazaki said.
TOKYO - JAPAN said on Wednesday its economy contracted in the second quarter as falling exports and weak consumer spending sent Asia's largest economy hurtling toward its first recession in six years. The slump reflects the rapidly deteriorating global economic climate, with fears of a recession in the eurozone also mounting as the fallout from the US financial crisis ripples around the world.
Japan's gross domestic product (GDP) shrank by 0.6 per cent in the three months to June from the previous quarter, the Cabinet Office said, marking the first time in a year that the world's second-biggest economy has contracted.
The economy shrank by 2.4 per cent on an annualised basis, matching market expectations.
The slump put Japan on the cusp of outright recession, which is usually defined as two or more straight quarters of economic contraction. The last time that happened in Japan was in 2001, when the recession lasted for three quarters.
Tokyo share prices slumped 2.1 per cent as the weak growth figures added to jitters about problems in the US banking sector.
GDP growth for the first quarter of 2008 was also revised down to 0.8 per cent quarter-on-quarter from 1.0 per cent previously.
Economic growth 'will remain very weak throughout this fiscal year,' said Mamoru Yamazaki, chief economist for Japan at RBS Securities.
'The increase in oil and commodity prices is damaging corporate profits,' while rising inflation is hurting households, he said.
After suffering a series of on-off recessions in the 1990s following the bursting of the economic bubble, Japan had been slowly recovering on the back of brisk exports and business investment.
Japan's government, however, last week effectively declared an end to the country's longest period of economic expansion in postwar times.
Even so, the economy is considered to be in much better shape than it was during previous downturns, particularly the corporate sector which has benefitted from several years of bumper earnings.
'The fundamentals of the economy are much better than in the previous post-bubble cycles,' Lehman Brothers chief Japan economist Kenichi Kawasaki wrote in a note to clients.
'The downside risks remain elevated, but we expect that this cyclical downturn will be a relatively mild one.' Japan is not the only major industrialised nation to have suffered an economic contraction this year - Canada's economy shrank in the first quarter and Italy suffered negative growth in the second quarter.
The US economy also shrank slightly in the fourth quarter last year but has since been bolstered by stimulus measures.
While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3 per cent.
While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3 per cent.
Household spending fell 0.5 per cent as soaring commodity and food prices, coupled with sluggish wages, prompted consumers to tighten their purse strings.
Business investment was another weak spot, dropping 0.2 percent as cautious companies spent less on new equipment and factories.
Reflecting a slowing global economy, Japan's current account surplus plunged 67.4 per cent in June from a year earlier to 493.9 billion yen (S$6.3 billion) as exports to the United States and Europe fell, official data showed on Wednesday.
The trade surplus alone tumbled 81.3 per cent to 252.1 billion yen.
Given the gloomy economic situation, analysts do not expect the Bank of Japan to raise its super-low interest rates from the current level of 0.5 per cent any time soon, despite the highest inflation in a decade.
'It's very hard for the BoJ to move despite the increase in prices,' RBS Securities' Yamazaki said.
Jobless claimants rise at fastest in 16 years
By Andrew Taylor, Employment Correspondent
Published: August 13 2008 10:10 Last updated: August 13 2008 10:10
The number of people claiming unemployment benefit rose last month at the fastest rate for almost 16 years as the jobs market came under increasing strain.
Total employment would also have fallen for the first time since the beginning of 2007 but for a surge in the number of pensioners taking jobs, according to figures published on Wednesday by the Office for National Statistics.
EDITOR’S CHOICEJobs market continues to falter - Aug-12
Published: August 13 2008 10:10 Last updated: August 13 2008 10:10
The number of people claiming unemployment benefit rose last month at the fastest rate for almost 16 years as the jobs market came under increasing strain.
Total employment would also have fallen for the first time since the beginning of 2007 but for a surge in the number of pensioners taking jobs, according to figures published on Wednesday by the Office for National Statistics.
EDITOR’S CHOICEJobs market continues to falter - Aug-12
IMF warns UK against laxer fiscal regime - Aug-06Jonathan Guthrie: Boom time for happynomics - Aug-06Rising inflation pressures point to more pain - Aug-01Corporate insolvencies jump 15% - Aug-01No quick fix for UK home loan crisis - Jul-30The number of people claiming jobseekers allowance rose for the sixth month in succession, increasing by 20,100 to 864,700.
Total unemployment – including those not on benefit – also rose by 60,000 to 1.67m during the three months to the end of June. The unemployment rate, regarded as the best guide to the state of the jobs market, increased by 0.2 percentage points to 5.4 per cent.
John Philpott, chief economist at the Chartered Institute of Personnel and Development, said that the labour figures were “the weakest” since the economic slowdown began. Employment growth had “ebbed to a trickle” and even fallen in some parts of the country while the rise in unemployment was “gaining worrying momentum”, he said.
Fall in house prices forces the elderly to look for a wageFalling house prices are adding to the gloom in the jobs market, not least because older people who had relied on the increase in the value of their home to supplement their pension might be forced to go out to compete for work .
According to Capital Economics, there are several ways a weakened housing market can affect jobs prospects, in addition to the impact of redundancies announced by housebuilders such as Barratt, Taylor Wimpey, Persimmon. Falling house sales also mean fewer purchases of white goods, furniture, carpet, curtains and other fixtures and fittings.
It is becoming “harder for unemployed workers to move to where jobs are available”, said Vicky Redwood, an economist at Capital Economics. She added: “Falling house prices are also likely to encourage more older people to enter the workforce, given that many have been relying on the increase in their housing wealth as a substitute for a pension. This will mean that the workforce is still rising at a time when employment is falling.”
Falling “housing equity” would also “make it harder for those who cannot find jobs to raise enough finance to start working for themselves instead”, she said.Total employment during the three months to the end of June rose by 20,000 to 29.56m but would have fallen but for an “increase of 25,000 in employment for those above the state pension age,” officials said.
The number of pensioners in work since 1997 has risen by more than two-thirds to 1.33m while the employment rate of pensioners has risen from 7.9 per cent to 11.7 per cent.
Increasing longevity, better health and the greater willingness of employers to hire older people, considered by many employers to be more reliable and harder working than some younger workers, explains some of the reasons for the rise.
The number of older people seeking work is expected to rise as final salary pensions are closed and pensioners face an increasing need to supplement their income.
The weakness of the labour market is further illustrated by a 47,400 drop in the number of vacancies to 634,900. Redundancies also increased during the second quarter by 13 per cent to 126,000. This figure is likely to rise further with building companies and financial institutions, announcing further jobs cuts, totalling more than 10,000, since the end of June.
More worryingly, a breakdown of job vacancies reveals how the impact of the credit crunch and rising energy and food costs has spilled over into other areas of the labour market as consumers have curbed their spending.
Vacancies in the shops, hotels and restaurants sector, including wholesalers, fell by almost 18 per cent during the three months to end of July. Construction vacancies were down by 12.6 per cent and finance and business services by 9.9 per cent over the same period.
Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, said: “Labour market conditions are deteriorating sharply ... it is clear that employers’ demand for labour is weakening in the face of the economic slowdown and the likelihood is that unemployment will rise further in the months ahead.”
The bleaker outlook for jobs, however, may apply a brake to pay demands.
Peter Newland, economist at Lehman Brothers, said: “The loosening of labour market conditions suggests that any significant upward pressure on average earnings is unlikely even as inflation erodes real wage growth.”
Total unemployment – including those not on benefit – also rose by 60,000 to 1.67m during the three months to the end of June. The unemployment rate, regarded as the best guide to the state of the jobs market, increased by 0.2 percentage points to 5.4 per cent.
John Philpott, chief economist at the Chartered Institute of Personnel and Development, said that the labour figures were “the weakest” since the economic slowdown began. Employment growth had “ebbed to a trickle” and even fallen in some parts of the country while the rise in unemployment was “gaining worrying momentum”, he said.
Fall in house prices forces the elderly to look for a wageFalling house prices are adding to the gloom in the jobs market, not least because older people who had relied on the increase in the value of their home to supplement their pension might be forced to go out to compete for work .
According to Capital Economics, there are several ways a weakened housing market can affect jobs prospects, in addition to the impact of redundancies announced by housebuilders such as Barratt, Taylor Wimpey, Persimmon. Falling house sales also mean fewer purchases of white goods, furniture, carpet, curtains and other fixtures and fittings.
It is becoming “harder for unemployed workers to move to where jobs are available”, said Vicky Redwood, an economist at Capital Economics. She added: “Falling house prices are also likely to encourage more older people to enter the workforce, given that many have been relying on the increase in their housing wealth as a substitute for a pension. This will mean that the workforce is still rising at a time when employment is falling.”
Falling “housing equity” would also “make it harder for those who cannot find jobs to raise enough finance to start working for themselves instead”, she said.Total employment during the three months to the end of June rose by 20,000 to 29.56m but would have fallen but for an “increase of 25,000 in employment for those above the state pension age,” officials said.
The number of pensioners in work since 1997 has risen by more than two-thirds to 1.33m while the employment rate of pensioners has risen from 7.9 per cent to 11.7 per cent.
Increasing longevity, better health and the greater willingness of employers to hire older people, considered by many employers to be more reliable and harder working than some younger workers, explains some of the reasons for the rise.
The number of older people seeking work is expected to rise as final salary pensions are closed and pensioners face an increasing need to supplement their income.
The weakness of the labour market is further illustrated by a 47,400 drop in the number of vacancies to 634,900. Redundancies also increased during the second quarter by 13 per cent to 126,000. This figure is likely to rise further with building companies and financial institutions, announcing further jobs cuts, totalling more than 10,000, since the end of June.
More worryingly, a breakdown of job vacancies reveals how the impact of the credit crunch and rising energy and food costs has spilled over into other areas of the labour market as consumers have curbed their spending.
Vacancies in the shops, hotels and restaurants sector, including wholesalers, fell by almost 18 per cent during the three months to end of July. Construction vacancies were down by 12.6 per cent and finance and business services by 9.9 per cent over the same period.
Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, said: “Labour market conditions are deteriorating sharply ... it is clear that employers’ demand for labour is weakening in the face of the economic slowdown and the likelihood is that unemployment will rise further in the months ahead.”
The bleaker outlook for jobs, however, may apply a brake to pay demands.
Peter Newland, economist at Lehman Brothers, said: “The loosening of labour market conditions suggests that any significant upward pressure on average earnings is unlikely even as inflation erodes real wage growth.”
Copyright The Financial Times Limited 2008
The financial crisis
Wall Street's bad dream
Wall Street's bad dream
Sep 18th 2008 NEW YORKFrom The Economist print edition
In a special nine-page report, we look at how the global financial system has fallen into the grip of panic
Illustration by S. Kambayashi“THINGS are frankly getting out of hand and ridiculous rumours are being repeated, some of which if I wrote down today and re-read tomorrow, I’d probably think I was dreaming.” So said an exasperated Colm Kelleher, Morgan Stanley’s finance chief, during a hastily arranged conference call on September 16th.
The carnage of the past fortnight may have an unreal air to it, but the damage is all too tangible—whether the seizure of Fannie Mae and Freddie Mac by their regulator, the record-breaking bankruptcy of Lehman Brothers (and the sale of its capital-markets arm to Barclays), Merrill Lynch’s shotgun marriage to Bank of America or, most shocking of all, the government takeover of a desperately illiquid American International Group (AIG).
The rescue of the giant insurer was justified on the grounds that letting it fail would have been catastrophic for financial markets. As it happened, even AIG’s rescue did not stop the bloodletting. On September 17th shares in Morgan Stanley and the other remaining big investment bank, Goldman Sachs, took a hammering. Even though both had posted better-than-expected results a day earlier, confidence ebbed in their stand-alone model, with its reliance on flighty wholesale funding. An index that reflects the risk of failure among large Wall Street dealers has climbed far above its previous high, during Bear Stearns’s collapse in March (see chart).
It is a measure of the scale of the crisis that, by the evening of September 17th, all eyes were on Morgan Stanley, and no longer on AIG, which only 24 hours before had thrust Lehman out of the limelight. After its share price slumped by 24% that day, and fearing a total evaporation of confidence, Morgan attempted to sell itself. Its boss, John Mack, reportedly held talks with several possible partners, including Wachovia, a commercial bank, and Citic of China. As contagion spread far and wide, on September 18th central banks launched a co-ordinated attempt to pump $180 billion of short-term liquidity into the markets. HBOS, Britain’s biggest mortgage lender, also sold itself to Lloyds TSB, one of the grandfathers of British banking, for £12.2 billion ($21.9 billion) after its share price plunged. The government was so anxious to broker a deal that it was expected to waive a competition inquiry.
Financial panics have been around as long as there have been organised economies. There are common themes. The cause of today’s crunch—the buying of property at inflated prices in the hope that some greater fool will take it off your hands—has featured many times in the past. And the withholding of funds by institutional investors is merely the modern version of an old-fashioned bank run.
The same, and yet differentBut each has its own characteristics, which makes it difficult for students of past crises to apply lessons. Ben Bernanke, the chairman of the Federal Reserve, may be a scholar of the Depression, but the vastness and complexity of the financial system, and the speed with which panic is spreading, create a daunting task.
Though they are putting on a brave face, officials could be forgiven for feeling at a loss as one great name buckles after another and investors flee any financial asset with the merest whiff of risk. Even the politicians have been stunned into inactivity. Congress probably will not pass new financial legislation this year, admitted Harry Reid, the Senate majority leader, because “no one knows what to do.”
At times, the responses appear alarmingly piecemeal. Amid a fresh clamour against short-sellers—Morgan Stanley’s Mr Mack accused them of trying to wrestle his stock to the ground—the Securities and Exchange Commission, America’s main markets regulator, brought back curbs on “naked”, or potentially abusive, shorts. It also rushed out a proposal forcing large investors, including hedge funds, to disclose their short positions. Calstrs, America’s second-largest pension fund, said it would stop lending shares to “piranhas”.
As in August 2007, when the crisis began in earnest, money markets were this week seizing up. The price at which banks lend each other short-term funds surged, leaving the spread over government bonds at a 21-year high. A scramble for safety pushed the yield on three-month Treasury bills to its lowest since daily records began in 1954—the year President Eisenhower introduced the world to domino theory.
Aptly enough, the crisis is spreading from one region to the next. Asian and European stockmarkets suffered steep falls. Japan was fretting that Lehman’s potential default on almost $2 billion of yen-denominated bonds would send a chill through the “samurai” market. Russia suspended share-trading and propped up its three largest banks with a handy $44 billion, as emerging markets lost their allure.
Another weak spot is the $62 trillion market for credit-default swaps (CDSs), which has given regulators nightmares since the loss of Bear Stearns. It did not fall apart after the demise of Lehman, another big dealer. But it remains fragile; or, as one banker puts it, in a state of “orderly chaos”.
CDS trading volumes reached unprecedented levels this week, and spreads widened dramatically, as hedge funds and dealers tried to unwind their positions. But as margin requirements rise, few participants are taking on much risk, according to Tim Backshall of Credit Derivatives Research. The turmoil will embolden those calling for the opaque, over-the-counter market to move onto exchanges. Nerves on Wall Street would be jangling less if a central clearinghouse, planned for later this year, was already up and running.
The CDS market may have figured in the government’s calculations of whether to save AIG, given that its collapse would have forced banks to write down the value of their contracts with the insurer, further straining their capital ratios. But officials also had an eye on Main Street. Some of AIG’s largest insurance businesses serve consumers; its failure would have shaken their confidence. As it was, thousands lined up outside its offices in Asia, with some looking to withdraw their business.
Consumers are already twitchy in America, where bank failures are rising and the nation’s deposit-insurance fund faces a potential shortfall. The failure of Washington Mutual (WaMu), a troubled thrift, could at the worst wipe out as much as half of what remains in the fund, reckons Dick Bove of Ladenburg Thalmann, a boutique investment bank. WaMu was said this week to be seeking a buyer.
No less worrying are the cracks appearing in money-market funds. Seen by small investors as utterly safe, these have seen their assets swell to more than $3.5 trillion in the crisis. But this week Reserve Primary became the first money fund in 14 years to “break the buck”—that is, to expose investors to losses through a reduction of its net asset value to under $1—after writing off almost $800m in debt issued by Lehman.
Any lasting loss of confidence in money funds would be hugely damaging. They are one of the last bastions for the ultra-cautious. And they are big buyers of short-term corporate debt. If they were to pull back, banks and large corporations would find funds even harder to come by.
Coming to a bank near youAt some point the Panic of 2008 will subside, but there are several reasons to expect further strain. Banks and households have started to cut their borrowing, which reached epic proportions in the housing boom, but they still have a long way to go. By the time they are finished, the pool of credit available across the markets will be smaller by several trillion dollars, reckons Daniel Arbess of Perella Weinberg Partners, an investment and advisory firm. A recent IMF study argued that the pain of deleveraging will be felt more keenly in Anglo-Saxon markets, because highly leveraged investment banks exacerbate credit bubbles, and are then forced to cut their borrowing more sharply in a downturn.
Furthermore, it is far from clear, even now, that banks are marking their illiquid assets conservatively enough. Disclosures accompanying third-quarter results, for instance, showed a lot of disparity in the valuation of Alt-A mortgages (though definitions of what constitutes Alt-A can vary). “Level 3” assets, those that are hardest to value, will remain under pressure until housing stabilises—and that may be some time yet. Jan Hatzius of Goldman Sachs expects house prices in America to fall by another 10%. Builders broke ground on fewer houses than forecast in August, suggesting the housing recession will continue to drag down growth.
The pain is only now beginning in other lending. “We may be moving from the mark-to-market phase to the more traditional phase of credit losses,” says a banker. This next stage will be less spectacular, thanks to accrual accounting, in which loan losses are realised gradually and offset by reserves. But the numbers could be just as big. Some analysts see a wave of corporate defaults coming. Moody’s, a rating agency, expects the junk-bond default rate, now 2.7%, will rise to 7.4% a year from now. Like many nightmares, this one feels as if it will never end.
In a special nine-page report, we look at how the global financial system has fallen into the grip of panic
Illustration by S. Kambayashi“THINGS are frankly getting out of hand and ridiculous rumours are being repeated, some of which if I wrote down today and re-read tomorrow, I’d probably think I was dreaming.” So said an exasperated Colm Kelleher, Morgan Stanley’s finance chief, during a hastily arranged conference call on September 16th.
The carnage of the past fortnight may have an unreal air to it, but the damage is all too tangible—whether the seizure of Fannie Mae and Freddie Mac by their regulator, the record-breaking bankruptcy of Lehman Brothers (and the sale of its capital-markets arm to Barclays), Merrill Lynch’s shotgun marriage to Bank of America or, most shocking of all, the government takeover of a desperately illiquid American International Group (AIG).
The rescue of the giant insurer was justified on the grounds that letting it fail would have been catastrophic for financial markets. As it happened, even AIG’s rescue did not stop the bloodletting. On September 17th shares in Morgan Stanley and the other remaining big investment bank, Goldman Sachs, took a hammering. Even though both had posted better-than-expected results a day earlier, confidence ebbed in their stand-alone model, with its reliance on flighty wholesale funding. An index that reflects the risk of failure among large Wall Street dealers has climbed far above its previous high, during Bear Stearns’s collapse in March (see chart).
It is a measure of the scale of the crisis that, by the evening of September 17th, all eyes were on Morgan Stanley, and no longer on AIG, which only 24 hours before had thrust Lehman out of the limelight. After its share price slumped by 24% that day, and fearing a total evaporation of confidence, Morgan attempted to sell itself. Its boss, John Mack, reportedly held talks with several possible partners, including Wachovia, a commercial bank, and Citic of China. As contagion spread far and wide, on September 18th central banks launched a co-ordinated attempt to pump $180 billion of short-term liquidity into the markets. HBOS, Britain’s biggest mortgage lender, also sold itself to Lloyds TSB, one of the grandfathers of British banking, for £12.2 billion ($21.9 billion) after its share price plunged. The government was so anxious to broker a deal that it was expected to waive a competition inquiry.
Financial panics have been around as long as there have been organised economies. There are common themes. The cause of today’s crunch—the buying of property at inflated prices in the hope that some greater fool will take it off your hands—has featured many times in the past. And the withholding of funds by institutional investors is merely the modern version of an old-fashioned bank run.
The same, and yet differentBut each has its own characteristics, which makes it difficult for students of past crises to apply lessons. Ben Bernanke, the chairman of the Federal Reserve, may be a scholar of the Depression, but the vastness and complexity of the financial system, and the speed with which panic is spreading, create a daunting task.
Though they are putting on a brave face, officials could be forgiven for feeling at a loss as one great name buckles after another and investors flee any financial asset with the merest whiff of risk. Even the politicians have been stunned into inactivity. Congress probably will not pass new financial legislation this year, admitted Harry Reid, the Senate majority leader, because “no one knows what to do.”
At times, the responses appear alarmingly piecemeal. Amid a fresh clamour against short-sellers—Morgan Stanley’s Mr Mack accused them of trying to wrestle his stock to the ground—the Securities and Exchange Commission, America’s main markets regulator, brought back curbs on “naked”, or potentially abusive, shorts. It also rushed out a proposal forcing large investors, including hedge funds, to disclose their short positions. Calstrs, America’s second-largest pension fund, said it would stop lending shares to “piranhas”.
As in August 2007, when the crisis began in earnest, money markets were this week seizing up. The price at which banks lend each other short-term funds surged, leaving the spread over government bonds at a 21-year high. A scramble for safety pushed the yield on three-month Treasury bills to its lowest since daily records began in 1954—the year President Eisenhower introduced the world to domino theory.
Aptly enough, the crisis is spreading from one region to the next. Asian and European stockmarkets suffered steep falls. Japan was fretting that Lehman’s potential default on almost $2 billion of yen-denominated bonds would send a chill through the “samurai” market. Russia suspended share-trading and propped up its three largest banks with a handy $44 billion, as emerging markets lost their allure.
Another weak spot is the $62 trillion market for credit-default swaps (CDSs), which has given regulators nightmares since the loss of Bear Stearns. It did not fall apart after the demise of Lehman, another big dealer. But it remains fragile; or, as one banker puts it, in a state of “orderly chaos”.
CDS trading volumes reached unprecedented levels this week, and spreads widened dramatically, as hedge funds and dealers tried to unwind their positions. But as margin requirements rise, few participants are taking on much risk, according to Tim Backshall of Credit Derivatives Research. The turmoil will embolden those calling for the opaque, over-the-counter market to move onto exchanges. Nerves on Wall Street would be jangling less if a central clearinghouse, planned for later this year, was already up and running.
The CDS market may have figured in the government’s calculations of whether to save AIG, given that its collapse would have forced banks to write down the value of their contracts with the insurer, further straining their capital ratios. But officials also had an eye on Main Street. Some of AIG’s largest insurance businesses serve consumers; its failure would have shaken their confidence. As it was, thousands lined up outside its offices in Asia, with some looking to withdraw their business.
Consumers are already twitchy in America, where bank failures are rising and the nation’s deposit-insurance fund faces a potential shortfall. The failure of Washington Mutual (WaMu), a troubled thrift, could at the worst wipe out as much as half of what remains in the fund, reckons Dick Bove of Ladenburg Thalmann, a boutique investment bank. WaMu was said this week to be seeking a buyer.
No less worrying are the cracks appearing in money-market funds. Seen by small investors as utterly safe, these have seen their assets swell to more than $3.5 trillion in the crisis. But this week Reserve Primary became the first money fund in 14 years to “break the buck”—that is, to expose investors to losses through a reduction of its net asset value to under $1—after writing off almost $800m in debt issued by Lehman.
Any lasting loss of confidence in money funds would be hugely damaging. They are one of the last bastions for the ultra-cautious. And they are big buyers of short-term corporate debt. If they were to pull back, banks and large corporations would find funds even harder to come by.
Coming to a bank near youAt some point the Panic of 2008 will subside, but there are several reasons to expect further strain. Banks and households have started to cut their borrowing, which reached epic proportions in the housing boom, but they still have a long way to go. By the time they are finished, the pool of credit available across the markets will be smaller by several trillion dollars, reckons Daniel Arbess of Perella Weinberg Partners, an investment and advisory firm. A recent IMF study argued that the pain of deleveraging will be felt more keenly in Anglo-Saxon markets, because highly leveraged investment banks exacerbate credit bubbles, and are then forced to cut their borrowing more sharply in a downturn.
Furthermore, it is far from clear, even now, that banks are marking their illiquid assets conservatively enough. Disclosures accompanying third-quarter results, for instance, showed a lot of disparity in the valuation of Alt-A mortgages (though definitions of what constitutes Alt-A can vary). “Level 3” assets, those that are hardest to value, will remain under pressure until housing stabilises—and that may be some time yet. Jan Hatzius of Goldman Sachs expects house prices in America to fall by another 10%. Builders broke ground on fewer houses than forecast in August, suggesting the housing recession will continue to drag down growth.
The pain is only now beginning in other lending. “We may be moving from the mark-to-market phase to the more traditional phase of credit losses,” says a banker. This next stage will be less spectacular, thanks to accrual accounting, in which loan losses are realised gradually and offset by reserves. But the numbers could be just as big. Some analysts see a wave of corporate defaults coming. Moody’s, a rating agency, expects the junk-bond default rate, now 2.7%, will rise to 7.4% a year from now. Like many nightmares, this one feels as if it will never end.
US Federal Reserve announces $85 billion bailout of insurance giant AIG
By Bill Van Auken17 September
Following emergency consultations between the Federal Reserve, the US Treasury and the Democratic leaders of both houses of Congress, the Federal Reserve on Tuesday night announced a bailout of the Wall Street insurance giant American International Group (AIG).
According to reports posted by the New York Times and the Wall Street Journal, under the emergency plan the Fed will provide the failing firm with an $85 billion loan in exchange for 80 percent of its assets.
The reported bailout is a reversal of the policy adopted by the federal government just last weekend, when it failed to intervene to stop the collapse of Lehman Brothers, the country’s fourth largest investment bank. According to the Journal, government officials believed “it would be ‘catastrophic’ to allow AIG to fail.”
Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, the newspaper said, “concluded that federal assistance would be necessary to avert an AIG bankruptcy, which they feared would have disastrous repercussions throughout the financial markets.”
The bailout is one more demonstration of the systemic crisis confronting American and world capitalism. It is unprecedented and, in some respects, goes even further than the government takeover of Fannie Mae and Freddie Mac barely a week before. Unlike the two mortgage finance giants, AIG is not a government-sponsored institution and is not even directly regulated by the federal government.
Pressure for a rescue of AIG grew after all three major rating agencies downgraded its credit Monday night, raising the prospect that lenders would recall their loans.
It was feared that the failure of AIG, with $1 trillion in paper assets, would have a domino effect, threatening banking and corporate failures throughout the world economy. AIG is one of the largest players in the global, unregulated market (estimated at $62 trillion) in credit default swaps, i.e., private contracts under which companies like AIG guarantee the debt, including mortgage-backed bonds, held by other companies.
While ostensibly an insurance company, AIG engaged in the same financial parasitism as the rest of Wall Street, investing heavily in mortgage-backed securities and writing derivatives on collateralized debt obligations (CDOs) tainted by subprime exposure.
Now, once again, millions of ordinary working people will be forced to pay the price for this reckless speculation carried out in pursuit of super-profits.
AIG was forced in recent weeks to take massive write-downs on its assets. In August, the company announced second-quarter results that included a staggering $25 billion in losses on its derivatives.
The government intervention at AIG follows the collapse over the weekend of two of Wall Street’s largest investment banks. The bankruptcy of Lehman Brothers and the takeover of Merrill Lynch by Bank of America sent shockwaves through financial markets around the globe and sparked fears of a chain reaction of banking failures.
A worldwide sell-off of stocks was capped by Monday’s 504-point drop on Wall Street, the steepest one-day loss since markets reopened following the September 11, 2001 attacks.
In response to the deepening financial crisis, the Federal Reserve Board and its counterparts in Europe and Asia poured hundreds of billions of dollars in fresh credit into the economy. Between them, the Fed, the European Central Bank, the Bank of England and the Bank of Japan pumped $210 billion into the money markets on Tuesday in an attempt to prevent a seizing up of the global credit system. Central banks in India and Australia also carried out major injections into their banking systems.
The immediate trigger for the massive cash infusion was the doubling of the interbank lending rate in the wake of the Lehman Brothers collapse. The sharp rise in short-term lending rates, which hit a seven-year high of 6.79 percent, was a measure of deep concern that AIG would follow Lehman into bankruptcy, saddling world financial institutions with hundreds of billions of dollars in losses in credit derivatives.
The interbank lending rate rise fed into the global stock market decline, as investors dumped financial stocks. On Tuesday, London’s FTSE 100 fell below 5,000 for the first time in seven years, with HBOS, Britain’s largest mortgage lender, seeing its shares plummet by 40 percent.
The Tokyo stock market fell by more than 4 percent, while in Paris and Frankfurt markets were down more than 2 percent. In Russia, the country’s main stock market halted trading after suffering losses of 11.47 percent.
The Federal Reserve Board shocked Wall Street Tuesday afternoon by leaving US interest rates unchanged. Speculation had run rife in the financial markets that the Fed would cut its federal funds rate by as much as 75 basis points in light of the deepening credit crisis.
The statement the US central bank issued in announcing its decision to stand pat painted a grim picture of the US economy. “Strains in financial markets have increased significantly and labor markets have weakened further,” it stated. “Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.”
It likewise cited “increases in the prices of energy and some other commodities” that left the outlook for inflation “highly uncertain.” It concluded that the “downside risks to growth and the upside risks to inflation are both of significant concern.”
The decision not to heed the demands of the stock market was attributed by some analysts to the Fed’s conviction that, given the depth of the banking crisis, lowering interest rates would have little or no effect in terms of generating credit for the economy.
“You could cut the Fed funds rate from 2 percent to 1.5 percent. It won’t cause any more lending. The banking system has no capital base to lend,” George Feiger, chief executive at Contango Capital Advisors in Berkley, California, told Reuters news agency.
The announcement of the Fed decision provoked sustained booing from the floor of the New York Stock Exchange, and stocks resumed their downward slide before rebounding later in the afternoon. The Dow Jones Industrial Average closed up 1.3 percent, or 141.5 points, at the end of the day.
Most analysts saw the rebound from Monday’s dramatic market decline as a response to predictions that the government would mount a rescue of AIG.
Furious trading in the company’s shares churned the market. At one point in the day, AIG stocks had lost 74 percent—falling to $1.25, compared to a year high of $70. By the end of the day, they were down 21.2 percent.
In the face of these developments, there was recognition within ruling circles and the major media internationally that world capitalism is facing a crisis of historic dimensions. Comparisons of the present crisis to the onset of the Great Depression of the 1930s were widespread.
The Financial Times of London, the sober voice of British finance capital, commented in its editorial Tuesday, “The world has not ended. The international economy has not yet collapsed. But one thing is now quite clear: the banking system as we know it has failed.”
Denunciations of the American financial establishment and the “free market” ideology that Washington has sought to ram down the rest of the world’s throat over the course of decades were also prevalent.
In Germany, the Frankfurter Rundschau stated: “The Americans are exposing the world to a highly dangerous experiment. For ideological reasons they don’t want to save another bank with taxpayers’ money and nationalize it. They are accepting the risk that this policy could end up costing a lot more money and lead to upheavals that no one had even dared imagine.”
The German newspaper added, “If things take a sharp turn for the worse, European taxpayers ... will have to pay billions of euros to save local banks, returns from life insurance and other retirement provisions will decline sharply, and the crisis will bestow upon Europe millions of unemployed. Thank you America!”
For its part, the Wall Street Journal, the unwavering champion of “free market” capitalism, published an editorial Tuesday entitled “Surviving the Panic.” It argued for a massive government intervention to buy up all of the worthless paper on the books of Wall Street’s finance houses and thereby secure their profits together with the multi-million-dollar incomes of their top executives.
The newspaper warned ominously, “More major bank failures are a certainty, including some very large ones.”
Its solution? The setting up of a new Resolution Trust Corporation, of the type created during the savings and loan crisis of the 1980s, which would “provide a buyer for securities for which there is no market.” In other words, the US Treasury’s vaults should be opened up to bail out major Wall Street investors and CEOs who made billions off of a speculative housing bubble that has now burst, precipitating the greatest financial crisis since the 1930s and threatening millions of working people with the loss of their jobs and homes.
Wall Street’s newspaper of record offered no indication of how it would pay for such a bailout for the rich. Undoubtedly, the answer will come after the November election, in the form of a ferocious assault on working class living standards and the dismantling of what remains of America’s tattered social safety net, including Social Security, Medicare and Medicaid.
According to reports posted by the New York Times and the Wall Street Journal, under the emergency plan the Fed will provide the failing firm with an $85 billion loan in exchange for 80 percent of its assets.
The reported bailout is a reversal of the policy adopted by the federal government just last weekend, when it failed to intervene to stop the collapse of Lehman Brothers, the country’s fourth largest investment bank. According to the Journal, government officials believed “it would be ‘catastrophic’ to allow AIG to fail.”
Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, the newspaper said, “concluded that federal assistance would be necessary to avert an AIG bankruptcy, which they feared would have disastrous repercussions throughout the financial markets.”
The bailout is one more demonstration of the systemic crisis confronting American and world capitalism. It is unprecedented and, in some respects, goes even further than the government takeover of Fannie Mae and Freddie Mac barely a week before. Unlike the two mortgage finance giants, AIG is not a government-sponsored institution and is not even directly regulated by the federal government.
Pressure for a rescue of AIG grew after all three major rating agencies downgraded its credit Monday night, raising the prospect that lenders would recall their loans.
It was feared that the failure of AIG, with $1 trillion in paper assets, would have a domino effect, threatening banking and corporate failures throughout the world economy. AIG is one of the largest players in the global, unregulated market (estimated at $62 trillion) in credit default swaps, i.e., private contracts under which companies like AIG guarantee the debt, including mortgage-backed bonds, held by other companies.
While ostensibly an insurance company, AIG engaged in the same financial parasitism as the rest of Wall Street, investing heavily in mortgage-backed securities and writing derivatives on collateralized debt obligations (CDOs) tainted by subprime exposure.
Now, once again, millions of ordinary working people will be forced to pay the price for this reckless speculation carried out in pursuit of super-profits.
AIG was forced in recent weeks to take massive write-downs on its assets. In August, the company announced second-quarter results that included a staggering $25 billion in losses on its derivatives.
The government intervention at AIG follows the collapse over the weekend of two of Wall Street’s largest investment banks. The bankruptcy of Lehman Brothers and the takeover of Merrill Lynch by Bank of America sent shockwaves through financial markets around the globe and sparked fears of a chain reaction of banking failures.
A worldwide sell-off of stocks was capped by Monday’s 504-point drop on Wall Street, the steepest one-day loss since markets reopened following the September 11, 2001 attacks.
In response to the deepening financial crisis, the Federal Reserve Board and its counterparts in Europe and Asia poured hundreds of billions of dollars in fresh credit into the economy. Between them, the Fed, the European Central Bank, the Bank of England and the Bank of Japan pumped $210 billion into the money markets on Tuesday in an attempt to prevent a seizing up of the global credit system. Central banks in India and Australia also carried out major injections into their banking systems.
The immediate trigger for the massive cash infusion was the doubling of the interbank lending rate in the wake of the Lehman Brothers collapse. The sharp rise in short-term lending rates, which hit a seven-year high of 6.79 percent, was a measure of deep concern that AIG would follow Lehman into bankruptcy, saddling world financial institutions with hundreds of billions of dollars in losses in credit derivatives.
The interbank lending rate rise fed into the global stock market decline, as investors dumped financial stocks. On Tuesday, London’s FTSE 100 fell below 5,000 for the first time in seven years, with HBOS, Britain’s largest mortgage lender, seeing its shares plummet by 40 percent.
The Tokyo stock market fell by more than 4 percent, while in Paris and Frankfurt markets were down more than 2 percent. In Russia, the country’s main stock market halted trading after suffering losses of 11.47 percent.
The Federal Reserve Board shocked Wall Street Tuesday afternoon by leaving US interest rates unchanged. Speculation had run rife in the financial markets that the Fed would cut its federal funds rate by as much as 75 basis points in light of the deepening credit crisis.
The statement the US central bank issued in announcing its decision to stand pat painted a grim picture of the US economy. “Strains in financial markets have increased significantly and labor markets have weakened further,” it stated. “Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters.”
It likewise cited “increases in the prices of energy and some other commodities” that left the outlook for inflation “highly uncertain.” It concluded that the “downside risks to growth and the upside risks to inflation are both of significant concern.”
The decision not to heed the demands of the stock market was attributed by some analysts to the Fed’s conviction that, given the depth of the banking crisis, lowering interest rates would have little or no effect in terms of generating credit for the economy.
“You could cut the Fed funds rate from 2 percent to 1.5 percent. It won’t cause any more lending. The banking system has no capital base to lend,” George Feiger, chief executive at Contango Capital Advisors in Berkley, California, told Reuters news agency.
The announcement of the Fed decision provoked sustained booing from the floor of the New York Stock Exchange, and stocks resumed their downward slide before rebounding later in the afternoon. The Dow Jones Industrial Average closed up 1.3 percent, or 141.5 points, at the end of the day.
Most analysts saw the rebound from Monday’s dramatic market decline as a response to predictions that the government would mount a rescue of AIG.
Furious trading in the company’s shares churned the market. At one point in the day, AIG stocks had lost 74 percent—falling to $1.25, compared to a year high of $70. By the end of the day, they were down 21.2 percent.
In the face of these developments, there was recognition within ruling circles and the major media internationally that world capitalism is facing a crisis of historic dimensions. Comparisons of the present crisis to the onset of the Great Depression of the 1930s were widespread.
The Financial Times of London, the sober voice of British finance capital, commented in its editorial Tuesday, “The world has not ended. The international economy has not yet collapsed. But one thing is now quite clear: the banking system as we know it has failed.”
Denunciations of the American financial establishment and the “free market” ideology that Washington has sought to ram down the rest of the world’s throat over the course of decades were also prevalent.
In Germany, the Frankfurter Rundschau stated: “The Americans are exposing the world to a highly dangerous experiment. For ideological reasons they don’t want to save another bank with taxpayers’ money and nationalize it. They are accepting the risk that this policy could end up costing a lot more money and lead to upheavals that no one had even dared imagine.”
The German newspaper added, “If things take a sharp turn for the worse, European taxpayers ... will have to pay billions of euros to save local banks, returns from life insurance and other retirement provisions will decline sharply, and the crisis will bestow upon Europe millions of unemployed. Thank you America!”
For its part, the Wall Street Journal, the unwavering champion of “free market” capitalism, published an editorial Tuesday entitled “Surviving the Panic.” It argued for a massive government intervention to buy up all of the worthless paper on the books of Wall Street’s finance houses and thereby secure their profits together with the multi-million-dollar incomes of their top executives.
The newspaper warned ominously, “More major bank failures are a certainty, including some very large ones.”
Its solution? The setting up of a new Resolution Trust Corporation, of the type created during the savings and loan crisis of the 1980s, which would “provide a buyer for securities for which there is no market.” In other words, the US Treasury’s vaults should be opened up to bail out major Wall Street investors and CEOs who made billions off of a speculative housing bubble that has now burst, precipitating the greatest financial crisis since the 1930s and threatening millions of working people with the loss of their jobs and homes.
Wall Street’s newspaper of record offered no indication of how it would pay for such a bailout for the rich. Undoubtedly, the answer will come after the November election, in the form of a ferocious assault on working class living standards and the dismantling of what remains of America’s tattered social safety net, including Social Security, Medicare and Medicaid.
No return to the 1930s! For the public ownership of the banks!
Statement by SEP presidential candidate Jerome White17 September 2008
The bankruptcy of Wall Street firm Lehman Brothers and the forced takeover of Merrill Lynch are the latest demonstrations of the collapse of American capitalism. All the lies and propaganda about the supposed infallibility of the “free market” are being discredited. The people of the US and the world are confronting a financial catastrophe on a scale not seen since the Great Depression.
What is revealed in this crisis is not merely the recklessness, incompetence and greed of America’s financial elite, but the failure of capitalism—an economic and political system that subordinates the needs of society to profit and personal enrichment.
Who is going to pay for this crisis? Here the US corporate and political establishment agrees: working people must accept a drastic reduction in their living standards to bail out the Wall Street investors and banking executives who are responsible for this debacle.
The American ruling class has for decades championed “private enterprise” and the wonders of the market as the pinnacles of human civilization, capable of solving all problems, while socialism has been denounced as evil and oppressive. Over the past 30 years, the operations of big business were deregulated—under both Republican and Democratic administrations—removing all legal restraints on corporate profit-making and the personal accumulation of wealth.
The ruling class responded to the crisis of American capitalism by carrying out a deliberate policy of deindustrialization, which wiped out millions of jobs and decimated cities like Detroit. Vast industrial resources were destroyed, and the savings of workers were plundered in order to free up capital for the most parasitic forms of financial speculation.
Increasingly, wealth was separated from the creation of real value. Corporate corruption and insider dealing became the norm, and vast fortunes were amassed in the hands of a small layer of the population.
The Financial Times recently reported that compensation for major executives of the seven largest US banks totaled $95 billion over the past three years, even as the banks recorded $500 billion in losses. Of course, neither Barack Obama or John McCain suggest that this money should be paid back.
Now that this orgy of financial speculation has produced a disaster, the corporations and banks are determined to roll back the conditions of the working class to the 1930s to pay for the crisis.
Obama and McCain are absolutely committed to the defense of capitalism and America’s financial elite. The next president—whether a Democrat or Republican—will move to gut entitlement programs such as Medicare and Social Security and support the corporate attack on jobs and living standards.
McCain’s sudden discovery of “greed” on Wall Street is laughable, coming as it does from a long-time defender of the US corporate establishment. Obama’s complaints about a lack of oversight ignore the role of the Clinton administration, whose policies helped fuel the speculative explosion and sub-prime mortgage crisis. Obama is a no less committed defender of the financial elite, receiving more campaign cash from Wall Street firms such as Lehman Brothers and Goldman Sachs than John McCain.
The Democratic candidate proposes no criminal investigations and refuses to hold anyone responsible, making his proposals for “regulation” thoroughly meaningless. In comments Tuesday, moreover, Obama declared his full support for the capitalist system, saying the “free market has been our engine of our progress,” which “rewarded the innovators and risk-takers.”
It is precisely these “risk-takers” and “innovators” who concocted the debt instruments and derivatives used to funnel billions into the hand of the wealthy. Meanwhile, the working class—which had been declared virtually obsolete in the “new economy”—is, as Marxists have always insisted, the only producer of real value.
It is indicative of the decrepit state of American democracy that the bailout of mortgage giants Fannie Mae and Freddie Mac, followed by Wall Street insurer AIG—which will essentially double the national debt while providing nothing for distressed homeowners—was taken without the slightest political debate or discussion. This underscores once again that behind the trappings of democracy, the American political system is a plutocracy, i.e., a government of, by and for the rich.
The alternative to capitalism and financial catastrophe is socialism—the reorganization of economic life to meet social needs and not private profit.
I call for:
* A public auditing of corporate finances and the personal accounts of the top management of the financial institutions over the past decade.
* The recovery of the vast sums of money that have been pocketed by the wealthy elite. Those responsible for the economic devastation must be brought to justice.
* A massive public fund to make whole all of the victims of predatory lending and the collapse of home values. All home foreclosures must be immediately halted, and funds made available to provide quality housing for all.
* Trillions of dollars for rebuilding basic industry, cities and the country’s infrastructure. This should be paid for through the establishment of a genuinely progressive tax system that drastically increases taxes on the wealthy, and through the dismantling of the gigantic US war machine.
* Transforming the giant banks and financial institutions into publicly owned and democratically controlled utilities, with measures taken to protect small shareholders. The financial resources of society—which are the product of the labor of millions of working people—must not be left in the hands of a financial aristocracy.
* Reorganizing the economy on the basis of a rational, democratic and egalitarian plan guided by the socialist principle of production for human need, not the enrichment of a wealthy elite.
Insofar as the Democrats even mention the economic crisis, it is to promote economic nationalism and the pitting of American workers against workers in other countries. In fact, the global consequences of the breakdown of American capitalism have demonstrated: (1) the integration of the world economy, and (2) the pressing necessity for the international unity of the working class in the struggle to defend jobs and living standards.
The SEP encourages all forms of mass opposition to attacks on social services, the gutting of jobs and the wave of home foreclosures. This crisis has proven that the capitalist class is unfit to direct economic and political life and that working people must establish genuine democratic control over society.
This requires a political break with the two parties of big business and the building of a mass political party of the working class fighting for a socialist alternative. I encourage workers and youth to support our election campaign, contribute to our fund and, above all, make the decision to join and build the Socialist Equality Party.
The bankruptcy of Wall Street firm Lehman Brothers and the forced takeover of Merrill Lynch are the latest demonstrations of the collapse of American capitalism. All the lies and propaganda about the supposed infallibility of the “free market” are being discredited. The people of the US and the world are confronting a financial catastrophe on a scale not seen since the Great Depression.
What is revealed in this crisis is not merely the recklessness, incompetence and greed of America’s financial elite, but the failure of capitalism—an economic and political system that subordinates the needs of society to profit and personal enrichment.
Who is going to pay for this crisis? Here the US corporate and political establishment agrees: working people must accept a drastic reduction in their living standards to bail out the Wall Street investors and banking executives who are responsible for this debacle.
The American ruling class has for decades championed “private enterprise” and the wonders of the market as the pinnacles of human civilization, capable of solving all problems, while socialism has been denounced as evil and oppressive. Over the past 30 years, the operations of big business were deregulated—under both Republican and Democratic administrations—removing all legal restraints on corporate profit-making and the personal accumulation of wealth.
The ruling class responded to the crisis of American capitalism by carrying out a deliberate policy of deindustrialization, which wiped out millions of jobs and decimated cities like Detroit. Vast industrial resources were destroyed, and the savings of workers were plundered in order to free up capital for the most parasitic forms of financial speculation.
Increasingly, wealth was separated from the creation of real value. Corporate corruption and insider dealing became the norm, and vast fortunes were amassed in the hands of a small layer of the population.
The Financial Times recently reported that compensation for major executives of the seven largest US banks totaled $95 billion over the past three years, even as the banks recorded $500 billion in losses. Of course, neither Barack Obama or John McCain suggest that this money should be paid back.
Now that this orgy of financial speculation has produced a disaster, the corporations and banks are determined to roll back the conditions of the working class to the 1930s to pay for the crisis.
Obama and McCain are absolutely committed to the defense of capitalism and America’s financial elite. The next president—whether a Democrat or Republican—will move to gut entitlement programs such as Medicare and Social Security and support the corporate attack on jobs and living standards.
McCain’s sudden discovery of “greed” on Wall Street is laughable, coming as it does from a long-time defender of the US corporate establishment. Obama’s complaints about a lack of oversight ignore the role of the Clinton administration, whose policies helped fuel the speculative explosion and sub-prime mortgage crisis. Obama is a no less committed defender of the financial elite, receiving more campaign cash from Wall Street firms such as Lehman Brothers and Goldman Sachs than John McCain.
The Democratic candidate proposes no criminal investigations and refuses to hold anyone responsible, making his proposals for “regulation” thoroughly meaningless. In comments Tuesday, moreover, Obama declared his full support for the capitalist system, saying the “free market has been our engine of our progress,” which “rewarded the innovators and risk-takers.”
It is precisely these “risk-takers” and “innovators” who concocted the debt instruments and derivatives used to funnel billions into the hand of the wealthy. Meanwhile, the working class—which had been declared virtually obsolete in the “new economy”—is, as Marxists have always insisted, the only producer of real value.
It is indicative of the decrepit state of American democracy that the bailout of mortgage giants Fannie Mae and Freddie Mac, followed by Wall Street insurer AIG—which will essentially double the national debt while providing nothing for distressed homeowners—was taken without the slightest political debate or discussion. This underscores once again that behind the trappings of democracy, the American political system is a plutocracy, i.e., a government of, by and for the rich.
The alternative to capitalism and financial catastrophe is socialism—the reorganization of economic life to meet social needs and not private profit.
I call for:
* A public auditing of corporate finances and the personal accounts of the top management of the financial institutions over the past decade.
* The recovery of the vast sums of money that have been pocketed by the wealthy elite. Those responsible for the economic devastation must be brought to justice.
* A massive public fund to make whole all of the victims of predatory lending and the collapse of home values. All home foreclosures must be immediately halted, and funds made available to provide quality housing for all.
* Trillions of dollars for rebuilding basic industry, cities and the country’s infrastructure. This should be paid for through the establishment of a genuinely progressive tax system that drastically increases taxes on the wealthy, and through the dismantling of the gigantic US war machine.
* Transforming the giant banks and financial institutions into publicly owned and democratically controlled utilities, with measures taken to protect small shareholders. The financial resources of society—which are the product of the labor of millions of working people—must not be left in the hands of a financial aristocracy.
* Reorganizing the economy on the basis of a rational, democratic and egalitarian plan guided by the socialist principle of production for human need, not the enrichment of a wealthy elite.
Insofar as the Democrats even mention the economic crisis, it is to promote economic nationalism and the pitting of American workers against workers in other countries. In fact, the global consequences of the breakdown of American capitalism have demonstrated: (1) the integration of the world economy, and (2) the pressing necessity for the international unity of the working class in the struggle to defend jobs and living standards.
The SEP encourages all forms of mass opposition to attacks on social services, the gutting of jobs and the wave of home foreclosures. This crisis has proven that the capitalist class is unfit to direct economic and political life and that working people must establish genuine democratic control over society.
This requires a political break with the two parties of big business and the building of a mass political party of the working class fighting for a socialist alternative. I encourage workers and youth to support our election campaign, contribute to our fund and, above all, make the decision to join and build the Socialist Equality Party.
GM posts $15.5B 2Q loss, 3rd-worst in its history
By TOM KRISHER and DEE-ANN DURBIN, AP Auto WritersFri Aug 1, 12:16 PM ET
General Motors Corp. posted a $15.5 billion second-quarter loss Friday, the third-worst quarterly performance in the company's nearly 100-year history.
The loss came as North American sales plummeted and GM faced expenses due to labor unrest and a massive restructuring plan aimed at preserving cash to weather a prolonged U.S. economic downturn.
The loss of $27.33 per share was in stark contrast to the year-ago period when GM recorded a net profit of $891 million, or $1.56 per share.
Revenue for the April-June period was $38.2 billion, down $8.5 billion from a year earlier.
The company said its loss included $9.1 billion in one-time charges, including $3.3 billion for the buyouts of 19,000 U.S. hourly workers, most of whom left at the end of June, as well as $2.8 billion in liabilities related to Delphi Corp., its former parts division.
It also included $1.3 billion worth of write-offs due to a reduction in the value of GM's 49 percent interest in its former financial arm, GMAC Financial Services.
Additionally, GM took a $2 billion charge to its bottom line because of huge drops in the value of pickup trucks and sport utility vehicles coming back to the company after lease terms end. GMAC and GM have suffered big losses when they try to sell the now-unpopular vehicles at depressed prices.
GM also took a $197 million charge related to the settlement of a nearly three-month strike at supplier American Axle and Manufacturing Holdings Inc., which hurt production at more than 30 GM plants. GM agreed to help American Axle fund worker buyouts as part of the settlement.
Without the one-time charges, GM lost $6.3 billion, or $11.21 per share. Twelve analysts surveyed by Thomson Financial predicted a $2.62 per share loss on revenue of $44.57 billion.
GM shares fell 43 cents, or 3.9 percent, to $10.64 in midday trading after falling nearly 11 percent earlier in the day.
Ray Young, GM's chief financial officer, said the company burned through $3.6 billion in cash during the second quarter, which he attributed largely to reducing the company's inventory by nearly 90,000 vehicles to less than 800,000.
He said GM does not expect a similar reduction in future quarters, so the cash burn should be smaller for the rest of the year.
"In that respect, the negative cash flow in the second quarter is overstated," he said.
So far this year, GM has gone through about $1 billion in cash per month, including $3.4 billion in the first quarter.
Young said GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion, which he called a strong position. GM already has announced plans to generate another $15 billion in liquidity in the next 18 months.
"We're going to get the second quarter behind us and just move ahead," Young said.
GM's net losses since 2005 total $51.1 billion.
The $15.5 billion loss reported Friday is less than half of GM's record $39 billion loss in the third quarter of last year. That loss was due to a charge for accumulated deferred tax credits. The second-worst loss was $21 billion in the first quarter of 1992.
GM said its revenues outside North America rose by $1.7 billion to $20.8 billion in the quarter, but those gains were more than offset by losses in North America, where high gas prices and the weak economy have wreaked havoc on the auto industry. The company said 55 percent of its automotive revenue was from outside North America.
North American revenues fell by nearly $10 billion to $19.8 billion for the quarter as sales in the region fell 20 percent. Work stoppages at American Axle and several other facilities in May and June also contributed to the decline, GM said. GM's revenue per vehicle in North America dropped 16 percent last quarter compared with the same period last year, from $21,375 to $17,940. The figure includes the drop in value of vehicles coming back to the company from leases.
Young said the revenue decline included the drop in leased vehicle values and the reduction in inventory, plus the company didn't have enough factory capacity to feed demand for fuel-efficient cars in the first half of the year.
With GM adding shifts at plants making midsize and compact cars in the second half, it should gain revenue from additional sales, he said.
"But ultimately we're going to have to grow the business in a tough market," he said.
On July 15, GM announced a plan to raise $15 billion for its restructuring by laying off thousands of hourly and salaried workers, speeding the closure of truck and SUV plants, suspending its dividend and raising cash through borrowing and the sale of assets.
GM also said it would reduce production by another 300,000 vehicles, and that may prompt another wave of blue-collar early retirement and buyout offers, Young said.
"As our recent product, capacity and liquidity actions clearly demonstrate, we are reacting rapidly to the challenges facing the U.S. economy and auto market, and we continue to take the aggressive steps necessary to transform our U.S. operations," GM Chairman and Chief Executive Rick Wagoner said in a statement.
GM sold 2.29 million vehicles in the second quarter, down 5 percent compared with the previous year. The company said a record 65 percent of those sales were outside North America.
For the first half of the year, Toyota Motor Corp. outsold GM by 277,532 vehicles. It was only the second time Toyota beat GM in sales for the first six months of a year
General Motors Corp. posted a $15.5 billion second-quarter loss Friday, the third-worst quarterly performance in the company's nearly 100-year history.
The loss came as North American sales plummeted and GM faced expenses due to labor unrest and a massive restructuring plan aimed at preserving cash to weather a prolonged U.S. economic downturn.
The loss of $27.33 per share was in stark contrast to the year-ago period when GM recorded a net profit of $891 million, or $1.56 per share.
Revenue for the April-June period was $38.2 billion, down $8.5 billion from a year earlier.
The company said its loss included $9.1 billion in one-time charges, including $3.3 billion for the buyouts of 19,000 U.S. hourly workers, most of whom left at the end of June, as well as $2.8 billion in liabilities related to Delphi Corp., its former parts division.
It also included $1.3 billion worth of write-offs due to a reduction in the value of GM's 49 percent interest in its former financial arm, GMAC Financial Services.
Additionally, GM took a $2 billion charge to its bottom line because of huge drops in the value of pickup trucks and sport utility vehicles coming back to the company after lease terms end. GMAC and GM have suffered big losses when they try to sell the now-unpopular vehicles at depressed prices.
GM also took a $197 million charge related to the settlement of a nearly three-month strike at supplier American Axle and Manufacturing Holdings Inc., which hurt production at more than 30 GM plants. GM agreed to help American Axle fund worker buyouts as part of the settlement.
Without the one-time charges, GM lost $6.3 billion, or $11.21 per share. Twelve analysts surveyed by Thomson Financial predicted a $2.62 per share loss on revenue of $44.57 billion.
GM shares fell 43 cents, or 3.9 percent, to $10.64 in midday trading after falling nearly 11 percent earlier in the day.
Ray Young, GM's chief financial officer, said the company burned through $3.6 billion in cash during the second quarter, which he attributed largely to reducing the company's inventory by nearly 90,000 vehicles to less than 800,000.
He said GM does not expect a similar reduction in future quarters, so the cash burn should be smaller for the rest of the year.
"In that respect, the negative cash flow in the second quarter is overstated," he said.
So far this year, GM has gone through about $1 billion in cash per month, including $3.4 billion in the first quarter.
Young said GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion, which he called a strong position. GM already has announced plans to generate another $15 billion in liquidity in the next 18 months.
"We're going to get the second quarter behind us and just move ahead," Young said.
GM's net losses since 2005 total $51.1 billion.
The $15.5 billion loss reported Friday is less than half of GM's record $39 billion loss in the third quarter of last year. That loss was due to a charge for accumulated deferred tax credits. The second-worst loss was $21 billion in the first quarter of 1992.
GM said its revenues outside North America rose by $1.7 billion to $20.8 billion in the quarter, but those gains were more than offset by losses in North America, where high gas prices and the weak economy have wreaked havoc on the auto industry. The company said 55 percent of its automotive revenue was from outside North America.
North American revenues fell by nearly $10 billion to $19.8 billion for the quarter as sales in the region fell 20 percent. Work stoppages at American Axle and several other facilities in May and June also contributed to the decline, GM said. GM's revenue per vehicle in North America dropped 16 percent last quarter compared with the same period last year, from $21,375 to $17,940. The figure includes the drop in value of vehicles coming back to the company from leases.
Young said the revenue decline included the drop in leased vehicle values and the reduction in inventory, plus the company didn't have enough factory capacity to feed demand for fuel-efficient cars in the first half of the year.
With GM adding shifts at plants making midsize and compact cars in the second half, it should gain revenue from additional sales, he said.
"But ultimately we're going to have to grow the business in a tough market," he said.
On July 15, GM announced a plan to raise $15 billion for its restructuring by laying off thousands of hourly and salaried workers, speeding the closure of truck and SUV plants, suspending its dividend and raising cash through borrowing and the sale of assets.
GM also said it would reduce production by another 300,000 vehicles, and that may prompt another wave of blue-collar early retirement and buyout offers, Young said.
"As our recent product, capacity and liquidity actions clearly demonstrate, we are reacting rapidly to the challenges facing the U.S. economy and auto market, and we continue to take the aggressive steps necessary to transform our U.S. operations," GM Chairman and Chief Executive Rick Wagoner said in a statement.
GM sold 2.29 million vehicles in the second quarter, down 5 percent compared with the previous year. The company said a record 65 percent of those sales were outside North America.
For the first half of the year, Toyota Motor Corp. outsold GM by 277,532 vehicles. It was only the second time Toyota beat GM in sales for the first six months of a year
August 6, 2008
UK downturn is set to last for two years
UK downturn is set to last for two years
Gary Duncan, Economics Editor The Chancellor's hopes for a rapid revival in Britain's faltering economy by next year were undercut today after the International Monetary Fund (IMF) reduced its forecasts and warned that the UK faces a two year-long economic downturn.
In its annual economic health check on Britain, the IMF said that a series of heavy blows from tumbling house prices, the credit crunch and rising unemployment meant that UK growth would be a meagre 1.4 per cent.
The IMF had previously forecast 1.8 per cent growth and today's revision is below the bottom end of Alistair Darling's present 1.75 to 2.25-per-cent prediction.
In a further blow, the IMF said the economy was set to be even weaker next year, with growth over 2009 now forecast to be only 1.1 per cent, which is sharply down from the 1.7 per cent it predicted in in last assessment in the spring, and far below the Chancellor's forecast for growth of between 2.25 and 2.75 per cent.
Related LinksFood price inflation spirals to 9.5 per cent Consumers plan to slash spending across the board Slowdown nears as service sector shrinks If the IMF is correct, the rough two years for the economy this year and next would leave Britain with its worst performance since the end of the last recession in the early Nineties.
However, the fund said that, for now, it expected that Britain would skirt technical recession, defined as two quarters in a row of falling output (GDP).
The IMF has no single quarter of decline shown in its projections for the period over the next few quarters when the downturn is at its worst.
The IMF said that it expected a gradual revival in growth to begin to take hold from the second quarter of next year, with the downturn reaching its low point around the turn of this year.
As the Bank of England prepares to set interest rates tomorrow, amid widespread City expectations that it will keep the cost of borrowing on hold at 5 per cent, the IMF said that the present sharp rise in inflation meant that it had "no scope" to cut interest rates.
But amid fears that the Bank's rate-setting Monetary Policy Committee (MPC) could push rates higher this week or in coming months, today's report added: "Nor is there a clear case for an immediate increase in the Bank rate".
The IMF expects that headline consumer price inflation will climb close to 5 per cent during the next few months, and remain above the Bank's 2 per cent target.
However, it expects inflation to be back on target during 2010 — consistent with the MPC's goal to hit the target over a two-year time horizon.
After a recent report that the Treasury is working on plans to ease its strict rules for the Government's finances that could pave the way for increased borrowing and spending to help take some of the sting from the economic downturn, the IMF fired a warning shot at the Chancellor, cautioning him against any relaxation of plans to cut Britain's state borrowing over coming years.
It said that reforming the rules to allow a loosening of fiscal policy through increased borrowing in the short term would be misguided at a time when the Government is expected to be in the red to the tune of 3.5 per cent of GDP this year and next, and is set to breach the 40 per cent of GDP ceiling on the national debt set by Gordon Brown from 2009 onwards, according to the fund's forecasts.
The IMF recommended that the Treasury keep the 40-per-cent debt ceiling in place and that it draw up plans to reduce debt to this level over coming years, and by early in the next decade.
With slumping house prices a drag on growth, the IMF said that its main scenario for the UK was based on a fall in home values of "about 15 per cent" over two years, "rather than a precipitous correction". However, it noted that "some market indicators" suggested a more severe plunge in prices of 20 to 25 per cent by 2011.
In its annual economic health check on Britain, the IMF said that a series of heavy blows from tumbling house prices, the credit crunch and rising unemployment meant that UK growth would be a meagre 1.4 per cent.
The IMF had previously forecast 1.8 per cent growth and today's revision is below the bottom end of Alistair Darling's present 1.75 to 2.25-per-cent prediction.
In a further blow, the IMF said the economy was set to be even weaker next year, with growth over 2009 now forecast to be only 1.1 per cent, which is sharply down from the 1.7 per cent it predicted in in last assessment in the spring, and far below the Chancellor's forecast for growth of between 2.25 and 2.75 per cent.
Related LinksFood price inflation spirals to 9.5 per cent Consumers plan to slash spending across the board Slowdown nears as service sector shrinks If the IMF is correct, the rough two years for the economy this year and next would leave Britain with its worst performance since the end of the last recession in the early Nineties.
However, the fund said that, for now, it expected that Britain would skirt technical recession, defined as two quarters in a row of falling output (GDP).
The IMF has no single quarter of decline shown in its projections for the period over the next few quarters when the downturn is at its worst.
The IMF said that it expected a gradual revival in growth to begin to take hold from the second quarter of next year, with the downturn reaching its low point around the turn of this year.
As the Bank of England prepares to set interest rates tomorrow, amid widespread City expectations that it will keep the cost of borrowing on hold at 5 per cent, the IMF said that the present sharp rise in inflation meant that it had "no scope" to cut interest rates.
But amid fears that the Bank's rate-setting Monetary Policy Committee (MPC) could push rates higher this week or in coming months, today's report added: "Nor is there a clear case for an immediate increase in the Bank rate".
The IMF expects that headline consumer price inflation will climb close to 5 per cent during the next few months, and remain above the Bank's 2 per cent target.
However, it expects inflation to be back on target during 2010 — consistent with the MPC's goal to hit the target over a two-year time horizon.
After a recent report that the Treasury is working on plans to ease its strict rules for the Government's finances that could pave the way for increased borrowing and spending to help take some of the sting from the economic downturn, the IMF fired a warning shot at the Chancellor, cautioning him against any relaxation of plans to cut Britain's state borrowing over coming years.
It said that reforming the rules to allow a loosening of fiscal policy through increased borrowing in the short term would be misguided at a time when the Government is expected to be in the red to the tune of 3.5 per cent of GDP this year and next, and is set to breach the 40 per cent of GDP ceiling on the national debt set by Gordon Brown from 2009 onwards, according to the fund's forecasts.
The IMF recommended that the Treasury keep the 40-per-cent debt ceiling in place and that it draw up plans to reduce debt to this level over coming years, and by early in the next decade.
With slumping house prices a drag on growth, the IMF said that its main scenario for the UK was based on a fall in home values of "about 15 per cent" over two years, "rather than a precipitous correction". However, it noted that "some market indicators" suggested a more severe plunge in prices of 20 to 25 per cent by 2011.
From Times OnlineAugust 5, 2008
Repossessions rise 40% as mortgage arrears worsen
Repossessions rise 40% as mortgage arrears worsen
Gráinne Gilmore, Siobhan Kennedy and Francis Elliott The number of people losing their homes after failing to meet mortgage payments jumped by 40 per cent in the first three months of this year.
The number of repossessions rose to 9,152 from January to March, up from 6,471 in the same period last year, according to figures published by the Financial Services Authority. More than 300,000 homeowners have fallen into mortgage arrears of three months or more, twice last year’s figure.
The statistics bear out warnings that the number losing their homes will reach 45,000 by the end of this year, compared with the 75,500 whose homes were repossessed at the peak of the 1991 housing downturn.
Alistair Darling, the Chancellor, acknowledged yesterday that the economic slowdown could be “pretty dramatic” and that collapsing confidence and more expensive borrowing were driving down house prices. He said that he was “looking at a number of measures” when asked about reports that he was considering plans for the suspension of stamp duty. “It is helping people that is important. I want to look at a range of options that will help people.”
Related LinksIt’s no help if you can’t get a mortgage Builder to double first-time buyers' deposits Treasury aides said later that no final decisions had been taken on whether measures would be aimed at all buyers or only those buying their first property. Options include an indefinite suspension of stamp duty, a proposal only to defer the tax and a scheme to introduce tax-free savings accounts for those saving for a deposit for a house.
The option of giving all buyers a stamp duty holiday is being pressed strongly by the Royal Institute of Chartered Surveyors, which argues that it would help to free the market and increase lending.
The institute met Treasury officials in May to outline its suggestions and sent detailed proposals to the Chancellor last month. These are under active consideration. The plan, seen by The Times, urges Mr Darling to introduce a “short-term holiday” followed by longer-term reform. Stamp duty is levied at 1 per cent for houses between £125,001 and £250,000, 3 per cent for £250,001 to £500,000 and 4 per cent for £500,001 or more. Under the proposals, no one would pay duty on the first £150,000. There would be a 2.5 per cent levy for homes between £150,000 and £250,000 and a 5 per cent rate on homes over £250,000.
If Mr Darling pushes ahead with a suspension, he will be following in the footsteps of Norman Lamont who announced an eight-month holiday from the duty during the housing downturn of 1991. At the time it was claimed that the measure — which is estimated to have cost the Treasury £400 million — would save 40,000 additional repossessions. The evidence of its effectiveness was mixed, although many lenders argued unsuccessfully to have it extended.
Vince Cable, the Liberal Democrat spokesman, dismissed the idea as irresponsible. “The Government should not be trying to bribe people into buying houses in a falling market. With the economy grinding to a halt, we are already likely to see a shortfall in taxation. Suspending stamp duty, even on a temporary basis, will only make this situation worse. The falls we are seeing in the housing market are painful, but necessary, if homes are to become affordable once more for those not on the property ladder.”
Adam Sampson, chief executive of Shelter, the homelessness charity, said: “We see many homeowners whose lives are wrecked by some, particularly sub-prime, lenders racing to repossess. The regulator must clamp down on merciless mortgage lenders who are robbing people of their homes.” Lesley Titcomb, the FSA director responsible for the mortgage sector, said: Repossession has to be the last resort.”
The number of repossessions rose to 9,152 from January to March, up from 6,471 in the same period last year, according to figures published by the Financial Services Authority. More than 300,000 homeowners have fallen into mortgage arrears of three months or more, twice last year’s figure.
The statistics bear out warnings that the number losing their homes will reach 45,000 by the end of this year, compared with the 75,500 whose homes were repossessed at the peak of the 1991 housing downturn.
Alistair Darling, the Chancellor, acknowledged yesterday that the economic slowdown could be “pretty dramatic” and that collapsing confidence and more expensive borrowing were driving down house prices. He said that he was “looking at a number of measures” when asked about reports that he was considering plans for the suspension of stamp duty. “It is helping people that is important. I want to look at a range of options that will help people.”
Related LinksIt’s no help if you can’t get a mortgage Builder to double first-time buyers' deposits Treasury aides said later that no final decisions had been taken on whether measures would be aimed at all buyers or only those buying their first property. Options include an indefinite suspension of stamp duty, a proposal only to defer the tax and a scheme to introduce tax-free savings accounts for those saving for a deposit for a house.
The option of giving all buyers a stamp duty holiday is being pressed strongly by the Royal Institute of Chartered Surveyors, which argues that it would help to free the market and increase lending.
The institute met Treasury officials in May to outline its suggestions and sent detailed proposals to the Chancellor last month. These are under active consideration. The plan, seen by The Times, urges Mr Darling to introduce a “short-term holiday” followed by longer-term reform. Stamp duty is levied at 1 per cent for houses between £125,001 and £250,000, 3 per cent for £250,001 to £500,000 and 4 per cent for £500,001 or more. Under the proposals, no one would pay duty on the first £150,000. There would be a 2.5 per cent levy for homes between £150,000 and £250,000 and a 5 per cent rate on homes over £250,000.
If Mr Darling pushes ahead with a suspension, he will be following in the footsteps of Norman Lamont who announced an eight-month holiday from the duty during the housing downturn of 1991. At the time it was claimed that the measure — which is estimated to have cost the Treasury £400 million — would save 40,000 additional repossessions. The evidence of its effectiveness was mixed, although many lenders argued unsuccessfully to have it extended.
Vince Cable, the Liberal Democrat spokesman, dismissed the idea as irresponsible. “The Government should not be trying to bribe people into buying houses in a falling market. With the economy grinding to a halt, we are already likely to see a shortfall in taxation. Suspending stamp duty, even on a temporary basis, will only make this situation worse. The falls we are seeing in the housing market are painful, but necessary, if homes are to become affordable once more for those not on the property ladder.”
Adam Sampson, chief executive of Shelter, the homelessness charity, said: “We see many homeowners whose lives are wrecked by some, particularly sub-prime, lenders racing to repossess. The regulator must clamp down on merciless mortgage lenders who are robbing people of their homes.” Lesley Titcomb, the FSA director responsible for the mortgage sector, said: Repossession has to be the last resort.”
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