Third Imperialist Economic Crisis

ENB-TENN:தமிழீழச் செய்தியகம்: மூன்றாவது உலகப் பொருளாதாரப் பெருமந்தம் 2012

2012-01-23T13:07:00.000-08:00

ENB-TENN:தமிழீழச் செய்தியகம்: மூன்றாவது உலகப் பொருளாதாரப் பெருமந்தம் 2012: Turbulent Year Ahead for Global Economy --------------------------------------------------------------------------------------------- * Gl...

ENB-TENN:தமிழீழச் செய்தியகம்: S&P Defends Ratings Cuts as France, Germany Stay t...

2012-01-14T18:57:00.000-08:00

ENB-TENN:தமிழீழச் செய்தியகம்: S&P Defends Ratings Cuts as France, Germany Stay t...: WSJ EUROPE NEWS JANUARY 14, 2012, 6:01 P.M. ET S&P Defends Ratings Cuts as France, Germany Stay the Course By GEOFFREY T. SMITH, GABRIEL...

Communiqué of the Twenty-Fourth Meeting of the IMFC: Collective Action for Global Recovery

2011-09-24T16:24:00.000-07:00

Communiqué of the Twenty-Fourth Meeting of the IMFC: Collective Action for Global Recovery

Chaired by Mr. Tharman Shanmugaratnam, Deputy Prime Minister of Singapore and Minister for
Finance Washington, DC, September 24, 2011

The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike. We are encouraged by the determination of our euro-area colleagues to do what is needed to resolve the euro-area crisis. We welcome that the IMF stands ready to strongly support this effort as part of its global role.

****************

Today we agreed to act decisively to tackle the dangers confronting the global economy. These include sovereign debt risks, financial system fragility, weakening economic growth and high unemployment. Our circumstances vary, but our economies and financial systems are closely interlinked. We will therefore act collectively to restore confidence and financial stability, and rekindle global growth.

The advanced economies are at the core of an effective resolution of current global stresses.

The strategy is to restore sustainable public finances while ensuring continued economic recovery. Taking into account different national circumstances, advanced economies will adopt policies to build confidence and support growth, and implement clear, credible and specificmeasures to achieve fiscal consolidation. Euro-area countries will do whatever is necessary to resolve the euro-area sovereign debt crisis and ensure the financial stability of the euro area as a whole and its member states. This includes implementing the euro-area Leaders’ decision of July 21 to increase the flexibility of the European Financial Stability Facility, maximizing its impact, and improve euro-area crisis management and governance. Advanced economies will ensure
that banks have strong capital positions and access to adequate funding; maintain accommodative
monetary policies as long as this is consistent with price stability, bearing in mind international spillovers; revive weak housing markets and repair household balance sheets; and undertake structural reforms to boost jobs and the medium-term growth potential of their economies.

Emerging market and developing economies, which have displayed remarkable stability and growth,
are also key to an effective global response. The strategy is to adjust macro-economic policies, where needed, to rebuild policy buffers, contain overheating and enhance our resilience in the face of volatile capital flows. Surplus economies will continue to implement structural reforms to strengthen domestic demand, supported by continued efforts that achieve greater exchange rate flexibility, thereby contributing to global demand and the rebalancing of growth. Fostering inclusive growth and creating jobs are priorities for all of us.

We reaffirm the importance of the financial sector reform agenda and are committed to its full and timely implementation. We will continue our coordinated efforts to strengthen the regulation of systemically important financial institutions, establish mechanisms for orderly domestic and cross-border resolution of troubled financial institutions, and address risks posed by shadow banking.

We call on the Fund to play a key role in contributing to an orderly resolution of the current crisis and prevention of future crises. We welcome the Consolidated Multilateral Surveillance

Report as an important tool to focus our discussions on key risks and policy issues. We welcome
the directions set out in the Managing Director’s Action Plan. In particular, we encourage the Fund to focus on the following priorities and report to the IMFC at our next meeting:

• A more integrated, evenhanded, and effective surveillance framework that better captures risks
to economic and financial stability, drawing on the Fund’s Triennial Surveillance Review and spillover reports;

• Early assessment of current financing tools and enhancements to the global financial safety net;

• Review of the adequacy of Fund resources;

• Ensuring adequate policy advice and financing to support low-income countries, including to address volatile food and fuel prices; and

• Further work on a comprehensive, flexible, and balanced approach for the management of capital
flows, drawing on country experiences.

Governance reform is crucial to the legitimacy and the effectiveness of the IMF. We will
intensify our efforts to meet the 2012 Annual Meetings target for the entry into force of the 2010 quota and governance reform. We call on the Fund to complete a comprehensive review of the quota formula by January 2013 and to report on progress at our next meeting. We reaffirm the commitment to complete the Fifteenth General Review of Quotas by January 2014. We look forward to further enhancing the role of the IMFC as a key forum for global economic and financial cooperation.

We thank Mr. Strauss-Kahn and Mr. Lipsky for their outstanding service at the helm of the Fund
in difficult times. We warmly welcome Ms. Lagarde, Mr. Lipton, Ms. Shafik, and Mr. Zhu. Our next
meeting will be held in Washington, D.C. on April 21, 2012.

Attendance can be found at http://www.imf.org/external/am/2011/imfc/attendees/index.ht
Source: IMF

ENB-TENN:தமிழீழச் செய்தியகம்: ஏகபோக நிதியாதிக்கக் கும்பல்களை ஊட்டி வளர்க்கும் அம...

2011-07-07T07:38:00.000-07:00

ENB-TENN:தமிழீழச் செய்தியகம்: ஏகபோக நிதியாதிக்கக் கும்பல்களை ஊட்டி வளர்க்கும் அம...

UK Stuck in Recession

2009-10-23T09:02:00.000-07:00

October 24, 2009
U.K. Stuck in Recession as Euro Area Shows Strength
By MATTHEW SALTMARSHPARIS — The British economy remained mired in recession during the third-quarter, according to data released Friday. That stood in stark contrast to the euro area, where reports showed steadily improving activity.
A significant reason for the divergent performance between the economies appears to be the larger debt burden of British consumers, analysts said.
A preliminary report from the Office of National Statistics in London showed gross domestic product contracted by 0.4 percent between July and September from the previous three months, and it shrank by 5.2 percent compared with a year earlier.
The British economy has now contracted for six successive quarters, making this the longest downturn since the agency started its data series in 1955.
Economists had expected growth of 0.2 percent for the quarter, based on recent improvements in housing statistics, purchasing managers’ indexes and the wilting pound, which should make exports more competitive.
Rather, the report showed weakness in the service sector, where output fell 0.2 percent; industrial production, down 0.7 percent; and construction, off 1.1 percent.
Britain is starting to further lag the 16-member euro area, where France and Germany are leading steady improvements in manufacturing, services and consumer demand.
Jean-Michel Six, chief European economist at Standard & Poor’s, cited consumer indebtedness as the main factor undermining a recovery in Britain.
“U.K. consumers are coming out of a period of very significant leveraging, and the process of unwinding that is long and painful,” he said. “You would expect savings rates to grow and credit demand to fall, weighing on the economy.”
Meanwhile, German business confidence in October rose to its highest level in 13 months, according to the Ifo economic research institute in Munich.
Its business climate index, which surveys 7,000 executives, rose to 91.9 from 91.3 in September. The index touched a recent low of 82.2 in March.
“The third quarter was a good quarter for the German economy,” said Carsten Brzeski, an analyst at ING. “Probably even an excellent quarter.”
He said German companies were benefiting from the pick-up in global activity, stock rebuilding, stimulus-driven private consumption and tax relief.
Another report, from the data firm Markit, showed a composite index of manufacturing and services industries in the euro area improved to 53 in October from 51.1 in September.
The reading was the highest in 22 months, Markit said.
Chris Williamson, Markit’s chief economist, said the data “indicate that the euro-zone economy has entered the fourth quarter on a strong note” and were consistent with G.D.P. rising at a quarterly rate of around 0.4 percent in October.
In France, the national statistics office INSEE said that consumer spending jumped 2.3 percent in September from August, well above expectations of a 0.5 percent rise.
Another release Friday, from the E.U. data agency Eurostat, showed that industrial orders in the euro area increased by 2.0 percent in August from July, but were down 23.1 percent from a year earlier.
Still, Mr. Six of S&P cautioned that smaller euro-area economies like Spain, Ireland, Greece and Portugal have not shown the level of resilience of the two largest members of the currency bloc.

Europe's plot to take over the world

2009-10-06T17:12:00.000-07:00

Europe's plot to take over the world
By Gideon Rachman
Published: October 6 2009 03:00 Last updated: October 6 2009 03:00
At last! Ireland has passed the Lisbon treaty and now the European Union can move forward with its plan for world domination. Within months, the EU is likely to appoint a president and a foreign minister.
Tony Blair is limbering up for a run at the top job. A clutch of Swedish, Dutch and Belgian candidates are jostling for the post of foreign minister.
Fortified by its new foreign-policy structures, the Union is staking a claim to be taken seriously as a global superpower. David Miliband, Britain's foreign secretary, says: "It shouldn't be a G2 of the US and
China. There should be a G3 with the European Union."
But what happens in Brussels - or even in trilateral dealings between the US, China and Europe - is a sideshow. The real key to Europe's global ambitions is the Group of 20.
Jean Monnet, the founding father of the EU, believed that European unity was "not an end in itself, but only a stage on the way to the organised world of tomorrow". His successors in Brussels make no secret
of the fact that they regard the Union's brand of supranational governance as a global model.
The realisation that the G20 is Europe's Trojan horse struck me at the G20's last summit in Pittsburgh a couple of weeks ago. The surroundings and atmosphere were strangely familiar. And then I understood;
I was back in Brussels, and this was just a global version of a European Union summit.
It was the same drill and format. The leaders' dinner the night before the summit; a day spent negotiating an impenetrable, jargon-stuffed communiqué; the setting-up of obscure working groups; the national
briefing rooms for the post-summit press conferences.
All of these procedures are deeply familiar to European leaders - but rather new to the Asian and American leaders whom the Europeans are carefully entangling in this new structure. Watching an Indonesian
delegate wandering, apparently carefree, through the conference centre in Pittsburgh, I felt a stab of pity. "You don't know what you are getting into," I thought. "You are going to waste the rest of your life
talking about fish quotas." (Or, this being the G20, carbon-emission quotas.)
The Europeans did not just set the tone at the G20 - they also dominate proceedings, since they are grossly over-represented. Huge countries such as Brazil, China, India and the US are represented by one
leader each. The Europeans managed to secure eight slots around the conference table for Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president
of the European Council. Most of the key international civil servants present were also Europeans: Dominique Strauss-Kahn, head of the International Monetary Fund; Pascal Lamy of the World Trade
Organisation; Mario Draghi of the Financial Stability Board.
As a result, the Europeans seemed much more tuned into what was going on than some of the other delegations. Puzzling over the new powers given to the IMF to monitor national economic policies in the
Pittsburgh conclusions, I was interrupted by an old friend from the European Commission, who recognised the language immediately. "Ah yes," she said, "the open method of co-ordination."
But does any of this really matter? After all, EU summits and statements have become a byword for tortuous and ineffective machinations that often have little real-world effect. The process that gave birth to
the Lisbon treaty started eight years ago. Even after Ireland's Yes vote, Lisbon could still be derailed by recalcitrant governments in the Czech Republic or Britain.
However, the saga of Lisbon can be read another way. Once the EU gets its teeth into an issue, it never really lets go. Processes started at EU summits - which often seem minor bits of bureaucratic paper-
shuffling - often turn out to have important political implications, years later. The same could well be true of some of the decisions made in Pittsburgh - such as the language on tax havens and bankers' bonuses.
From the very start, the EU advanced through small, apparently technical, steps focusing on economic issues - the so-called "Monnet method". Monnet himself believed that Europe would be built through "the
common management of common problems". Is this so very different from President Barack Obama's recent appeal for "global solutions to global problems"?
Of course, there is still a huge gap between the capabilities of the modern EU and those of the G20. There is no army of G20 civil servants to match the bureaucrats of Brussels. There is no body of G20 law
and no G20 court to enforce the group's decisions. Nor is there much immediate prospect that the US or China - both countries that zealously guard their sovereignty - will cede any serious powers to a G20
law-making body.
Yet the kernel of something new has been created. To understand its potential, it is worth going back to the Schuman Declaration of 1950, which started the process of European integration. "Europe," it said,
"will not be made all at once, or according to a single plan. It will be built through concrete achievements, which first create a de facto solidarity."
The G20 now has some achievements and a burgeoning sense of solidarity between the members of this new, most exclusive, club. Who knows what comes next?

Transcript: India Budget speech

2009-07-07T13:55:00.000-07:00

Transcript: India Budget speech

Published: July 6 2009 14:38 Last updated: July 6 2009 14:38
The newly elected Indian government launched a big spending budget that boosted infrastructure spending and protected farmers, but was deeply unpopular with investors. Read the full transcript of Pranab Mukherjee’s budget speech
Madam Speaker,
I rise to present the Budget for 2009-10.
Just 140 days back, I had the privilege to present the Interim Budget for 2009-10. It is a rare honour that I have been called upon to present the regular budget after the new Government assumed office.
The Congress-led UPA Government has come back to power with a renewed mandate. As Prime Minister, Dr. Manmohan Singh, said recently “It is a mandate for continuity, stability and prosperity. It is a mandate for inclusive growth and equitable development.” It is a mandate that we accept with humility and a firm resolve to do all that we can for the welfare of this nation.
I am deeply conscious of the faith reposed by the people in our government and the responsibilities that come with it. I am sensitive to the great challenge of rising expectations of a young India . It reflects a population that is restless, yet engaged and is ready to seize the opportunities that it is presented with. There are new and powerful reasons for us to create, facilitate and sustain those opportunities.
In the Interim Budget for 2009-10, I had stated that the new Government would need to anchor its policies for 2009-10, in a medium term perspective that would have to:
(a) sustain a growth rate of at least 9 per cent per annum over an extended period of time;
(b) strengthen the mechanisms for inclusive growth for creating about 12 million new work opportunities per year;
(c) reduce the proportion of people living below poverty line to less than half from current levels by 2014;
(d) ensure that Indian agriculture continues to grow at an annual rate of 4 per cent;
(e) increase the investment in infrastructure to more than 9 per cent of GDP by 2014;
(f) support Indian industry to meet the challenge of global competition and sustain the growth momentum in exports;
(g) strengthen and improve the economic regulatory framework in the country;
(h) expand the range and reach of social safety nets by providing direct assistance to vulnerable sections;
(i) strengthen the delivery mechanism for primary health care facilities with a view to improve the preventive and curative health care in the country;
(j) create a competitive, progressive and well regulated education system of global standards that meets the aspiration of all segments of the society; and
(k) move towards providing energy security by pursuing an Integrated Energy Policy.
The Government recognizes the challenges that this task entails, particularly at a time when the world is still struggling with an unprecedented financial crisis and an economic slowdown that has also affected India . While we are determined to convert our words into deeds, Members would appreciate that a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so. Yet, it is an important means to share the vision of the Government, particularly as we begin a new term. I propose to do just that for the next hour or so, as I dwell on the challenges and outline the approach of the government in the short term and medium term perspectives.
The first challenge is to lead the economy back to the high GDP growth rate of 9 per cent per annum at the earliest. Growth of income is important in itself, but it is as important for the resources that it brings in. These resources provide us with the means to bridge the critical gaps that remain in our development efforts, particularly with regard to the welfare of the vulnerable segments of our population.
The second challenge is to deepen and broaden the agenda for inclusive development; and to ensure that no individual, community or region is denied the opportunity to participate in and benefit from the development process.
The third challenge is to re-energize government and improve delivery mechanisms. Our institutions must provide high quality public services, security and the rule of law to all citizens with transparency and accountability.
Overview of the Economy
Madam Speaker, at the time of the presentation of the Interim Budget, I had given a detailed analysis of the economic situation. Without repeating myself, I would like to highlight that the development course charted by the UPA Government in the last five years has been possible due to a step up in the growth rate of the economy and improved revenue buoyancy. The principal growth driver in this period has been private investment, which has been predominantly funded by domestic resources. During the year 2008-09, there has been a dip in the growth rate of GDP from an average of over 9 per cent in the previous three fiscal years to 6.7 per cent. It has affected the pace of job creation in certain sectors of the economy and the investment sentiments of the business community. It has also resulted in considerably lower revenue growth for the government. Another feature of the year 2008-09 was a sharp rise in the wholesale price index to nearly 13% in August 2008 and an equally sharp fall close to 0% in March 2009. While a detailed analysis of the developments has been presented in the Economic Survey-2008-09, tabled in both houses of Parliament last Thursday, I draw your attention to a few aspects.
The structure of India ’s economy has changed rapidly in the last ten years. External trade and external capital flows are an important part of the economy and so is the contribution of the services sector to the GDP at well over 50 per cent. The share of merchandise trade (exports plus imports) as a proportion of GDP has more than doubled over the past decade to 38.9 per cent in 2008-09. Similarly, trade in goods and services taken together has also doubled to 47 per cent during this period. Gross capital flows rose to a peak of over 9 per cent of GDP in 2007-08 before falling in the wake of the global financial crisis. The significant increase in the inflow of foreign capital is important, not so much for bridging the domestic savings-investment gap, but for facilitating the intermediation of financial resources to meet the growing needs of the economy.
This growing integration of the Indian economy with the rest of the world has brought new opportunities and also new challenges. It has made the task of sustaining high growth more complex. Over the past month, we have critically evaluated Government’s efforts at both short term economic recovery as well as medium term economic growth. The economic recovery and growth is a cooperative effort of the Central and State Governments. That is why, for the first time, I held a meeting with Finance Ministers of States as part of the preparations for this Budget. I intend to make this an annual feature.
TOWARDS ECONOMIC REVIVAL
Short-term measures
To counter the negative fallout of the global slowdown on the Indian economy, the Government responded by providing three focused fiscal stimulus packages in the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. The RBI took a number of monetary easing and liquidity enhancing measures to facilitate flow of funds from the financial system to meet the needs of productive sectors.
This fiscal accommodation led to an increase in fiscal deficit from 2.7 per cent in 2007-08 to 6.2 per cent of GDP in 2008-09. The difference between the actuals of 2007-08 and 2008-09 constituted the total fiscal stimulus. This fiscal stimulus at 3.5% of GDP at current market prices for 2008-09 amounts to Rs.1,86,000 crore.
These measures were effective in arresting the fall in growth rate of GDP in 2008-09 and we achieved a growth of 6.7 per cent. There are signs of revival in the domestic industry and the foreign investors have also returned to the Indian market in the last couple of months. It is possible that the two worst quarters since the global financial meltdown in September 2008 are behind us. While the global financial conditions have shown improvement over the recent months, uncertainties relating to the revival of the global economy remain. We cannot, therefore, afford to drop our guard. We have to continue our efforts to provide further stimulus to the economy.
Madam Speaker, what I unfold now are only the ‘First steps’. It will be my endeavour to make the process of budget formulation more participatory and a continuous exercise.
Infrastructure Development
To stimulate public investment in infrastructure, we had set up the India Infrastructure Finance Company Limited (IIFCL) as a special purpose vehicle for providing long term financial assistance to infrastructure projects. We will ensure that IIFCL is given greater flexibility to aggressively fulfil its mandate.
‘Takeout financing’ is an accepted international practice of releasing long term funds for financing infrastructure projects. It can be used to effectively address the asset liability mismatch of commercial banks arising out of financing infrastructure projects and also to free up capital for financing new projects. IIFCL would, in consultation with banks, evolve a ‘takeout financing’ scheme which could facilitate incremental lending to the infrastructure sector.
Government has had some success in attracting private investment in a wide range of infrastructure sectors such as telecommunications, power generation, airports, ports, roads and even in railways through public private partnerships ( PPP ). To ensure that infrastructure projects do not face financing difficulties arising from the current downturn, as I indicated in my Interim Budget Speech, the Government has decided that IIFCL will refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the next fifteen to eighteen months. The IIFCL and Banks are now in a position to support projects involving a total investment of Rs.100 thousand crore in infrastructure. Combined with the steps we are taking to increase public investment in infrastructure, this will provide a big boost to such investment.
The investment in infrastructure for the growth of economy is critical. I have urged my colleagues in the Central and State Governments to remove policy, regulatory and institutional bottlenecks for speedy implementation of infrastructure projects. I, on my part, will ensure that sufficient funds are made available for this sector.
Highway and Railways
The allocation during the current year to National Highways Authority of India (NHAI) for the National Highways Development Programme (NHDP) is being stepped up by 23 per cent over the 2008-09 (BE). I have also increased the allocation for the Railways from Rs.10,800 crore made in the Interim Budget for 2009-10 to Rs.15,800 crore.
Urban Infrastructure
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has been an important instrument for refocusing the attention of the State governments on the importance of urban infrastructure. In recognition of the role of JNNURM, the allocation for this scheme is being stepped up by 87 per cent to Rs.12,887 crore in the current budget. To improve the lot of the urban poor, I propose to enhance the allocation for housing and provision of basic amenities to urban poor to Rs.3,973 crore in the current year’s budget. This includes the provision for Rajiv Awas Yojana (RAY), a new scheme announced in the address of the President of India. This scheme, the parameters of which are being worked out, is intended to make the country slum free in the five year period.
Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA)
To address the problem of flooding in Mumbai, Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA) was initiated in 2007. The entire estimated cost of the project at Rs.1,200 crore is being funded through Central assistance. A sum of Rs.500 crore has been released for this project upto
2008-09. I have enhanced the provision for this project from Rs.200 crore in Interim BE to Rs.500 crore to expedite the completion of the project.
Power
The Accelerated Power Development and Reform Programme (APDRP) is an important scheme for reducing the gap between power demand and supply. I propose to increase the allocation for this scheme to Rs.2,080 crore, a steep increase of 160 per cent above the allocation in the BE of 2008-09.
Gas
With the recent find of natural gas in the KG Basin on the Eastern offshore of the country, the indigenous production of Natural Gas is set to double with natural gas emerging as an important source of energy. LNG infrastructure in the country is also being expanded. Government proposes to develop a blueprint for long distance gas highways leading to a National Gas Grid. This would facilitate transportation of gas across the length and breadth of the country.
Assam Gas Cracker Project
The Assam Gas Cracker Project sanctioned in April 2006 is being executed at a cost of Rs.5,461 crore. The capital subsidy of Rs.2,138 crore for the project is to be provided by the Central Government. The outlay for this project is being stepped up suitably.
Agricultural Development
I now turn to Agricultural development.
Agriculture has been the mainstay of our economy with 60 per cent of our population deriving their sustenance from it. In the recent past, the sector has recorded a growth of about 4 per cent per annum with substantial increase in plan allocations and capital formation in the sector. Agriculture credit flow was Rs.2,87,000 crore in 2008-09. The target for agriculture credit flow for the year 2009-10 is being set at Rs.3,25,000 crore. To achieve this, I propose to continue the interest subvention scheme for short term crop loans to farmers for loans upto Rs.3 lakh per farmer at the interest rate of 7 per cent per annum. I am also happy to announce that, for this year, the Government shall pay an additional subvention of 1 per cent as an incentive to those farmers who repay their short term crop loans on schedule. Thus, the interest rate for these farmers will come down to 6 per cent per annum. For this, I am making an additional Budget provision of Rs.411 crore over Interim BE.
Debt Relief for farmers
The one-time bank loan waiver of nearly Rs.71,000 crore to cover an estimated 40 million farmers was one of the major highlights of the last Budget. Under the Agricultural Debt Waiver and Debt Relief Scheme (2008), farmers having more than two hectares of land were given time upto 30th June, 2009 to pay 75% of their overdues. Due to the late arrival of monsoon, I propose to extend this period by six months upto 31st December, 2009 .
It is learnt that in some regions of Maharashtra , a large number of farmers had taken loans from private money lenders and the loan waiver scheme did not cover them. The matter requires special attention. To examine the matter in greater detail and suggest the future course of action, I propose to set up a Taskforce.
Accelerated Irrigation Benefit Programme
I propose to provide an additional Rs.1,000 crore over Interim BE for the Accelerated Irrigation Benefit Programme (AIBP), marking an increase of 75 per cent over the allocation in 2008-09(BE). The allocation for the Rashtriya Krishi Vikas Yojna (RKVY) is also being stepped up by 30 per cent over Budget Estimates of 2008-09.
Restoring Export Growth
Our exporters by virtue of their close links to the external sector have borne the brunt of the global economic crisis. It is, therefore, appropriate that we continue to provide all possible assistance to our exporters to help them overcome the short term disadvantages. More specifically:
(a) An adjustment assistance scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95 per cent to badly hit sectors had been initiated in December 2008 to mitigate the difficulties faced by the exporters. In view of the continuing contraction in exports, I propose to extend the benefits of this scheme up to March 2010.
(b) The Market Development Assistance Scheme provides support to exporters in developing new markets. With many traditional markets still under financial stress, greater effort is required to identify and develop new markets. I propose to enhance the allocation for this scheme by 148% over BE 2008-09 to Rs.124 crore.
(c) With a view to insulating the employment - oriented export sectors from the global meltdown, Government had provided an interest subvention of 2 per cent on pre-shipment credit for seven such sectors. These sectors are textiles including handlooms, handicrafts, carpets, leather, gems and jewellery, marine products and small and medium exporters. I propose to extend the interest subvention beyond the current deadline of September 30, 2009 to March 31, 2010 .
(d) Micro, Small and Medium Enterprises (MSMEs) have been affected by the slowdown in exports and the indirect effect of the global crisis on domestic demand. To support this sector, I propose to facilitate the flow of credit at reasonable rates, by providing a special fund out of Rural Infrastructure Development Fund (RIDF) to Small Industries Development Bank (SIDBI). This fund of Rs.4,000 crore will incentivise Banks and State Finance Corporations (SFCs) to lend to Micro and Small Enterprises (MSEs) by refinancing 50 per cent of incremental lending to MSEs during the current financial year.
(e) In February, 2009 the Print Media was given a stimulus package comprising waiver of 15% agency commission on DAVP advertisements and a 10% increase in the DAVP rates to be paid as a ‘special relief’ subject to documentary proof of loss of revenue in non-governmental advertisements. Since Print Media is still passing through difficult times, I have decided to extend the stimulus package for another six months from 30th June, 2009 to 31st December, 2009 .
Medium-term sustainability
The short term fiscal stimulus has to be balanced against long term prudence and fiscal sustainability objectives. To quote Kautilya, “In the interest of the prosperity of the country, a King shall be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those which happen, remove all obstructions to economic activity and prevent loss of revenue to the state”. I intend to take Kautilya’s advice and return to the FRBM target for fiscal deficit at the earliest and as soon as the negative effects of the global crisis on the Indian economy have been overcome. On the medium term fiscal perspective, I await the recommendations of the 13th Finance Commission.
To bring the fiscal deficit under control, we have to initiate institutional reform measures during the current year itself. This is essential for maintaining a stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment. These measures have to encompass all aspects of the budget such as subsidies, taxes, expenditure and disinvestment.
Fertilizer subsidy
In the context of the nation’s food security, the declining response of agricultural productivity to increased fertilizer usage in the country is a matter of concern. To ensure balanced application of fertilizers, the Government intends to move towards a nutrient based subsidy regime instead of the current product pricing regime. It will lead to availability of innovative fertilizer products in the market at reasonable prices. This unshackling of the fertilizer manufacturing sector is expected to attract fresh investments in this sector. In due course it is also intended to move to a system of direct transfer of subsidy to the farmers.
Petroleum and Diesel pricing policy
Madam Speaker, Honourable Members are aware that global prices of oil and petroleum products had shot up to unprecedented levels in 2008-09. Most oil importing countries, including our neighbours, adjusted their domestic prices to reflect these global changes. Though prices have declined since then, they are already about double of the lows reached in the wake of the global financial crisis. It is important to recognise that, with almost three-quarters of our oil consumption met through imports, domestic prices of petrol and diesel have to be broadly in sync with global prices of these items. Government will set up an expert group to advise on a viable and sustainable system of pricing petroleum products. Details will be announced by my colleague, the Minister of Petroleum and Natural Gas.
Taxation
It is time that we complete the process that was started in 1991 for building a trust based, simple, neutral, tax system with almost no exemptions and low rates designed to promote voluntary compliance. The Income Tax Return Forms should be simple and user-friendly. I have asked the Department to work on SARAL-II forms for early introduction. We need a tax system which generates revenues on a sustained basis without use of coercive tax collection methods at the end of each year to meet targets. It is my intention to make a modest start in this direction in the current year and ensure that the process is completed in the next four years. At the end of this process, I hope the Finance Minister can credibly say that our tax collectors are like honey bees collecting nectar from the flowers without disturbing them, but spreading their pollen so that all flowers can thrive and bear fruit.
People’s ownership of PSUs
The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 per cent Government equity in our enterprises, I propose to encourage people’s participation in our disinvestment programme. Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive.
Financial sector
The financial sector is the life blood of any economy. Our Government’s approach to the banking and financial sector has been to ensure robust oversight and regulation while expanding financial access and deepening markets. The merit of this balanced approach has been borne out in the recent experience, as the turbulence in the world financial markets has left the Indian banking and financial sector relatively unaffected. Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40 years ago - on 14th of July, 1969 - appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.
The average public float in Indian listed companies is less than 15 per cent. Deep non-manipulable markets require larger and diversified public shareholdings. This requirement should be uniformly applied to the private sector as well as listed public sector companies. I propose to raise, in a phased manner, the threshold for non-promoter public shareholding for all listed companies.
For a country like ours, with significant sections of unbanked population and regions, financial inclusion is vital for sustaining long term equitable development. As part of the financial inclusion drive, scheduled commercial banks have been opening ‘no frills’ accounts either with ‘nil’ or very low minimum balances. So far, these banks have opened 3.3 crore such accounts. The RBI has announced a further relaxation in its Branch Authorisation Policy. Scheduled Commercial Banks are now allowed to set up off-site ATMs without prior approval, subject to reporting.
Despite the expansion of banking network in the country, there are still some areas that remain under-banked or unbanked. A sub-committee of State Level Bankers Committee ( SLB C) will identify such areas and formulate an action plan for providing banking facilities to all these areas in the next 3 years. I propose to set aside Rs.100 crore during the current year as one-time grant-in-aid to ensure provision of at least one centre/Point of Sales (POS) for banking services in each of the unbanked blocks in the country.
The Government has established Competition Commission of India, an autonomous regulatory body to promote and sustain competition in markets, protect interests of consumers and to prevent practices having adverse effect on competition. An Appellate body headed by a retired judge of the Supreme Court has also been constituted.
The benefits of competition should now come to more sectors and their users and consumers. Now is the time for us to work on these aspects to eliminate supply bottlenecks, enhance productivity, reduce costs and improve quality of goods and services supplied to consumers.
Investment environment
Private sector investment has been affected by the global macro economic conditions. Our Government is committed to creating a facilitating environment in which a competitive private sector can thrive and play its rightful role in nation’s economic development. India ’s high growth of 8.5% per annum from 2004 to 2008 was fuelled in very large part by private investment. I look forward to working closely with industry and our vibrant entrepreneurial community to address their outstanding concerns.
TOWARDS INCLUSIVE DEVELOPMENT
Madam Speaker, the UPA government has gone for a paradigm shift for making the development process more inclusive. It involves creating entitlements backed by legal guarantee to provide basic amenities and opportunities for livelihood to vulnerable sections. ‘Aam Admi’ is now the focus of all our programmes and schemes.
National Rural Employment Guarantee Scheme (NREGS)
(i) It is widely acknowledged that the National Rural Employment Guarantee Act, (NREGA) first implemented in February 2006, has been a magnificent success. During 2008-09, NREGA provided employment opportunities for more than 4.47 crore households as against 3.39 crore households covered in 2007-08. We are committed to providing a real wage of Rs.100 a day as an entitlement under the NREGA. To increase the productivity of assets and resources under NREGA, convergence with other schemes relating to agriculture, forests, water resources, land resources and rural roads is being initiated. In the first stage, a total of 115 pilot districts have been selected for such convergence. Details of these measures and convergence guidelines will be announced by my colleague, the Minister of Rural Development. I propose an allocation of Rs.39,100 crore for the year 2009-10 for NREGA which marks an increase of 144% over 2008-09 Budget Estimates.
National Food Security Act (NFSA)
(ii) I am happy to announce that the work on National Food Security Act has begun in right earnest. This will ensure that every family living below the poverty line in rural or urban areas will be entitled by law to 25 kilos of rice or wheat per month at Rs.3 a kilo. The Government proposes to put the draft Food Security Bill on the website of the Department of Food and Public Distribution for public debate and consultations very soon.
Bharat Nirman
(iii) Bharat Nirman with its six schemes is an important initiative for bridging the gap between the rural and urban areas and improving the quality of life of people, particularly the poor, in the rural areas. I propose to step up the allocations for Bharat Nirman by 45 per cent in 2009-10 over the BE of 2008-09. The Pradhan Mantri Gram Sadak Yojana (PMGSY) is one of the most successful programmes under Bharat Nirman. I propose to step up the allocation for this programme by 59% over BE 2008-09 to Rs.12,000 crore. I also propose to allocate Rs.7,000 crore to Rajiv Gandhi Grameen Viduytikaran Yojana (RGGVY) which represents a 27 per cent increase over 2008-09 (BE).
(iv) The allocation for the Indira Awaas Yojana ( IAY) is proposed to be increased by 63 per cent to Rs.8,800 crore in Budget Estimates 2009-10. To broaden the pace of rural housing, I propose to allocate, from the shortfall in the priority sector lending of commercial banks, a sum of Rs.2,000 crore for Rural Housing Fund in the National Housing Bank (NHB). This will boost the resource base of NHB for their refinance operations in rural housing sector.
Pradhan Mantri Adarsh Gram Yojana (PMAGY)
(v) There are about 44,000 villages in which the population of Scheduled castes is above 50 per cent. A new scheme called Pradhan Mantri Adarsh Gram Yojana (PMAGY) is being launched this year on a pilot basis, for the integrated development of 1000 such villages. I propose an allocation of Rs.100 crore for this scheme. Each village would be able to avail gap funding of Rs.10 lakh over and above the allocations under Rural Development and Poverty Alleviation Schemes. On successful implementation of the pilot phase, the Yojana would be extended in coming years.
Empowerment of Weaker Sections
The Swarna Jayanti Gram Swarozgar Yojna (SGSY) is being restructured as the National Rural Livelihood Mission to make it universal in application, focused in approach and time bound for poverty eradication by 2014-15. Stress will be laid on the formation of women Self Help Groups (SHGs). Apart from providing capital subsidy at an enhanced rate, it is also proposed to provide interest subsidy to poor households for loans upto Rs. one lakh from banks.
The Women’s Self Help Group movement is bringing about a profound transformation in rural areas. There are today over 22 lakh such groups linked with banks. Our objective is to enrol at least 50% of all rural women in India as members of SHGs over the next five years and link these SHGs to banks.
The Rashtriya Mahila Kosh has been working towards the facilitation of credit support or micro finance to poor women and has developed a number of innovative schemes for their benefit. In recognition of its role as an instrument of socio-economic change and development, the corpus of the Kosh, which at present is Rs.100 crore, would be raised to Rs.500 crore, over the next few years.
Female literacy
The low level of female literacy continues to be a matter of grave concern. It has, therefore, been decided to launch a National Mission for Female Literacy, with focus on minorities, SC, ST and other marginalised groups. The aim will be to reduce by half, the current level of female illiteracy, in three years.
Integrated Child Development Services
Government is committed to universalisation of the Integrated Child Development Services (ICDS) Scheme in the country. By March 2012, all services under ICDS would be extended, with quality, to every child under the age of six.
Student Loans to Weaker Sections
To enable students from economically weaker sections to access higher education, it is proposed to introduce a scheme to provide them full interest subsidy during the period of moratorium. It will cover loans taken by such students from scheduled banks to pursue any of the approved courses of study, in technical and professional streams, from recognised institutions in India . It is estimated that over 5 lakh students would avail of this benefit.
Welfare of Minorities
The Plan outlay of Ministry of Minority Affairs has been enhanced from Rs.1,000 crore in BE 2008-09 to Rs.1,740 crore in 2009-10, registering an increase of 74%. This includes Rs.990 crore for Multi-Sectoral Development Programme for Minorities in selected minority concentration districts, Grants-in-aid to Maulana Azad Education Foundation which is almost doubled, and provisions for National Minorities Development and Finance Corporation and Pre-Matric and Post-Matric Scholarships for Minorities. Allocations have also been made for the new schemes of National Fellowship for Students from the Minority Community and Grants-in-aid to Central Wakf Council for computerization of records of State Wakf Boards.
Aligarh Muslim University has decided to establish its campuses at Murshidabad in West Bengal and Malappuram in Kerala. I propose to make an allocation of Rs.25 crore each for these two campuses.
Welfare of workers in the unorganised sector
The unorganised or informal sector of our economy accounts for 92% of the employment and absorbs bulk of the annual increase in our labour force. The Unorganised Workers Social Security Bill, 2007 has now been passed by both Houses of Parliament. I have already initiated action to ensure that social security schemes for occupations like weavers, fishermen and women, toddy tappers, leather and handicraft workers, plantation labour, construction labour, mine workers, bidi workers, and rikshaw pullers are implemented at the earliest. Necessary financial allocations will be made for these schemes.
Employment Exchanges
I propose to launch a new project for modernisation of the Employment Exchanges in public private partnership so that a job seeker can register on-line from anywhere and approach any employment exchange. Under the project, a national web portal with common software will be developed. This will contain all the data regarding availability of skilled persons on the one hand and requirements of skilled persons by the industry on the other. It will help youth get placed and enable industry to procure required skills on real time basis.
Handlooms
In the last Budget two mega handloom clusters at Varanasi and Sibsagar and two mega powerloom clusters at Erode and Bhiwandi were approved. They are under successful implementation. I propose to add one handloom mega cluster each in West Bengal and Tamil Nadu and one powerloom mega cluster in Rajasthan. These will help preserve the magnificent textile traditions in West Bengal and Tamil Nadu and generate thousands of jobs in Rajasthan. In addition, I propose to add new mega clusters for Carpets in Srinagar (J&K) and Mirzapur (UP).
Health
The National Rural Health Mission is an essential instrument for achieving our goal of Health for all. I propose an increase of Rs.2,057 crore over and above Rs.12,070 crore provided in the Interim Budget.
Rashtriya Swasthya Bima Yojana (RSBY) was operationalised last year. The initial response has been very good. More than 46 lakh BPL families in eighteen States and UTs have been issued biometric smart cards. This scheme empowers poor families by giving them freedom of choice for using health care services from an extensive list of hospitals including private hospitals. Government proposes to bring all BPL families under this scheme. An amount of Rs.350 crore, marking 40% increase over the previous allocation, is being provided in 2009-10 Budget Estimates.
Environment and Climate Change
The National Action Plan on Climate Change unveiled last year, outlines our strategy to adapt to Climate Change and enhance the ecological sustainability of our development path. Following this, eight national missions representing a multi-pronged, long term and integrated approach are being launched. I propose to provide necessary funds for these missions.
Our government has already set up a ‘National Ganga River Basin Authority’ (NGRBA). I propose increasing the budgetary outlay for the National River and Lake Conservation Plans to Rs.562 crore in 2009-10 from Rs.335 crore in 2008-09.
I propose to make a special one-time grant of Rs.100 crore to the Indian Council of Forestry Research and Education, Dehradun in recognition of its excellence in the field of research, education and extension. I also propose an allocation of Rs.15 crore each for the Botanical Survey of India and Zoological Survey of India. An additional amount of Rs.15 crore is being allocated to Geological Survey of India.
TOWARDS BUILDING ACCOUNTABLE INSTITUTIONS
Improving delivery of public services
As substantial resources, both public and private, are mobilized to fuel the growth of the economy and make it more inclusive in character, efficiency of delivery must become the focus of government programmes. The enactment of the Right to Information Act at the Centre and in many states has been an important and successful step in this direction, ushering in greater transparency and accountability in the public decision-making process.
The setting up of the Unique Identification Authority of India (UIDAI) is a major step in improving governance with regard to delivery of public services. This project is very close to my heart. I am happy to note that this project also marks the beginning of an era where the top private sector talent in India steps forward to take the responsibility for implementing projects of vital national importance. The UIDAI will set up an online data base with identity and biometric details of Indian residents and provide enrolment and verification services across the country. The first set of unique identity numbers will be rolled out in 12 to 18 months. I have proposed a provision of Rs.120 crore for this project.
National Security
For modernisation of Police force in the States, an additional amount of Rs.430 crore is being proposed, over and above the provisions in the Interim Budget. The Government has also sanctioned special risk/hardship allowances to the personnel of Para Military Forces at par with Defence forces. Provisions for payment of these allowances are also being proposed in the Budget.
For strengthening Border Management, an additional amount of Rs.2,284 crore, over and above the provision in the Interim Budget, is being provided for construction of fences, roads, flood-lights on the international borders.
Significant augmentation in the strength of para-military forces is being done. This calls for more investment in creating the necessary infrastructure, particularly in the area of housing. The Government, therefore, proposes to launch a massive programme of housing to create 1 lakh dwelling units for Central Para-Military Forces personnel. This will not only contribute to the morale of the forces, but will also enable leveraging of government’s annual budgetary resources and create an innovative financing model.
One Rank One Pension for Ex-Servicemen (OROP)
Our country owes a deep debt of gratitude to our valiant ex-Servicemen. The Committee headed by the Cabinet Secretary on OROP has submitted its report and the recommendations of the Committee have been accepted. On the basis of these recommendations, the Government has decided to substantially improve the pension of pre 1.1.2006 defence pensioners below officer rank (PBOR) and bring pre 10.10.1997 pensioners on par with post 10.10.1997 pensioners. Both these decisions will be implemented from 1st July 2009 resulting in enhanced pension for more than 12 lakh jawans and JCOs. These measures will cost the exchequer more than Rs.2,100 crore annually. Certain pension benefits being extended to war wounded and other disabled pensioners are also being liberalised.
Education
The demographic advantage India has in terms of a large percentage of young population needs to be converted into a dynamic economic advantage by providing them the right education and skills. The provision for the scheme, ‘ Mission in Education through ICT,’ has been substantially increased to Rs.900 crore. Similarly, the provision for setting up and up-gradation of Polytechnics under the Skill Development Mission has been increased to Rs.495 crore. The government shall take forward its intent of having one Central University in each uncovered State and for this purpose I am allocating Rs.827 crore. I am also allocating Rs.2,113 crore for IITs and NITs, which includes a provision of Rs.450 crore for new IITs and NITs. The overall Plan budget for higher education is proposed to be increased by Rs.2,000 crore over Interim BE.
Union Territory of Chandigarh is the capital of Punjab and Haryana. The facilities at Punjab University , Chandigarh , need to be improved. I, therefore, propose to make an allocation of Rs.50 crore for this university. To enable the Union Territory Administration to provide better infrastructure to the people, I propose to suitably enhance the Plan allocation for Chandigarh during the current financial year.
Commonwealth Games 2010
The Commonwealth Games present the country with an opportunity to showcase our potential as an emerging Asian Power. I propose to substantially enhance the allocations for the Commonwealth Games from Rs.2,112 crore in the Interim Budget to Rs.3,472 crore in the Budget for 2009-10.
Madam Speaker, the Government is committed to ensure that Sri Lankan Tamils enjoy their rights and legitimate aspirations within the territorial sovereignty and framework of Sri Lanka ’s Constitution. The Ministry of External Affairs is working closely with the Sri Lankan Government in this regard. I propose to allocate Rs.500 crore for the rehabilitation of the internally displaced persons and reconstruction of the northern and eastern areas of Sri Lanka .
73. As Honourable Members are aware, Cyclone Aila struck the coast of West Bengal in the last week of May 2009. Extensive damage was caused to roads, houses and infrastructure. While immediate interim relief has been provided from the Calamity Relief Fund (CRF), it is proposed to draw up a programme for rebuilding the damaged infrastructure. For this purpose, I propose to allocate Rs.1,000 crore.
BUDGET ESTIMATES 2009-10
Madam Speaker, now I turn to the Budget Estimates for 2009-10.
The Budget Estimates 2009-10 provide for a total expenditure of Rs.10,20,838 crore consisting of Rs.6,95,689 crore towards Non Plan and Rs.3,25,149 crore towards Plan expenditure. The increase in Non Plan expenditure over BE 2008-09 is 37% whereas the increase in Plan expenditure is 34%. The total increase in expenditure in 2009-10 over BE 2008-09 is 36%.
The increase in Non Plan expenditure is mainly on account of the implementation of the Sixth Central Pay Commission recommendations, increased food subsidy and higher interest payment arising out of the larger fiscal deficit in 2008-09. Interest payments are estimated at Rs.2,25,511 crore constituting about 36% of Non Plan revenue expenditure in BE 2009-10. The total provision for subsidies are up from Rs.71,431 crore in BE 2008-09 to Rs.1,11,276 crore in BE 2009-10. The outlay on Defence has gone up from Rs.1,05,600 crore in BE 2008-09 to Rs.1,41,703 crore in BE 2009-10.
Honourable Members may recall that while presenting the Interim Budget 2009-10, I had stated that the Plan expenditure for 2009-10 may have to be increased further as a part of counter-cyclical measures to minimise the impact of global recession and economic slowdown. Against the backdrop of limited fiscal space because of reduction in CENVAT and Service Tax rates, Government have taken a conscious and bold decision to enhance the Gross Budgetary Support (GBS) for the Annual Plan 2009-10 by Rs.40,000 crore over Interim Budget 2009-10. Bulk of this enhanced GBS is directed towards public investment in infrastructure with special emphasis on rural infrastructure, raising growth potential and leading to income generation. Besides, the State Governments will be permitted to borrow additional 0.5% of their GSDP by relaxing the fiscal deficit target under FRBM from 3.5% to 4% of their GSDP. This will enable the State Governments to raise additional open market loans of about Rs.21,000 crore in the current year. In other words, the total additionality in Plan expenditure by Centre and the States put together would be Rs.61,000 crore over Interim Budget. I do believe that this fiscal expansion will go a long way in reversing the impact of economic slowdown and accelerate our growth revival in the medium term.
Madam Speaker, given the possibility of the economic downturn persisting in the current year, the gross tax receipts are budgeted at Rs.6,41,079 crore in BE 2009-10, compared to Rs.6,87,715 crore in BE 2008-09. The non tax revenue receipts are, however, likely to be better and are estimated at Rs.1,40,279 crore in BE 2009-10 compared to Rs.95,785 crore in BE 2008-09. The revenue deficit as a percentage of GDP is projected at 4.8% compared to 1% in BE 2008-09 and 4.6% as per provisional accounts of 2008-09. The fiscal deficit as a percentage of GDP is projected at 6.8% compared to 2.5% in BE 2008-09 and 6.2% as per provisional accounts 2008-09. This level of deficit is a matter of concern and Government will address this issue in right earnest to come back to the path of fiscal consolidation at the earliest.
Madam Speaker, before I turn to my tax proposals, I cannot resist the temptation of re-visiting Kautilya. He said and I quote, “Just as one plucks fruits from a garden as they ripen, so shall a King have revenue collected as it becomes due. Just as one does not collect unripe fruits, he shall avoid taking wealth that is not due because that will make the people angry and spoil the very sources of revenue.”
PART - B
TAX PROPOSALS
Madam Speaker, I shall now present my tax proposals.
As the House is aware, the thrust of reforms over the last few years, including the previous term of this Government, has been to improve the efficiency and equity of our tax system. This is sought to be achieved by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the base. These policy changes have been accompanied by requisite re-engineering of key business processes coupled with automation, both for direct and indirect taxes. On the direct tax side, a recent initiative for further improving efficiency is the setting up of a Centralized Processing Centre (CPC) at Bengaluru where all electronically filed returns, and paper returns filed in entire Karnataka, will be processed.
These tax reform initiatives have produced impressive results. The Centre’s Tax- GDP ratio has increased to 11.5 per cent in 2008-09 from a low of 9.2 per cent in 2003-04. The healthy growth in tax revenues over the last five years is essentially attributable to growth in direct taxes. Further, the share of direct taxes in the Centre’s tax revenues has increased to 56 per cent in 2008-09 from 41 per cent in 2003-04, reflecting a sharp improvement in the equity of our tax system. The Government is committed to furthering this process of tax reform.
In the course of preparation of this budget, I have had the opportunity to interact with large number of stakeholders and receive valuable inputs. Most suggestions were for structural changes in the tax system. Tax reform, like all reforms, is a process and not an event. Therefore, I propose to pursue structural changes in direct taxes by releasing the new Direct Taxes Code within the next 45 days and in indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010 .
The Direct Taxes Code, along with a Discussion Paper, will be released to the public for debate. Based on the inputs received, the Government will finalise the Direct Taxes Code Bill for introduction in this House sometime during the Winter Session.
To further enhance efficiency in tax administration, I intend to merge the two Authorities for Advance Rulings on Direct and Indirect Taxes by amending the relevant Acts. This will enable the Authority for Advance Rulings set up under Section 245-O of the Income Tax Act, 1961 to also function as the Authority for Advance Rulings for Indirect Taxes.
I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders.
DIRECT TAXES
I shall now deal with direct taxes.
Madam Speaker, there have been demands by the corporate sector for reduction in tax rates. However, tax rates are determined by the size of the tax base; if the tax base is higher, the tax rates can be lower. The Income Tax Act is riddled with a plethora of tax exemptions which substantially erode the tax base. The extent of this erosion is presented to this House in the form of a Revenue Foregone Statement. The growth in the direct tax revenue foregone is relatively higher than the growth in the direct tax revenues. Accordingly, I do not propose to make any change in the Corporate Tax rates.
With a view to providing interim relief to small and marginal taxpayers and senior citizens, I propose to increase the personal income tax exemption limit by Rs.15,000 from Rs.2.25 lakh to Rs.2.40 lakh for senior citizens. Similarly I also propose to raise the exemption limit by Rs.10,000 from Rs.1.80 lakh to Rs.1.90 lakh for women tax payers and by Rs.10,000 from Rs.1.50 lakh to Rs.1.60 lakh for all other categories of individual taxpayers. Further, I also propose to increase the deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability to Rs.1 lakh from the present limit of Rs.75,000.
In the past, surcharges on direct taxes have generally been levied to meet the revenue needs arising from natural calamities. The Government has set up the National Calamity Contingency Fund to build up resources to meet emergency situations. As a corollary, surcharge on direct taxes should be removed. However, this has to be balanced with the revenue needs of the Government. Therefore, in the first instance, I propose to phase out the surcharge on various direct taxes by eliminating the surcharge of 10 per cent on personal income tax.
Deduction in respect of export profits is available under sections 10A and 10B of the Income-tax Act. The deduction under these sections would not be available beyond the financial year 2009-2010. In order to tide over the slowdown in exports, I propose to extend the sun-set clauses for these tax holidays by one more year i.e. for the financial year 2010-11.
The Finance Act, 2005 introduced the Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees. This tax has been perceived as imposing considerable compliance burden. Empathising with these sentiments, I propose to abolish the Fringe Benefit Tax.
The competitive ability of an economy rests on its progress in the area of Research and Development (R&D). In order to incentivise the corporate sector to undertake R&D work, I propose to extend the scope of the current provision of weighted deduction of 150% on expenditure incurred on in-house R&D to all manufacturing businesses except for a small negative list.
Under the present scheme of the Income Tax Act, tax exemptions are largely profit-linked. Such incentives are inherently inefficient and liable to misuse. Therefore, it is proposed to incentivise businesses by providing investment-linked tax exemptions. To begin with, I propose to extend investment- linked tax incentives to the businesses of setting up and operating ‘cold chain’, warehousing facilities for storing agricultural produce and the business of laying and operating cross country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle. Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments will be fully allowable as deduction.
Minimum Alternate Tax (MAT) was introduced to address inequity in taxation of corporate taxpayers. In the quest for greater equity, I propose to increase the rate of MAT to 15 per cent of book profits from the present rate of 10 per cent. However, to grant relief to corporate taxpayers, I also propose to extend the period allowed to carry forward the tax credit under MAT from seven years to ten years.
The New Pension System (NPS) is an important milestone in the development of a sustainable, efficient, voluntary and defined contribution pension system in India . While the NPS will continue to be subjected to the Exempt-Exempt-Taxed (EET) method of tax treatment of savings, it is proposed to provide necessary fiscal support to the NPS for the establishment of this much needed social security system. Accordingly, I propose to exempt the income of the NPS Trust from income tax and any dividend paid to this Trust from Dividend Distribution Tax. Similarly, all purchase and sale of equity shares and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax. I also propose to enable self employed persons to participate in the NPS and avail of the tax benefits available thereto.
In order to further improve the investment climate in the country, we need to facilitate the resolution of tax disputes faced by foreign companies within a reasonable time frame. This is particularly relevant for such companies in the Information Technology (IT) sector. I, therefore, propose to create an alternative dispute resolution mechanism within the Income Tax Department for the resolution of transfer pricing disputes. To reduce the impact of judgemental errors in determining transfer price in international transactions, it is proposed to empower the Central Board of Direct Taxes (CBDT) to formulate ‘safe harbour’ rules.
The Finance Act, 2008 introduced the Commodity Transaction Tax (CTT) to be levied on taxable commodities transactions entered in a recognized association. The Prime Minister’s Economic Advisory Council has recommended abolition of the CTT. I, therefore, propose to abolish the Commodity Transaction Tax.
The House will agree that it is desirable to bring about transparency in the funding of political parties in the country. With a view to reforming the system of funding of political parties, I propose to provide that donations to electoral trusts shall be allowed as a 100 per cent deduction in the computation of the income of the donor. For this purpose, Electoral Trusts will be such trusts as are set up as pass-through vehicles for routing the donations to political parties and are approved by CBDT.
Section 80E of the Income-tax Act provides for a deduction in respect of interest on loans taken for pursuing higher education in specified fields of study. I propose to extend the scope of this provision to cover all fields of study, including vocational studies, pursued after completion of schooling.
Anonymous donations to charitable institutions are presently liable to tax so as to prevent unaccounted money being routed to such entities in the garb of anonymous donations. However, some organisations are facing genuine problems in complying with the procedural requirements. In order to mitigate the practical difficulties being faced by such charitable organisations, I propose to grant relief to such organisations by not taxing anonymous donations received to the extent of 5 per cent of their total income or a sum of Rs.1 lakh, whichever is higher.
To facilitate the business operations of all small taxpayers and reduce their compliance burden, I propose to expand the scope of presumptive taxation to all small businesses with a turnover upto Rs.40 lakh. All such taxpayers will have the option to declare their income from business at the rate of 8 per cent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts. As a procedural simplification, I also propose to allow them to pay their entire tax liability from business at the time of filing their return by exempting them from paying advance tax. This new scheme will come into effect from the financial year 2010-11.
Madam Speaker, in the context of the geo-political environment, it is necessary for us to create our own facilities for energy security. Accordingly, I propose to extend the tax holiday under section 80-IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, also to natural gas. This tax benefit will be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the New Exploration Licensing Policy-VIII round of bidding. Further, I also propose to retrospectively amend the provisions of the said section to provide that “undertaking” for the purposes of section 80-IB(9) will mean all blocks awarded in any single contract.
Under the present provisions of section 2 (15) of the Income Tax Act, “charitable purpose” includes relief of the poor, education, medical relief, and the “advancement of any other object of general public utility”. However, the “advancement of any other object of general public utility” cannot involve the carrying on of any activity in the nature of trade, commerce or business. I propose to provide the same tax treatment to trusts engaged in preserving and improving our environment (including watersheds, forests and wildlife) and preserving our monuments or places or objects of artistic or historic interest, as is available to trusts engaged in providing relief of the poor, education and medical relief.
INDIRECT TAXES
Madam Speaker, I turn to my main proposals on indirect taxes.
I will first take up customs duties.
Although our domestic industry has weathered the impact of the global financial crisis and the resultant slowdown with resilience, it is yet to fully find its feet. Manufacturing growth, which had turned negative in October 2008 on a year-on-year basis and remained in that zone till March this year, appears to be barely turning the corner. However, the global scenario remains worrisome and it is my view that the paramount need is to provide industry with a stable framework. My proposals on indirect taxes seek to achieve this by maintaining the overall rate structure for customs and central excise duties as well as service tax. I must hasten to add that I have not hesitated to act where distortions provide a compelling reason or where relief would provide a healing touch.
Full exemption from basic customs duty was provided to Set Top Boxes in 2006 to enable their free import for the smooth introduction of the Conditional Access System (CAS). Now that production capacity has come up in the country, I propose to impose a nominal basic customs duty of 5 per cent on such Set Top Boxes to encourage domestic value addition.
The electronic hardware industry has a strong potential for creating employment especially in the SME sector. I intend to reduce the basic customs duty on LCD panels from 10 per cent to 5 per cent to support indigenous production of LCD televisions.
Full exemption from CVD of 4 per cent was available to accessories, parts and components imported for the manufacture of mobile phones till the 30th of June, 2009 . I propose to reintroduce this exemption for another year.
For reasons that are apparent, industry sectors having an export-orientation have been adversely impacted by the demand compression in global markets. Presently, exporters of leather products, textile garments, footwear as well as sports goods are permitted to import raw materials, consumables etc. upto 3 per cent of the fob value of their exports free of duty. I propose to add a few more items to these lists. Full exemption from basic customs duty is being provided to rough corals for encouraging value-addition and export.
It is imperative that the contribution of new and renewable energy sources of power is enhanced if we have to successfully combat the phenomena of global warming and climate change. I am reducing the basic customs duty on permanent magnets - a critical component for Wind Operated Electricity Generators - from 7.5 per cent to 5 per cent.
On influenza vaccine and nine specified life saving drugs used for the treatment of breast cancer, hepatitis-B, rheumatic arthritis etc. and on bulk drugs used for the manufacture of such drugs, I propose to reduce the customs duty from 10 per cent to 5 per cent. They will also be totally exempt from excise duty and countervailing duty.
Customs duty will also be reduced from 7.5 per cent to 5 per cent on two specified life saving devices used in treatment of heart conditions. These devices will be fully exempt from excise duty and CVD also.
Gold bars currently attract customs duty at the specific rate of Rs.100 per ten grams while other forms of gold (excluding jewellery) are chargeable to a duty of Rs.250 per ten grams. These rates were fixed in 2004 and have not been reviewed even as the price of gold has increased manifold. I propose to partially restore the incidence by increasing these rates to Rs.200 per ten grams and Rs.500 per ten grams respectively. Along the same lines, the customs duty on silver (excluding jewellery) will be increased from Rs.500 per kg to Rs.1,000 per kg. These revised rates would also apply to gold and silver, including ornaments that are not studded, when imported by a bona fide passenger as baggage.
I will now come to central excise duties.
Hon’ble Members are aware that the Government announced a series of fiscal stimulus packages, one of the key elements of which was the sharp reduction in the ad valorem rates of Central Excise duty for non-petroleum products by 4 percentage points across the board on 7th of December 2008 and by another 2 percentage points in the mean CENVAT rate on the 24th of February, 2009.
One of the consequences of these cuts was that pure cotton textiles came to be fully exempted from excise duty. We have received representations that full exemption prevents manufacturers from availing of export rebate of the duty paid from CENVAT credit. I propose to rectify this situation by restoring the erstwhile optional rate of 4 per cent for cotton textiles beyond the fibre stage.
Ever since the revamp of the excise duty structure on textiles by my distinguished predecessor in the 2004 budget, a differential in rates has been maintained between the cotton sector and the manmade sector. In keeping with the integrity of the earlier structure, I propose to restore the rate of 8 per cent Central Excise duty on manmade fibre and yarn on a mandatory basis and on stages beyond fibre and yarn at that rate on optional basis. These changes, together with duty changes on intermediates, would imply that the duty on all types of manmade fibre and yarn and their intermediates would be the same, easing the problem of credit accumulation.
Wool waste and cotton waste are chargeable to basic customs duty of 15 per cent. These are used in the manufacture of cheaper varieties of textile articles such as blankets and rugs. As a measure of relief to this sector, I propose to reduce the basic customs duty on these items to 10 per cent.
With the Government’s proclaimed objective of introducing a Goods and Services Tax (GST) both at the national and State level, some more steps in that direction are necessary. One measure that would facilitate the process is the further convergence of central excise duty rates to a mean rate - currently 8 per cent. I have reviewed the list of items currently attracting the rate of 4 per cent, the only rate below the mean rate. There is a case for enhancing the rate on many items appearing in this list to 8 per cent, which I propose to do, with the following major exceptions:
• food items; and
• drugs, pharmaceuticals and medical equipment.
Some of the other items on which I propose to retain the rate of 4 per cent are:
• paper, paperboard & their articles;
• items of mass consumption such as pressure cookers, cheaper electric bulbs, low-priced footwear, water filters/purifiers, CFL etc.;
• power driven pumps for handling water; and
• paraxylene.
The details are available in the relevant notifications.
Bio-diesel, obtained from vegetable oils and used for blending with petro-diesel, is currently exempt from excise duty. I now propose to fully exempt petro-diesel blended with bio-diesel from excise duty.
In order to encourage the use of this environment friendly fuel and augment its availability in the country, I also propose to reduce basic customs duty on bio-diesel from 7.5 per cent to 2.5 per cent - at par with petro-diesel. With these proposals I hope to see a smile on the faces of the green brigade!
My other proposals on central excise duties seek to address distortions that the manufacturing industry has been complaining about.
The IT industry has pointed out that it is facing difficulties in the assessment of software which involves transfer of the right to use after the levy of service tax on IT software service. To resolve the matter, I propose to exempt the value attributable to the transfer of the right to use packaged software from excise duty and CVD.
The construction industry has represented that they are facing difficulties on account of withdrawal of exemption on goods manufactured at site. I propose to restore full exemption to such goods, including pre-fabricated concrete slabs or blocks, when used for further construction at site.
A specific component was added to the ad valorem duty of 24 per cent applicable to large cars and utility vehicles in June last year. In the case of vehicles of engine capacity below 2000 cc, this component was Rs.15,000/- per unit while for vehicles of higher engine capacity it was Rs.20,000/- per unit. These rates are now being unified at the lower level of Rs.15,000/- per unit.
Petrol driven trucks provide a useful means of transport within cities and across short distances. These are chargeable to excise duty of 20 per cent. I propose to reduce excise duty on these trucks to 8 per cent to equate the duty with similar vehicles run on diesel.
Madam Speaker, I fear that my proposals relating to gold and silver on the customs side would somewhat dent my popularity with women. I propose to salvage this by fully exempting branded jewellery from excise duty.
I now turn to my proposals on service tax.
It is an international practice to zero-rate exports. To achieve this objective, a scheme was announced in 2007, granting refund of service tax paid on certain taxable services used after the clearance of export goods from the factory. For some time now, the exporting community has been expressing dissatisfaction over the difficulties faced in obtaining such refunds. Several procedural simplifications attempted in the past have also not yielded satisfactory results. The solution seems to lie in placing greater trust on the claims filed by the exporters. Keeping this in view, I propose to make the following changes in the scheme:
• Services received by exporters from goods transport agents and commission agents, where the liability to pay service tax is ab initio on the exporter, would be exempted from service tax. Thus, there would be no need for the exporter to first pay the tax and later claim refund.
• For other services received by exporters, the exemption would be operated through the existing refund mechanism based on self-certification of the documents where such refund is below 0.25 per cent of fob value, and certification of documents by a Chartered Accountant for value of refund exceeding the above limit.
The Export Promotion Councils and the Federation of Indian Export Organizations (FIEO) provide a valuable service in augmenting our export effort. I propose to exempt them from the levy of service tax on the membership and other fees collected by them till 31st March, 2010 .
In the goods transport sector, service tax is currently levied on transport of goods by road, by air, through pipelines and in containers. However, goods carried by Indian railways or those carried as coastal cargo or through inland waterways are not charged to service tax. In order to provide a level playing field in the goods transport sector, I propose to extend the levy of service tax to these modes of goods transport. The new levy is not likely to impact the prices of essential commodities or goods for mass consumption, as suitable exemptions would be provided.
As the Hon’ble Members are aware, services provided by chartered accountants, cost accountants, and company secretaries as well as by engineering and management consultants are presently charged to service tax. Although there is a school of thought that legal consultants do not provide any service to their client, I hold my distinguished predecessor in high esteem and disagree! As such, I propose to extend service tax on advice, consultancy or technical assistance provided in the field of law. This tax would not be applicable in case the service provider or the service receiver is an individual.
Vehicles having ‘Stage Carriage Permits’ and run by State undertakings are exempted from service tax. However, transportation of passengers undertaken by private enterprises in vehicles having ‘Contract Carriage Permits’ is, subjected to service tax. In order to bring parity in tax treatment, I propose to exempt such transportation also from the levy of service tax.
In July, 2008 goods transport agents (GTA) went on strike with several demands. One of the demands that was accepted by the government was to exempt certain services, such as packing, cargo handling and warehousing, provided to GTAs en route, from service tax. For this purpose an exemption notification was issued. It was also demanded by goods transport agents that the proceedings already initiated against such service providers should be dropped. The Government has accepted this genuine demand. Therefore, I propose to make certain legislative changes required to fulfill this promise.
Copies of notifications giving effect to the changes in customs, central excise and service tax will be laid on the Table of the House in due course.
My tax proposals on direct taxes are revenue neutral. On indirect taxes, they are estimated to yield a net gain of Rs.2,000 crore for a full year.
CONCLUSION
As we begin this five year journey, the road ahead will not be easy. We will have to manage uncertainties and there will be as many problems as there would be solutions. Mahatma Gandhi said and I quote, “Democracy is the art and science of mobilizing the entire physical, economic and spiritual resources of various sections of the people in the service of the common good of all.” This is precisely what we will have to do. With strong hearts, enlightened minds and willing hands, we will have to overcome all odds and remove all obstacles to create a brave new India of our dreams.
Madam Speaker, with these words I commend the budget to the House.

The Age Of Turbulence: Mr Greenspan

2009-03-09T08:43:00.000-07:00

“The Age of Turbulence” Mr. Greenspan Product detailsPaperback: 576 pages :Publisher: Penguin (9 Sep 2008) :Language English ISBN-10: 0141029919: ISBN-13: 978-0141029917 : Product Dimensions: 19.4 x 12.8 x 2.8 cm September 18, 2007: Books of the Times
Economist’s Life, Scored With Jazz Theme By DAVID LEONHARDTIn 1944 a draft board in downtown Manhattan rejected Alan Greenspan, then a recent high school graduate, for military service because he had a spot on his lung that looked like it might be tuberculosis. So Mr. Greenspan, suddenly without a plan for the future, auditioned to play clarinet for the trumpeter Henry Jerome’s traveling big band.
He got the job, but he was never a star. He was a sideman rather than a soloist. Among his fellow musicians he became known as the band’s resident intellectual, the clarinetist who could also fill out his bandmates’ income tax forms for them. Between sets, when they disappeared into the green room — “which would quickly fill with the smell of tobacco and pot,” Mr. Greenspan recalls — he read books about business.
The pattern repeated itself, albeit in a more sober form, after the war ended and he began studying economics at New York University. Many of his classmates were swept up by grand questions relating to the new economic order, but Mr. Greenspan was more interested in numbers and equations. “I still had the sideman psychology,” he writes in his memoir, “The Age of Turbulence.” “I preferred to focus on technical challenges and did not have a macro view.”
His macro view wouldn’t come until the 1950s, when his first wife introduced him to Ayn Rand’s New York salon. Rand — whom he calls “quite plain to look at” but “a stabilizing force in my life” — pushed him to think beyond mathematics and helped turn him into a libertarian.
By the time President Ronald Reagan named Mr. Greenspan to run the Federal Reserve in 1987, he had already a lived a full, fascinating, Zelig-like life. For years he was the quietly influential man off to the side. With his book he finally lets us know what he was thinking.
For a memoir from such a high-profile figure, it is surprisingly frank. Large parts of the book are downright entertaining. Its biggest failing — the reason it isn’t a great memoir — is Mr. Greenspan’s reluctance to be as forthright and penetrating about himself as he is about others.
Born in 1926, he was raised in Washington Heights, the only son of parents who soon divorced. He attended George Washington High School a few years behind Henry Kissinger (and a few decades before the baseball stars Rod Carew and Manny Ramirez, a historical oddity that Mr. Greenspan, who still remembers Joe DiMaggio’s 1936 batting average, probably appreciates). Before joining the Jerome big band, he played in the same informal ensemble as Stan Getz. At Columbia University, Arthur Burns, himself a future chairman of the Fed, became Mr. Greenspan’s graduate-school adviser.
Like his father, a stockbroker, Mr. Greenspan eventually made his way to Wall Street, where he ran a consulting business that forecast the economy. He was doing quite nicely there when Martin Anderson, another Rand acolyte, asked if Mr. Greenspan wanted to join Richard M. Nixon’s 1968 presidential campaign.
Except for Jimmy Carter, Mr. Greenspan has worked with every president since 1969, and the book offers a fairly blunt critique of each. Gerald Ford, who’s portrayed as an unusually decent politician, clearly ranks first. “He always understood what he knew and what he didn’t know,” Mr. Greenspan writes.
Despite their ideological differences, Bill Clinton seems to place second, thanks to his “consistent, disciplined focus on long-term economic growth.” At one point, with urging from Newt Gingrich, the House speaker, Mr. Greenspan called Rush Limbaugh to argue for the Clinton administration’s Mexican loan guarantees. Mr. Greenspan even shares some of the credit for his signature insight — recognizing early on that technology was transforming the economy — with Mr. Clinton.
Nixon, Reagan and George H. W. Bush each receives a mix of praise and criticism. Only the current President Bush goes without receiving credit for a single significant accomplishment.
“The Age of Turbulence” is really two books, one of which I suspect Mr. Greenspan preferred writing and one of which he understood his audience would prefer reading. The second half — the typically Greenspan half — is a series of meditations on economic issues, like income inequality and the rise of China.
The first 250-odd pages are a standard autobiography, and Mr. Greenspan confesses in the acknowledgments that learning to write in the first person was a struggle. For all of the book’s candor, this is a struggle he does not quite win. This first half of the book is utterly readable, but it lacks a narrative core. It’s telling that the book opens on Sept. 11, 2001, with Mr. Greenspan on a plane flying home from Switzerland that gets rerouted. This is supposed to serve as drama.
Mr. Greenspan also doesn’t really let readers inside his life. He laments that Nixon’s televised announcement of price controls in 1971 pre-empted “Bonanza” — “a show I loved to watch” — and he calls his wife, Andrea Mitchell, “very beautiful.” But he does not easily admit error. He does not even confess to having his own ambitions. He seems to want people to believe that he accepted his fantastic ascent with reluctance.
Yet, perhaps accidentally, he has still managed to create a lasting image of himself. He never seems happier than when poring over economic indicators that allow him to predict everything from the 1958 steel recession to the 1990s boom. “My early training was to immerse myself in extensive detail in the workings of some small part of the world and to infer from that detail the way that segment of the world behaves. That is the process I have applied throughout my career,” he writes.
He lacks the same sure footing when confronting the great political issues, and even the economic ones, of the last few decades. He provided the critically influential voice in support of the current administration’s tax cuts, for instance, but he now disowns them. He worries that the backlash to globalization could create a “truly serious economic crisis,” but his proposed remedies — like higher pay for math teachers — don’t seem up to the task.
Despite Rand’s tutoring he never quite escapes the sideman’s psychology. Now, there should be no shame in that. Mr. Greenspan may have had a better feel for the ups and downs of the postwar American economy than anyone else, and he put his talents to good use as a central banker. The question that lingers is why the rest of us allowed him to be treated as something much more.

UK : FT series entitled the Future of Capitalism (1)

2009-03-09T07:32:00.000-07:00

FT series entitled the Future of Capitalism (1)
A survival plan for global capitalism

A survival plan for global capitalism

Published: March 8 2009 18:28 Last updated: March 8 2009 18:28
J.K. Galbraith wrote that 1929 stood alongside 1066, 1776, 1914, 1945 and 1989 in its importance. The world today was shaped by the efforts of governments to overcome the economic meltdown of the 1930s – and the consequences of their failures. Even if this economic crisis is not as bad as the Great Depression, it will have epoch-moulding consequences. This week the Financial Times starts a series on the Future of Capitalism. Much, however, depends
on the success of next month’s meeting of the Group of 20 in London and how successful governments are at ending this worldwide crisis.
The intellectual impact of the crisis has already been colossal. The “Greenspanist” doctrine in monetary policy is in retreat. It no longer seems clear that it is easier for central banks to clean up after asset price bubbles burst than to prick them when they are small. Monetary authorities will need to be more concerned both about financial stability and global imbalances which allowed a few countries to build up vast surpluses while a few others ran yawning deficits.

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Seeds of its own destruction

By Martin Wolf
Published: March 8 2009 19:13 Last updated: March 8 2009 19:13
Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.
“The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Thus quipped Ronald Reagan, hero of US conservatism. The remark seems ancient history now that governments are pouring trillions of dollars, euros and pounds into financial systems.
“Governments bad; deregulated markets good”: how can this faith escape unscathed after Alan Greenspan, pupil of Ayn Rand and predominant central banker of the era, described himself, in congressional testimony last October, as being “in a state of shocked disbelief” over the failure of the “self-interest of lending institutions to protect shareholders’ equity”?
In the west, the pro-market ideology of the past three decades was a reaction to the perceived failure of the mixed-economy, Keynesian model of the 1950s, 1960s and 1970s. The move to the market was associated with the election of Reagan as US president in 1980 and the ascent to the British prime ministership of Margaret Thatcher the year before. Little less important was the role of Paul Volcker, then chairman of the Federal Reserve, in crushing inflation.
Yet bigger events shaped this epoch: the shift of China from the plan to the market under Deng Xiaoping, the collapse of Soviet communism between 1989 and 1991 and the end of India’s inward-looking economic policies after 1991. The death of central planning, the end of the cold war and, above all, the entry of billions of new participants into the rapidly globalising world economy were the high points of this era. Today, with a huge global financial crisis and a synchronised slump in economic activity, the world is changing again. The financial system is the brain of the market economy. If it needs so expensive a rescue, what is left of Reagan’s dismissal of governments? If the financial system has failed, what remains of confidence in markets?
It is impossible at such a turning point to know where we are going. In the chaotic 1970s, few guessed that the next epoch would see the taming of inflation, the unleashing of capitalism and the death of communism. What will happen now depends on choices unmade and shocks unknown. Yet the combination of a financial collapse with a huge recession, if not something worse, will surely change the world. The legitimacy of the market will weaken.
The credibility of the US will be damaged. The authority of China will rise. Globalisation itself may founder. This is a time of upheaval.
How did the world arrive here? A big part of the answer is that the era of liberalisation contained seeds of its own downfall: this was also a period of massive growth in the scale and profitability of the financial sector, of frenetic financial innovation, of growing global macroeconomic imbalances, of huge household borrowing and of bubbles in asset prices.
In the US, core of the global market economy and centre of the current storm, the aggregate debt of the financial sector jumped from 22 per cent of gross domestic product in 1981 to 117 per cent by the third quarter of 2008. In the UK, with its heavy reliance on financial activity, gross debt of the financial sector reached almost 250 per cent of GDP (see charts).
Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard argue that the era of liberalisation was also a time of exceptionally frequent financial crises, surpassed, since 1900, only by the 1930s. It was also an era of massive asset price bubbles. By intervening to keep their exchange rates down and accumulating foreign currency reserves, governments of emerging economies generated huge current account surpluses, which they recycled,
together with inflows of private capital, into official capital outflows: between the end of the 1990s and the peak in July 2008, their currency reserves alone rose by $5,300bn.
These huge flows of capital, on top of the traditional surpluses of a number of high-income countries and the burgeoning surpluses of oil exporters, largely ended up in a small number of high-income countries and particularly in the US. At the peak, America absorbed about 70 per cent of the rest of the world’s surplus savings.
Meanwhile, inside the US the ratio of household debt to GDP rose from 66 per cent in 1997 to 100 per cent a decade later. Even bigger jumps in household indebtedness occurred in the UK. These surges in household debt were supported, in turn, by highly elastic and innovative financial systems and, in the US, by government programmes. Throughout, the financial sector innovated ceaselessly. Warren Buffett, the legendary investor, described derivatives as “financial weapons of mass destruction”. He was proved at least partly right. In the 2000s, the “shadow banking system” emerged and traditional banking was largely replaced by the originate-and-distribute model of securitisation via constructions such as collateralised debt obligations. This model blew up in 2007.
We are witnessing the deepest, broadest and most dangerous financial crisis since the 1930s. As Profs Reinhart and Rogoff argue in another paper, “banking crises are associated with profound declines in output and employment”. This is partly because of overstretched balance sheets: in the US, overall debt reached an all-time peak of just under 350 per cent of GDP – 85 per cent of it private. This was up from just over 160 per cent in 1980.
Among the possible outcomes of this shock are: massive and prolonged fiscal deficits in countries with large external deficits, as they try to sustain demand; a prolonged world recession; a brutal adjustment of the global balance of payments; a collapse of the dollar; soaring inflation; and a resort to protectionism. The transformation will surely go deepest in the financial sector itself. The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it. As Mr Volcker remarked during a speech last April: “Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards –
has failed the test of the marketplace.”
In a recent paper Andrew Haldane, the Bank of England’s executive director for financial stability, shows how little banks understood of the risks they were supposed to manage. He ascribes these failures to “disaster myopia” (the tendency to underestimate risks), a lack of awareness of “network externalities” (spillovers from one institution to the others) and “misaligned incentives” (the upside to employees and the downside to shareholders
and taxpayers).
. . .
After the crisis, we will surely “see finance less proud”, as Winston Churchill desired back in 1925. Markets will impose a brutal, if temporary, discipline. Regulation will also tighten.
Less clear is whether policymakers will contemplate structural remedies: a separation of utility commercial banking from investment banking; or the forced reduction in the size and complexity of institutions deemed too big or interconnected to fail. One could also imagine a return of much banking activity to the home market, as governments increasingly call the tune. If so, this would be “de-globalisation”.
Churchill called also for industry to be “more content”. In the short run, however, the collapse of the financial system is achieving the opposite: a worldwide industrial slump. It is also spreading to every significant sector of the real economy, much of which is clamouring for assistance.
Yet if the financial system has proved dysfunctional, how far can we rely on the maximisation of shareholder value as the way to guide business? The bulk of shareholdings is, after all, controlled by financial institutions. Events of the past 18 months must confirm the folly of this idea. It is better, many will conclude, to let managers determine the direction of their companies than let financial players or markets override them.
A likely result will be an increased willingness by governments to protect companies from active shareholders – hedge funds, private equity and other investors. As a defective financial sector loses its credibility, the legitimacy of the market process itself is damaged. This is particularly true of the free-wheeling “Anglo-Saxon” approach.
No less likely are big changes in monetary policy. The macroeconomic consensus had been in favour of a separation of responsibility for monetary and fiscal policy, the placing of fiscal policy on autopilot, independence of central banks and the orientation of monetary decisions towards targeting inflation.
But with interest rates close to zero, the distinction between monetary and fiscal policy vanishes. More fundamental is the challenge to the decision to ignore asset prices in the setting of monetary policy.
Many argue that Mr Greenspan, who succeeded Mr Volcker, created the conditions for both bubbles and subsequent collapse. He used to argue that it would be easier to clean up after the bursting of a bubble than identify such a bubble in real time and then prick it. In a reassessment of the doctrine last November, Donald Kohn, Fed vice-chairman, restated the orthodox position, but with a degree of discomfort.
Mr Kohn now states that “in light of the demonstrated importance to the real economy of speculative booms and busts (which can take years to play out),
central banks probably should always try to look out over a long horizon when evaluating the economic outlook and deliberating about the appropriate accompanying path of the policy rate”. Central banks will have to go further, via either monetary policy or regulatory instruments.
. . .
Yet a huge financial crisis, together with a deep global recession, if not something far worse, is going to have much wider effects than just these.
Remember what happened in the Great Depression of the 1930s. Unemployment rose to one-quarter of the labour force in important countries, including the US. This transformed capitalism and the role of government for half a century, even in the liberal democracies. It led to the collapse of liberal trade, fortified the credibility of socialism and communism and shifted many policymakers towards import substitution as a development strategy.
The Depression led also to xenophobia and authoritarianism. Frightened people become tribal: dividing lines open within and between societies. In 1930, the Nazis won 18 per cent of the German vote; in 1932, at the height of the Depression, their share had risen to 37 per cent.
One transformation that can already be seen is in attitudes to pay. Even the US and UK are exerting direct control over pay levels and structures in assisted institutions. From the inconceivable to the habitual has taken a year. Equally obvious is a wider shift in attitudes towards inequality: vast rewards were acceptable in return for exceptional competence; as compensation for costly incompetence, they are intolerable. Marginal tax rates on the wealthier
are on the way back up.
Yet another impact will be on the sense of insecurity. The credibility of moving pension savings from government-run pay-as-you-go systems to market-based systems will be far smaller than before, even though, ironically, the opportunity for profitable long-term investment has risen. Politics, like markets, overshoot.
The search for security will strengthen political control over markets. A shift towards politics entails a shift towards the national, away from the global.
This is already evident in finance. It is shown too in the determination to rescue national producers. But protectionist intervention is likely to extend well beyond the cases seen so far: these are still early days.
The impact of the crisis will be particularly hard on emerging countries: the number of people in extreme poverty will rise, the size of the new middle class will fall and governments of some indebted emerging countries will surely default. Confidence in local and global elites, in the market and even in the possibility of material progress will weaken, with potentially devastating social and political consequences. Helping emerging economies through a crisis for
which most have no responsibility whatsoever is a necessity.
The ability of the west in general and the US in particular to influence the course of events will also be damaged. The collapse of the western financial system, while China’s flourishes, marks a humiliating end to the “uni-polar moment”. As western policymakers struggle, their credibility lies broken. Who still trusts the teachers?
These changes will endanger the ability of the world not just to manage the global economy but also to cope with strategic challenges: fragile states, terrorism, climate change and the rise of new great powers. At the extreme, the integration of the global economy on which almost everybody now depends might be reversed. Globalisation is a choice. The integrated economy of the decades before the first world war collapsed. It could do so again.On June 19 2007, I concluded an article on the “new capitalism” with the observation that it remained “untested”. The test has come: it failed. The era of financial liberalisation has ended. Yet, unlike in the 1930s, no credible alternative to the market economy exists and the habits of international co-
operation are deep.“I’ve a feeling we’re not in Kansas any more,” said Dorothy after a tornado dropped her, her house and dog in the land of Oz. The world of the past
three decades has gone. Where we end up, after this financial tornado, is for us to seek to determine.
This is the first part of an FT series entitled the Future of Capitalism

Marx for the 21st century

2008-12-25T05:28:00.000-08:00

This book testifies that the economic thinking of Karl Marx is still valid for the 21st century, introducing readers to unknown materials buried in archives which portray Marx's attitudes to democracy. With contributions from a variety of leading Japanese scholars and edited by one of the most respected Marx experts in the world, Marx for the 21st Century will be read and enjoyed by students and academics in many different areas from political economy to the history of economic thought.
More detailsMarx for the 21st CenturyBy Hiroshi Uchida, Terrell CarverContributor Terrell CarverPublished by Routledge, 2006ISBN 0415305306, 9780415305303203 pagesMarx for the 21st Century (Routledge Frontiers of Political Economy) (Hardcover) by Hiroshi Uchida (Editor) RRP: £75.00
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The New Republic
The Crisis Of '08 Reading List
by John B. Judis
The best books to help you make sense of Marx, Keynes, the Great Depression, and how we got where we are now.
Post Date Wednesday, December 24, 2008

Every few years, someone urges me to do a Christmas book list, and while protesting my ignorance and incompetence, I gladly comply. This year's subject is the current global recession, which threatens to become a global depression. This is a layman's list, because I am strictly a layman on the subject of economics. You don't have to know anything about string theory to read any of the books I recommend.

I learned most (or what little I know) of economics from reading on my own or from study groups we used to hold in the fading days of the new left. I read all three volumes of Capital in a study group organized by the late Harry Chang, a Korean immigrant to the Bay Area who was a computer programmer by day (in the keypunch era) and a Marxist scholar by night. I read Keynes under sporadic supervision of economist Jim O'Connor, the author of The Fiscal Crisis of the State, and a fellow member of the collective that published Socialist Revolution (which in 1978 became Socialist Review). And I got my introduction to economic history from historian Marty Sklar, who was also a member of that collective.

A decade ago, I might have been embarrassed to admit that I was raised on Marx and Marxism, but I am convinced that the left is coming back. Friedrich Hayek is going to be out; Friedrich Engels in. Larry Kudlow out; Larry Mishel in. And why is that? Because a severe global recession like this puts in relief the transient, fragile, and corruptible nature of capitalism, and the looming contradiction between what Marx called the forces and relations of production evidenced in unemployed engineers and boarded up factories and growing poverty amidst a potential for abundance. As capitalism itself--or at the least the vaunted miracle of the free market--becomes problematic, the left is poised for an intellectual comeback. So here are four topics and some books to read about them, plus a few articles, from someone who learned economics by reading and rereading Paul Baran and Paul Sweezy's Monopoly Capital.

1. The current crisis. I was warning my colleagues of an encroaching disaster a year ago, because I was reading the columns and articles of Paul Krugman, Nouriel Roubini, Larry Summers, and Dean Baker. They were on top of this when Hank Paulson and Ben Bernanke were still telling everyone not to worry. Of the current books I've read (and I haven't read many), I'm very high on Financial Times columnist Martin Wolf's Fixing Global Finance, George Cooper's The Origin of Financial Crises, Jamie Galbraith's The Predator State, and Dean Baker's Plunder and Blunder. Wolf is terrific on the international currency mess--and the Financial Times is the paper to read--Cooper is first-rate on the irrationality of money and finance, Galbraith has a good explanation of how we got to where we are, and how to get out of it, and Baker is the expert on the housing bubble. I also liked Krugman's The Return of Depression Economics when it appeared almost ten years ago (Short take: If it could happen to Japan, it could happen to us). There is a new edition that incorporates some material about 2008, but I haven't read it.

2. John Maynard Keynes. Keynes is back in vogue, and rightly so. One economist--I can't remember who it was--recently warned against reading The General Theory of Employment, Interest, and Money because it was written strictly for economists. I don't agree at all. It's a very hard book, especially some of the middle sections, but worth reading and rereading. If you don't have energy for the whole thing, read the first three chapters, some of the middle chapters (7, 10, 16, and 18 are my suggestions) and the last three. I suggest, however, a guide. The best I've found is Dudley Dillard's The Economics of John Maynard Keynes, which, to my amazement, is still in print after sixty years. I also like Hyman Minsky and Paul Davidson's guidebooks to Keynes. But you've got to read Robert Skidelsky's three-volume biography of Keynes, Hopes Betrayed, The Economist as Savior, and Fighting for Freedom (also now available in an abridged one-volume edition). Believe me, this is one of the great biographies. The way he brings together Keynes, the gay aesthete of Bloomsbury, and Keynes, the economist and man of worldly affairs, is something to behold. Skidelsky's second volume is also the best introduction to Keynes's economics, because you learn that exactly those ideas you found mystifying or most difficult in Keynes were hotly debated between him and his colleagues.

3. The Great Depression. There have been a lot of books on this subject, but most of what I read I read decades ago, so I'm sure I'm going to overlook worthy choices. Still, there are two older books that continue to stand up. George Soule was an editor of The New Republic during the 1930s. He was also an economist and in 1947 published a study of the American economy from 1917 to 1929 entitled Prosperity Decade. Soule shows that well before 1929, there were rumblings of trouble in the American economy--not only in the stock market bubble, but in overcapacity in key industries like auto, and in the rise of technological unemployment. You'll see the surprising resemblance to our own decade, including an anticipatory recession in 1926 like the one in 2001. On the international crisis of the 1930s, I like Charles P. Kindleberger's The World in Depression, which I reread two months ago when I was writing about the current international imbroglio. I want also to mention an essay by Sklar in The United States as a Developing Country. In chapter five, "Some Political and Cultural Consequences of the Disaccumulation of Capital," Sklar puts forward the idea that during the 1920s, capitalism shifted from the accumulation to disaccumulation of capital. That's Marxist jargon, but what it means is that goods production began to expand as a function of the reduction rather than increase in labor-time and in the labor force. That created an enormous opportunity, but also a potential crisis. The depression of the 1930s, Sklar argues, was the first "disaccumulationist" depression. One of his former students, historian Jim Livingston from Rutgers, has put forward a similar analysis of the current recession.

4. Marx and Marxism. Marx, like Keynes, is best read in his own words. There are a lot of brilliant shorter works, but I'd put the first volume of Capital up there with The Origin of Species, The Interpretation of Dreams, and The Philosophical Investigations on my list of great books of the last two hundred years. It's not a guide to starting your own business and really doesn't have a theory of crises. Some of that is in the other unfinished volumes. What volume one does is establish capitalism as a phase, and perhaps a passing phase, in world history whose very nature has consisted in disguising that fact from worker and capitalist alike. You read Capital to understand the historical underpinnings, not the mechanics of capitalism. Marx's theory of history has obvious deficiencies--he didn't foresee, certainly, the rise of corporate capitalism and of corporate liberalism. His trademark theory of the falling rate of profit, which you can find in volume three, is also unpersuasive. But these failings pale beside his portrayal of capitalism as mode of production based upon labor power as a commodity and on the accumulation of capital. I wish I could recommend guides to Marx's thought. The economic guides often err by trying to justify his works as modern economics. G. A. Cohen's book, Karl Marx's Theory of History, is a little academic, but of all the books I've read in the last twenty or thirty years, it's the best.
Have a good, if grim, read of these books--if you have some better ideas, include them in the comments below--and let's hope that the next year brings some better economic news than this one.
John B. Judis is a senior editor at The New Republic.
© The New Republic 2008

UK Economy- The downturn in facts and figures

2008-12-02T18:44:00.000-08:00

UK Economy
The downturn in facts and figures

-Source: BBC.CO.UK

World Economic Depression 2008-Finance

2008-09-25T17:27:00.000-07:00

World Economic Depression 2008-Finance

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.

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

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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

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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.

Aljazeera

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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

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.

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.

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."

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.

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

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.

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.

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

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.”

The financial crisis
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.

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.

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.

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

August 6, 2008
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.

From Times OnlineAugust 5, 2008
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.”

Third Global Economic Depression- 2008

2008-04-12T12:44:00.000-07:00

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* Pointing to the overall confidence reading of 29.5 in
April, T.J. Marta, a fixed-income strategist at RBC Capital Markets, said:
"What confidence? There is no confidence. It's like 1929."

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Reuters - Friday, April 11 11:27 pm

G-7 finance ministers and central bankers sit at the start of a G-7 Ministerial Meeting at the U.S. Treasury during the World. Bank/IMF 2008 Spring Meetings in Washington April 11, 2008. REUTERS/Joshua Roberts

G7 cuts growth

view By Louise Egan and Gernot Heller Reuters - 2 hours 13 minutes agoWASHINGTON (Reuters) -

Finance chiefs from rich nations offered a gloomier assessment of
the global economy on Friday and vowed to act swiftly on wide-ranging reforms aimed at moving beyond a credit crisis that threatens world growth.
The finance ministers and central bankers also expressed concern about sharp fluctuations in currency markets since the Group of Seven last met in Tokyo in
February, suggesting unease with how far markets have pushed down the U.S. dollar.
With fresh signs of economic distress in the United States, where a report showed consumer confidence hit its lowest level since 1982, the G7 officials said risks to
the economic outlook were tilted to the downside. They pointed to the weak U.S. housing market, stressed financial markets and rising inflation as hurdles that still
must be overcome.
"There may be more bumps in the road," U.S. Treasury Secretary Henry Paulson said after the officials concluded a meeting. "As we work through this period, our
highest priority is limiting its impact on the real economy."
The G7 -- the United States, Canada, Britain, France, Germany, Italy and Japan -- stopped short of declaring that the U.S. economy was heading for a recession
and steered clear of recommending the use of public funds to bail out troubled markets, an idea widely discussed before the meeting.
"We remain positive about the long-term resilience of our economies, but near-term global economic prospects have weakened," the G7 said in a communique. "The
turmoil in global financial markets remains challenging and more protracted than we had anticipated."
WHAT NOW?
The main focus of the meetings was a special study commissioned by the G7 that offered a detailed assessment of the banking and regulatory failures that contributed
to an eight-month-long and ongoing bout of market turmoil. The report offered dozens of recommendations on how to shore up banking oversight and regulatory
cooperation to prevent a recurrence.
The G7 said it strongly endorsed the report from the Financial Stability Forum, which comprises central bankers and global regulators. The report calls for tougher
capital requirements for banks to ensure they can withstand periods of financial market stress, and urges closer international cooperation between central banks and
regulators.
Defaulting U.S. subprime mortgage loans sparked a tightening of credit that has mushroomed into an international crisis. Central banks have flooded markets with
cash to try to spark lending, and the U.S. Federal Reserve and other central banks have cut interest rates to try to keep economies afloat.
Banks have already written down roughly $225 billion in assets tied to souring mortgages and other loans in 2007 and the first quarter of 2008, according to German
Finance Minister Peer Steinbrueck, who dismissed as far-fetched estimates that losses could eventually reach $1 trillion.
"Numbers like that can cause a lot of fear, he said.
G7 members, notably the United States and Canada, want to push bankers to match the vigour that global central banks have shown in battling the liquidity squeeze
by urging these private-sector players to quickly put losses behind them and raise new capital. A select group of bankers has been invited to a dinner on Friday night at the U.S. Treasury Department.
LIKE POETRY
In a nod to European leaders who had voiced dismay over volatile foreign exchange markets that pushed the euro to new highs against the U.S. dollar, the G7 also
strengthened its call for calm in currency markets.
"Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and
financial stability," the communique stated. "We continue to monitor exchange markets closely, and cooperate as appropriate."
That marked the first shift in four years from the G7's boilerplate language on currencies, and provided a verbal caution to markets that world finance leaders were
keeping a close watch on currency moves.
"This change in the language ... shows a concern we have not seen for some years," Italian Economy Minister Tommaso Padoa-Schioppa said.
When asked about the thinking behind the changes in the statement, European Central Bank President Jean-Claude Trichet replied, "It's like a poem, it speaks for
itself."
(Reporting by G7 reporting team; writing by Emily Kaiser and Glenn Somerville; editing by Tim Ahmann)

Note:Highlights ENB

IMF to sell more than 400 tons of gold to close budget gap
By Harry DunphyWASHINGTON, Tuesday (AP) -

The International Monetary Fund's executive board has approved a broad financial overhaul plan that envisages the eventual sale of 403.3 tons (365 metric tons) of its substantial gold supplies. The sale cannot occur without approval by the U.S. Congress and legislative action in many of the 184 other member nations of the Washington-based lending institution.
IMF Managing Director Dominique Strauss-Kahn welcomed the board's decision to propose a new income and expenditure framework for the fund designed to
close a projected $400 million (euro255 million) budget deficit over the next four years. It is "a landmark agreement that will put the institution on a solid financial
footing and modernize the IMF's structure and operations," he said in a statement. The budget proposal includes sharp spending cuts of $100 million (euro63.7
million) over the next three years that will include up to 100 staff dismissals. "We have made difficult but necessary choices to close the projected income shortfall and
put the fund's finances on a sustainable basis, but in the end it will make the fund more focused, efficient and cost-effective in serving our members," said Strauss-
Kahn, a former French finance minister. The IMF said the board agreed to revamp the fund's income model from one that primarily relies on lending to one that
generates money from various sources. During the 1990s the IMF lent billions to countries in Asia and Latin America that were facing financial crises and financed its
operations on interest from those loans. In recent years, IMF lending has dried up as many of those countries have built up reserves to prevent them from having to
borrow again from the IMF, which often puts severe restrictions and conditions on its loans. The declining interest payments led to the IMF's budget gap. Actual sale
of the gold cannot start because the U.S. member on the IMF board cannot vote for it until Congress approves. Congress has made approval conditional on a broad
range of operational changes that Strauss-Khan has pledged to carry out to preserve the relevancy of the 64-year-old organization, whose mission is to promote
global financial stability.
Under the plan, the IMF would sell the 403 tons, or nearly 13 million ounces, of gold for about $11 billion (euro7 billion) over several years. The IMF would keep
$4.4 billion (euro2.8 billion) on its books, and the remaining $6.6 billion (euro4.2 billion) would go into an investment account.
The IMF, which has sold gold before, said it would coordinate the sales with central banks in an effort to prevent market disruptions.
"Gold sales would be conducted in a transparent manner with strong safeguards to ensure that they do not add to official sales and avoid any risk of market
disruption," the IMF said in a statement.
The Bush administration said in February it could support selling a limited amount of IMF gold as away to ensure the agency's long-term financial stability, but U.S.
Treasury officials realized this would be a hard sell. In 1999 Congress rejected a previous proposal to sell IMF gold, and the current majority leader of the Senate,
Democrat Harry Reid, comes from the gold-mining state of Nevada.
Strauss-Khan, who took over last November as head of the IMF, said the financial overhaul was another major step in the organization's reform process. It followed
a decision last month to increase slightly the voting power of rapidly developing countries such as China, India and Brazil, who are playing a growing role in the world
economy. Since its founding, the United States, the largest shareholder, and European nations have dominated IMF decision-making.
Besides using the gold sales to produce an income stream, the fund's narrow investment authority will be broadened.

IMF slashes world growth forecast

The International Monetary Fund (IMF) has said that the world economy will grow much more slowly in the next two years as a result of the credit crunch.
In its latest economic forecast, the IMF says that world economic growth will slow to 3.7% in 2008 and 2009, 1.25% lower than growth in 2007.
The downturn will be led by the US, which the IMF believes will go into a "mild recession" this year.
Growth in the UK will slow sharply to 1.6% in both 2008 and 2009.
It said that the UK economy would be affected by a weakening housing market, the contraction of the financial sector, and the impact on UK exports of weaker
growth in the US and Europe.
Its UK forecast is substantially below the Treasury forecast of around 2% growth this year and 2.5% next year made at the time of the March Budget.
The greatest risk comes from the still-unfolding events in financial markets (which might lead to) the current credit squeeze mutating into a full-blown credit crunch IMF World Economic Forecast
The IMF admits that the global downturn might be still more severe than it is currently predicting, and says that there is a one in four chance of a "global recession"
when world growth falls below 3%.
The world downturn will be led by problems in the US housing market, but the IMF warns that excessive house price inflation in some European countries, including
Spain, Ireland and the UK, has made them more vulnerable to a slowdown.
House prices have already fallen by around 10% in the US by some measures, and the IMF says that it they may be over-valued by 10% to 20% in the UK.
It is forecasting further falls in US house prices of 14% to 20% this year.
US recession
The IMF forecasts that the US economy will grow by just 0.5% during 2008 and will actually contract in the first half of the year.
Its recovery will be slow, with growth of only 0.6% forecast in 2009.
"The US economy will tip into a mild recession in 2008 as a result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009,
reflecting the time needed to resolve underlying balance sheet strains," the report notes.
It says that, comparing the US economy year-on-year from the four quarter of 2007 to the fourth quarter of 2008. it will be 0.7% smaller, as the recession bites in the
first half of this year.
And it warns that with the scale of the credit losses to the financial sector approaching $1 trillion (£500bn), there is a risk that the crisis could get worse.
"The greatest risk comes from the still-unfolding events in financial markets," it says, warning that the current credit squeeze could "mutate into a full-blown credit crunch".
The IMF says that losses are spreading from sub-prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.
The IMF also says that given the potential severity of the problems, "additional initiatives to support the US housing market, including the use of the public balance
sheet, could help reduce uncertainties about the evolution of the US financial system" although it warned that "care would be needed to avoid undue moral hazard".
The US Congress and the Bush administration are currently deadlocked over plans for further aid to the housing sector, with Democrats in both branches of
Congress proposing an expansion of financial support for home owners facing foreclosure.
European impact
The biggest impact of the US slowdown is likely to felt in Europe, which is the biggest trading partner with the US.
"Activity in the other advanced economies will be sluggish in both 2008 and 2009 in the face of trade and financial spillovers," the IMF says.
It is predicting growth in the eurozone of just 1.4% in 2008 and 1.2% in 2009, with Europe's largest economy, Germany, growing by just 1% in 2009, a sharp
revision of its forecast just three months ago.
And it says that in light of the slowdown, the European Central Bank - which has kept interest rates unchanged due to concern about inflation - "can afford some
easing of its policy stance".
And it suggests that in future, central banks should take more account of rising house prices when setting interest rates, in effect "leaning against the wind" to prevent
house prices moving out of "normal valuation ranges".
This is an implicit criticism of the US Federal Reserve which kept interest rates at 1% for several years under former chairman Alan Greenspan.
Worldwide impact
The IMF says that the big emerging market countries like China and India which are growing rapidly will be less affected by the slowdown, although they will be
affected by a slowdown in trade among the rich countries.
The rate of growth of imports into rich countries is expected to slow sharply, leading to a cut in the rate of growth of exports by developing countries.
And it warns that the spillover will more severe in Latin America or in countries linked to the dollar, which has declined sharply on world currency markets.

IMF Lowers Japan Growth

Forecast For 2008, Warns Of Risks
TOKYO -(Dow Jones)- The International Monetary Fund Wednesday lowered its growth outlook for Japan's economy for 2008 and said its central bank could cut
interest rates if a sharp global slowdown causes conditions to worsen sharply.
Given the significant role exports play in driving Japan's economy, the biggest risk facing the country is a slowdown in exports caused by a global economic downturn,
the IMF said in its latest World Economic Outlook report.
"In light of the prevailing headwinds to growth, monetary policy should maintain its accommodative stance and could be eased further in the face of a serious
downturn," the IMF said.
The IMF predicted that the world's second-largest economy will expand 1.4% in 2008 in price-adjusted terms, a tad slower than its previous forecast for growth of
1.5% released in January. It also expects 1.5% growth in 2009.
The IMF attributed the downward revision in this year's growth outlook to deteriorating business and consumer sentiment and signs of moderating export growth.
The report highlights the challenges facing the new governor of the Bank of Japan, Masaaki Shirakawa. Shirakawa, who was appointed to the top post earlier
Wednesday, signaled that he would take a flexible approach as he helps Japan navigate through one of the most severe global financial crises in decades.
"Uncertainty over the economy is particularly high at the moment, it's not appropriate to have preconceptions on the future direction of monetary policy," he said at a
press conference earlier Wednesday after the BOJ decided to keep its policy rate steady at 0.50%.
The IMF said Japan's economy can count on support from its neighbors, however. With emerging Asian countries taking almost one half of Japanese exports and the
proportion of shipments to the U.S. and Europe declining, Japan "should remain well supported" as long as Asian economies remain firm, the report said.
Still, amid global uncertainties, a sharper-than-expected slowdown can't be ruled out, and developments in emerging Asian nations are a key factor for Japan's outlook, it said.
Prospects for domestic demand pose another threat to the economy in the near term, the fund said.
High oil and raw materials costs have been pushing up prices of daily necessities, hurting consumer sentiment amid sluggish salary growth.
Capital spending could also weaken if global market turmoil continues and causes a tightening of credit markets, the report said.
On the brighter side, residential investment - which slumped after building standards were tightened last June - is expected to recover and support the economy in the
second half of 2008, the IMF said.
Still, given such risks to the economy, the IMF recommended the central bank keep a flexible stance toward interest rates as price increases haven't built up any
significant momentum.
Consumer prices started rising steadily, if slowly, in Japan late last year.
Inflation has been pushed up by food and oil, but excluding such factors prices were still falling marginally, and slower growth put an end to the acceleration in overall
increases.
The IMF predicted that Japan's consumer prices will rise 0.6% in 2008 and 1.3% in 2009.
-By Akane Vallery Uchida, Dow Jones Newswires; 813-5255-2929; akane.uchida@ dowjones.com
(END) Dow Jones Newswires 04-09-080915ET

Consumer confidence falls to new low

By JEANNINE AVERSA, AP Economics WriterFri Apr 11, 11:57 AM ET

Americans' confidence in the economy fell to a new low, dragged down by worries about mounting job losses, record-high home foreclosures and zooming energy
prices.
According to the RBC Cash Index, confidence dropped to a mark of 29.5 in April, down from 33.1 in March. The new reading was the worst since the index began
in 2002. It marked the fourth month in a row where confidence has fallen to an all-time low.
"Consumers are very pessimistic," said Mark Vitner, economist at Wachovia. "There are not a lot of happy campers out there."
Over the past year, consumer confidence has deteriorated significantly. Worsening problems in housing, harder-to-get credit, financial turmoil on Wall Street and lofty
energy prices have put people in a much more gloomy mind-set. Last April, confidence stood at 85.4. The index is based on results from the international polling firm
Ipsos.
All the economy's problems are taking a toll on President Bush's approval ratings, too. The public's approval rating on his economic stewardship fell to a low of 27
percent, according to a separate Associated Press-Ipsos poll. Bush's overall job-approval rating dipped to 28 percent, also an all-time low, the poll said.
Many economists believe the country has tipped into its first recession since 2001. Federal Reserve Chairman Ben Bernanke for the first time acknowledged last
week that a recession was possible. It was a rare public utterance of the "r" word by a Fed chief.
"Consumer sentiment is tracking at levels we think are consistent with a mild recession at this point," said Brian Bethune, economist at Global Insight.
A measure looking at consumer's feelings about current economic conditions slipped to a 54.6 in April, from 54.7 in March. The new reading was the lowest in six
years of records.
Rising unemployment and job losses are making people more uneasy.
The government reported last week, that employers slashed 80,000 jobs in March, the most in five years and the third straight month where the nation's payrolls were
cut. The unemployment rate jumped from 4.8 percent to 5.1 percent, the highest since the aftermath of the devastating Gulf Coast hurricanes.
Another factor blamed for eroding consumer confidence is high gasoline prices, which are socking people's wallets and pocketbooks. That's squeezing already
strained budgets and leaving people with less money to spend on other things.
"Much of the angst we're seeing from consumers is `Gosh, I'm working harder and harder, and all I'm doing is paying for my basic necessities. I don't have anything
left to have any fun,'" Vitner said.
Gasoline prices, which have set a string of records in recent weeks, climbed to a new record of $3.357 a gallon on Thursday, according to AAA and the Oil Price
Information Service.
Anxiety also has grown as people wonder if there is any relief in sight for the troubled housing market. With the housing collapse, many people have watched their
single-biggest asset — their home — drop in value. That has made them feel less wealthy and less inclined to spend.
Against the backdrop of all these concerns, another measure tracking individuals' sentiments about the economy and their own financial standing over the next six
months fell deeper into negative territory. This gauge dropped to a negative 48.3 in April, down from a negative 41.6 in March. The new reading was the worst on
record.
A measure on consumers feelings about employment conditions fell to 97 in April, from 99.2 in March. The new reading was the lowest since early October 2003.
Another gauge of attitudes about investing, including comfort in making major purchases, declined to 56.4 in April, from 56.7 in March. The new figure was the
lowest on records going back to 2002.
Economists keep close tabs on confidence barometers for clues about consumer spending, a major shaper of overall economic activity.
Cautious shoppers gave most retailers their most dismal March in 13 years, according to sales figures reported by major retailers on Thursday. J.C. Penney Co., Gap
Inc., and Limited Brands Inc. were among the merchants hit by a sharp drop in sales.
The RBC consumer confidence index was based on the responses from 1,005 adults surveyed Monday through Wednesday about their attitudes on personal finance
and the economy. Results of the survey had a margin of sampling error of plus or minus 3 percentage points. The overall confidence index is benchmarked to a
reading of 100 in January 2002, when Ipsos started the survey.
Pointing to the overall confidence reading of 29.5 in April, T.J. Marta, a fixed-income strategist at RBC Capital Markets, said: "What confidence? There is no
confidence. It's like 1929."

IMF says US crisis is 'largest financial shock since Great Depression'

Heather Stewart in Washington guardian.co.uk, Wednesday April 9 2008

America's mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is now a one-in-four chance of a full-blown global
recession over the next 12 months, the International Monetary Fund warned today.
The US is already sliding into what the IMF predicts will be a "mild recession" but there is mounting pessimism about the ability of the rest of the world to escape
unscathed, the IMF said in its twice-yearly World Economic Outlook. Britain is particularly vulnerable, it warned, as it slashed its growth targets for both the US and
the UK.
The report made it clear that there will be no early resolution to the global financial crisis.
"The financial shock that erupted in August 2007, as the US sub-prime mortgage market was derailed by the reversal of the housing boom, has spread quickly and
unpredictably to inflict extensive damage on markets and institutions at the heart of the financial system," it said.
After warning earlier this week that the world's financial firms could end up shouldering $1 trillion (£500bn) worth of losses from the credit crunch, the IMF said it
expects the US to achieve GDP growth of just 0.5% this year, and 0.6% in 2009, with the housing crash getting even worse.
Simon Johnson, the IMF's director of research, said later the key risk to the forecasts was the danger of a vicious circle emerging, as house prices continue to fall,
dealing a fresh blow to the banks, and exacerbating the problems in the markets. "Sentiment in financial markets has improved in recent weeks since the Federal
Reserve's strong actions with regard to investment banks. But we have seen how strains in markets can quickly become reinforcing, and the possibility of a negative
spiral or 'financial decelerator' remains a possibility."
President George Bush has already signed off a $150bn tax rebate package to kick-start the economy, and the Federal Reserve has backed an emergency buyout of
investment bank Bear Stearns, but the IMF said this may still not be enough: "Room may need to be found for some additional support for housing and financial
markets."
In the UK, the chancellor has repeatedly insisted that the economy is "better-placed" to weather the storm, because of its flexible labour market and low
unemployment, but the IMF calculated that the British housing market is overvalued by up to 30%, and could be destined for a damaging correction.
Alistair Darling is due to fly to Washington tomorrow to discuss the turmoil with fellow G7 finance ministers.
Mervyn King, governor of the Bank of England, will also be in Washington this weekend to discuss the ramifications of the credit crunch with central bankers from
around the world.
· This article was amended on Friday April 11 2008. We said that the IMF expects the US to achieve GDP growth of 0.6% in 2008, when this is actually their prediction for 2009 growth. This has been corrected.

US Economy: Great Depression

2008-04-05T13:08:00.000-07:00

Great Depression lesson

Mon Mar 31, 12:19 AM ET USA Today

With the Bush administration set to unveil an overhaul of the nation's fragmented financial regulatory system today, and Congress likely to offer a counterproposal in
the coming months, it might be tempting to tune the whole debate out. After all, this is a topic unusually rich in detail and complexity.
But the question at its core is really quite simple. Should financial institutions capable of doing great harm to markets or necessitating taxpayer bailouts be left alone to
decide what level of risks they wish to undertake? The answer is just as simple: no.
The government learned that lesson in the Great Depression, which was triggered in part by runs at undercapitalized banks. It set up a system requiring banks to
maintain sufficient reserves. It also created federal deposit insurance to give people confidence that their money would be safe.
But since then, a parallel universe of unregulated financial institutions has come to be and taken over much of the business of financing. In this universe, the traditional
bank lending its own money to people it knows has been replaced by a series of impersonal and interdependent institutions such as investment banks and hedge
funds. These firms have turned the basics of banking — lending, borrowing, managing risk — into a system of readily tradable, but impossibly complex, securities.
This system has been a failure. Rather than spreading and diversifying risks as intended, it has enabled certain institutions, such as Bear Stearns Cos., to place
enormous bets in housing and other areas, without the government, shareholders, or even top executives fully appreciating the risks involved or knowing whether the
institutions have the means to cover their losses. That is a scary proposition given how Wall Street's largest houses can have a domino effect if they fail.
An enhanced government role in overseeing these institutions need not be overly regulatory. Washington should have little interest in signing off on every new financial
instrument issued. But if it is going to rush in when large institutions get into trouble, it has an interest in keeping them out of trouble in the first place. This entails
requiring them to maintain adequate reserves should their financial conditions rapidly deteriorate. It also entails some way to promote greater transparency and
simplicity in credit markets.
There's no sense in allowing so much of the financial world to play by its own rules when times are good and expect a bailout when they are not. That lesson was
learned in the 1930s, and needs to be relearned now.

An economy on the edge

Thu Apr 3, 12:20 AM ET USA Today
Alfred Kahn, the adviser to President Carter who was chastised for using the dreaded R-word to describe an economic slump, famously took to calling it a "banana"
instead. President Bush prefers to call it a "rough patch" or not to talk about it at all. But Federal Reserve Chairman Ben Bernanke treated the nation like grown-ups
Wednesday, telling Congress that the economy is in such shaky shape that a "recession is possible."
This isn't exactly a news flash. Many economists — looking at billions of dollars of bad mortgages, months of job losses, plummeting home and car sales, and soaring
gasoline and food prices — have concluded the nation is already in one.
But more important than whether the current downturn meets the technical definition of recession (two consecutive quarters of economic contraction) is the question
of how bad this is going to be.
No one knows for sure, not even Bernanke, making the situation a little like walking down a dark path and wondering whether that noise in the bushes is an angry
dog or a grizzly bear.
Bernanke's frank testimony at a congressional hearing led to two conclusions:
* If the nation is not already in recession, it is flirting with one. Bernanke expressed some optimism, however, that the economy could start recovering later this year.

* For all the recession talk, the more ominous threat lies elsewhere. Bernanke made it clear the nation was perilously close to something far worse when Bear
Stearns, Wall Street's fifth-largest investment bank, came within 24 hours of filing for bankruptcy protection. Had the Fed not stepped in with a controversial rescue
plan, he said, the viability of scores of other institutions Bear Stearns did business with worldwide would have been in doubt. That could have set off a cascade of
failures that, as Bernanke understated it, would have caused damage "severe and extremely difficult to contain."
Rescuing a reckless speculator such as Bear Stearns is distasteful. But construing the Fed's action as a bailout for wealthy bankers misstates both the motive and the
result. The purpose was to avoid a collapse of the world financial system, which would invite not recession but depression.
Bernanke said he doesn't foresee a collapse of another big firm, but if there's a menacing growl in the bushes, that's the animal to worry about. Recessions are more
easily managed.

USA 2008: The Great Depression
Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive – a sure sign the world's richest country faces economic crisis
Tuesday, 1 April 2008 Independent UK
We knew things were bad on Wall Street, but on Main Street it may be worse. Startling official statistics show that as a new economic recession stalks the United
States, a record number of Americans will shortly be depending on food stamps just to feed themselves and their families.
Dismal projections by the Congressional Budget Office in Washington suggest that in the fiscal year starting in October, 28 million people in the US will be using
government food stamps to buy essential groceries, the highest level since the food assistance programme was introduced in the 1960s.
The increase – from 26.5 million in 2007 – is due partly to recent efforts to increase public awareness of the programme and also a switch from paper coupons to
electronic debit cards. But above all it is the pressures being exerted on ordinary Americans by an economy that is suddenly beset by troubles. Housing foreclosures,
accelerating jobs losses and fast-rising prices all add to the squeeze.
Emblematic of the downturn until now has been the parades of houses seized in foreclosure all across the country, and myriad families separated from their homes.
But now the crisis is starting to hit the country in its gut. Getting food on the table is a challenge many Americans are finding harder to meet. As a barometer of the
country's economic health, food stamp usage may not be perfect, but can certainly tell a story.
Michigan has been in its own mini-recession for years as its collapsing industrial base, particularly in the car industry, has cast more and more out of work. Now, one
in eight residents of the state is on food stamps, double the level in 2000. "We have seen a dramatic increase in recent years, but we have also seen it climbing more in
recent months," Maureen Sorbet, a spokeswoman for Michigan's programme, said. "It's been increasing steadily. Without the programme, some families and kids
would be going without."
But the trend is not restricted to the rust-belt regions. Forty states are reporting increases in applications for the stamps, actually electronic cards that are filled
automatically once a month by the government and are swiped by shoppers at the till, in the 12 months from December 2006. At least six states, including Florida,
Arizona and Maryland, have had a 10 per cent increase in the past year.
In Rhode Island, the segment of the population on food stamps has risen by 18 per cent in two years. The food programme started 40 years ago when hunger was
still a daily fact of life for many Americans. The recent switch from paper coupons to the plastic card system has helped remove some of the stigma associated with
the food stamp programme. The card can be swiped as easily as a bank debit card. To qualify for the cards, Americans do not have to be exactly on the breadline.
The programme is available to people whose earnings are just above the official poverty line. For Hubert Liepnieks, the card is a lifeline he could never afford to lose.
Just out of prison, he sleeps in overnight shelters in Manhattan and uses the card at a Morgan Williams supermarket on East 23rd Street. Yesterday, he and his
fiancée, Christine Schultz, who is in a wheelchair, shared one banana and a cup of coffee bought with the 82 cents left on it.
"They should be refilling it in the next three or four days," Liepnieks says. At times, he admits, he and friends bargain with owners of the smaller grocery shops to
trade the value of their cards for cash, although it is illegal. "It can be done. I get $7 back on $10."
Richard Enright, the manager at this Morgan Williams, says the numbers of customers on food stamps has been steady but he expects that to rise soon. "In this
location, it's still mostly old people and people who have retired from city jobs on stamps," he says. Food stamp money was designed to supplement what people
could buy rather than covering all the costs of a family's groceries. But the problem now, Mr Enright says, is that soaring prices are squeezing the value of the benefits.
"Last St Patrick's Day, we were selling Irish soda bread for $1.99. This year it was $2.99. Prices are just spiralling up, because of the cost of gas trucking the food
into the city and because of commodity prices. People complain, but I tell them it's not my fault everything is more expensive."
The US Department of Agriculture says the cost of feeding a low-income family of four has risen 6 per cent in 12 months. "The amount of food stamps per household
hasn't gone up with the food costs," says Dayna Ballantyne, who runs a food bank in Des Moines, Iowa. "Our clients are finding they aren't able to purchase food like
they used to."
And the next monthly job numbers, to be released this Friday, are likely to show 50,000 more jobs were lost nationwide in March, and the unemployment rate is up
to perhaps 5 per cent.

Wall Street fears for next Great Depression

Independent.co.uk Web By Margareta Pagano, Business Editor Sunday, 16 March 2008
Wall Street is bracing itself for another week of roller-coaster trading after more than $300bn (£150bn) was wiped off the US equity markets on Friday following the
emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.
One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The
Fed's emergency funding procedure was first used in the Depression and has rarely been used since.
A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just
standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow."
In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: "We have all been talking about a 1970s-style
crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it's a self-feeding disaster." Mr Taylor, who had
been relatively optimistic, has turned bearish: "It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of
England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on."
Mr Taylor added that he expects a sharp downturn in the real UK economy as the public and companies stop borrowing. "We have never seen anything like this
before. This is new territory for us. Liquidity is being pumped into the system but the banks are not taking any notice. This is all about confidence. The more the
central banks do, the more the banks seem to ignore what's going on."
Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: "There will be more banks and hedge funds heading for collapse."
One of the problems facing the markets is that, despite the Fed's move last week to feed them another $200bn, the banks are still not lending to each other.
"This crisis is one of faith. We are going to see even more problems in the hedge funds as they face margin calls," said Mark O'Sullivan, director of dealing at
Currencies Direct in London. "What we are waiting for now is for the Fed to cut interest rates again this week. But that's already been discounted by the market and
is unlikely to help restore confidence."
Mr O'Sullivan added that the dollar's free-fall is set to continue and may need cuts in European interest rates to trim the euro's recent strength against the dollar. "But
the ECB doesn't like cutting rates," he said.
On Europe, Mr Taylor said that while the German economy remains strong, others such as Italy's and Spain's are weakening. "You could see a scenario where the
eurozone breaks up if economies continue to be so worried about inflation."
European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.
The Fed's plan will give 28 days of secured funding to Bear Stearns, which saw its value slashed over the week by more than a half to $3.7bn. JP Morgan will
provide the funding, but the Fed will bear the risk if the loan is not repaid. Fed chairman, Ben Bernanke, who pumped $200bn of loans to cash-strapped institutions
last week, said more would be available to help others in distress.

Bernanke admits US is contracting but plays down 'Great Depression'

By Stephen Foley in New York Thursday, 3 April 2008
Ben Bernanke, the chairman of the Federal Reserve, has admitted for the first time that the US economy may be contracting, but he said suggestions that the country
was heading into a new Great Depression were unlikely to prove true.
Assailed by references to the economic catastrophe of the 1930s during his testimony before Congress yesterday, Mr Bernanke – one of the world's foremost
scholars of the causes of the Depression – said the modern-day Fed was pursuing "creative" actions to shore up confidence in the financial system.
His comments were the first public references to the Fed's role in the bail-out of Bear Stearns, whose failure last month would have had consequences that "could
have been severe and extremely difficult to contain", he told the joint economic committee.
The Fed stepped in with a $29bn loan to support JPMorgan's takeover of Bear Stearns and ripped up decades of previous central banking policy to promise that it
would act as lender of last resort not just to retail banks but also now to Wall Street. "We think we have been pretty creative," Mr Bernanke said.
The Fed chairman batted away suggestions that it would have been better to let Bear Stearns go into liquidation, to punish it for poor investments in sub-prime
mortgages. He said that, "with the very glaring exception of the 1930s, the Fed has been an eff-ective market stability regul-ator".He added: "At the time of the
Depression, liquidationist theory was supported by the Treasury, and it was partly on the basis of that theory that the Fed stood by and let a third of the banks in the
country fail. The financial stability that was not addressed was a major contributor to the Depression, not just in the US but abroad. Today we will not let prices fall at
10 per cent a year, we will act to keep the economy growing and stable. There are very great differences between the 1930s and today."
Mr Bernanke repeated his prediction of a rebound in the US economy later this year but conceded: "It now appears likely that real gross domestic product will not
grow much, if at all, over the first half of 2008, and could even contract slightly". It was before the joint economic committee a year ago that Mr Bernanke predicted
"the impact on the broader economy and financial markets of the problems in the sub-prime market seem likely to be contained" – a prediction that proved not to be
the case.
The International Monetary Fund has again cut its forecast for global growth this year, it emerged yesterday. The world economy will grow at the slowest pace since
2002, according to an IMF document obtained by Bloomberg News, and there is a one-in-four chance of an all-out global recession.
"Global expansion is losing momentum in the face of what has become the largest financial crisis in the US since the Great Depression," the IMF says.

US faces 'greatest crisis since Great Depression', UK growth down to 1%

Wednesday, 02 Apr 2008 13:07

The US faces its greatest financial crisis since the Great Depression, claims the International Monetary Fund (IMF), as the chance of world recession grows.
The IMF's latest outlook states there is a 25 per cent chance of a global recession as the US economy looks downwards.
An IMF statement, obtained by Bloomberg, read: "The financial shock that originated in the US subprime mortgage market in August 2007 has spread quickly, and in
unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system.
"Global expansion is losing momentum in the face of what has become the largest financial crisis in the US since the Great Depression."
Meanwhile, forecasts from Capital Economics for the UK economy have slipped to one per cent in 2009.
Julian Jessop at Capital Economics said: "Recent news on the UK economy has been upbeat in comparison with the dreadful state of the US.
"But this is unlikely to last very long. Most major downturns in the US have been accompanied, or followed shortly after, by equally severe or even sharper
slowdowns in the UK."
He added: "The very problems which have hit the US economy look likely to hit the UK just as hard.
"Although the UK does not have the same subprime problems, the wider housing market looks just as overvalued as that in the US, if not more, and households are
just as overstretched."
Mr Jessop also predicted with the slow growth UK interest rates could fall to 3.5 per cent by 2009.
"It seems clear official interest rates need to come down considerably further. We now expect UK rates to fall to four per cent by the end of this year – implying one
quarter point cut every two months – and further to 3.5 per cent in 2009."
Capital Economics predicts UK growth of 1.7 per cent in 2008 and one per cent in 2009, comparing with forecasts in the Budget of growth between 1.75 per cent
and 2.25 per cent this year.

U.S. Economy: Employers Cut Most Workers Since 2003

By Bob Willis
April 4 (Bloomberg) -- Employers in the U.S. cut the most workers in five years last month, signaling that the economic contraction is deepening and that the Federal
Reserve will continue to lower interest rates.
Payrolls shrank by 80,000, more than forecast and the third monthly decline, the Labor Department said today in Washington. The jobless rate rose to 5.1 percent,
the highest level since September 2005, from 4.8 percent.
``This is the final blow,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``It's clear the U.S. economy is in a
recession. That's going to shake the confidence of investors and companies across the world and cause people to curtail spending in other countries.''
Traders raised bets the Fed will cut its benchmark rate half a point this month after central bankers already enacted the deepest reductions in borrowing costs in two
decades last quarter. Officials signaled increasing concern about the economy and credit markets this week, with Chairman Ben S. Bernanke saying for the first time
the U.S. may enter a recession.
Treasuries climbed, with 10-year note yields falling to 3.50 percent at 11:10 a.m. in New York, from 3.59 percent late yesterday. Odds of a half-point rate cut at the
Fed's April 29- 30 meeting rose to 38 percent from 20 percent yesterday, futures show. Stocks dropped.
Economists' Estimates
Workers' average hourly wages were 3.6 percent higher than a year earlier, the smallest increase since March 2006.
In a sign that investor concern about inflation is diminishing, U.S. debt that adjusts to inflation outperformed regular Treasuries. Regular 10-year notes yielded 2.30
percentage points more than similar-maturity Treasury Inflation Protected Securities, the least since March 27. The so-called breakeven rate reflects the rate of
inflation that traders expect for the next decade.
The loss of jobs in February was revised to 76,000 from 63,000. Economists had projected payrolls would fall by 50,000 in March, according to the median of 79
forecasts in a Bloomberg News survey. Economists' forecasts ranged from a decline of 150,000 to a gain of 65,000.
``If you're ever going to ring a bell on a recession, these numbers do it,'' Stuart Hoffman, chief economist at PNC Financial in Pittsburgh said in a Bloomberg
Television interview. ``You have had job losses all year.''
IMF Meeting
The job figures come a week before Bernanke and Treasury Secretary Henry Paulson meet their counterparts from the Group of Seven major industrial nations
alongside the spring meetings of the International Monetary Fund in Washington.
IMF Chief Economist Simon Johnson said yesterday in a statement that the U.S. economy has slowed to a ``virtual standstill,'' hurting global growth prospects. A
document featuring IMF forecasts obtained by Bloomberg News this week showed the fund characterized the U.S. financial crisis as the worst since the Great
Depression.
Gains in government jobs prevented a deeper drop in payrolls last month as private employers cut 98,000 workers, the fourth straight monthly decline. A survey from
ADP Employer Services issued yesterday had projected private payrolls would rise by 8,000.
Labor revisions subtracted 67,000 jobs from the originally reported total figures for January and February. The last time the economy lost jobs for at least three
months coincided with the start of the Iraq War in 2003.
Unemployment Forecasts
The jobless rate was forecast to rise to 5 percent from 4.8 percent in February, the Bloomberg survey said.
President George W. Bush's chief economist said he's not paying too much attention lately to the unemployment rate.
``I don't focus too much on the monthly unemployment rate because it has been a bit volatile,'' Edward Lazear, chairman of Bush's Council of Economic Advisers,
said in a Bloomberg Television interview. By historical standards, Lazear said joblessness isn't that high compared with past recessions.
Factory payrolls shrank by 48,000 workers, the biggest decrease since July 2003, Labor said. The drop included a loss of 24,000 jobs in the auto manufacturing and
parts industries, which the government said ``largely'' reflected the effects of a strike at a supplier for General Motors Corp. Economists had forecast a decline of
35,000 in manufacturing jobs.
The walkout by workers at American Axle & Manufacturing over pay and benefits that started on Feb. 26 has idled almost half of GM's North American workforce.
Ford Cuts
Ford Motor Co., which lost $15.3 billion in the past two years, may cut more jobs in North America, Chief Executive Officer Alan Mulally said last month.
``We must continue to downsize and simply will not have enough jobs for all of our current hourly workers,'' Joe Hinrichs, Ford's manufacturing chief, and Marty
Mulloy, vice president of labor affairs, said in a March 19 commentary sent to newspapers in communities where Ford has plants.
Builders eliminated 51,000 jobs after a decline of 37,000 in February.
Service industries, which include banks, insurance companies, restaurants and retailers, added 13,000 workers last month after an increase of 6,000 in February, the
report showed. Retail payrolls decreased by 12,400 after dropping 46,700 in February.
Payrolls at financial firms decreased by 5,000, after declining 11,000 the prior month, Labor said. Job losses in the industry are mounting following the collapse in
subprime lending.
Wall Street Losses
Wall Street banks hit by mortgage losses and writedowns have cut more than 34,000 jobs in the past nine months, the most since the dot-com boom fizzled in 2001,
according to the Securities Industry and Financial Markets Association.
This year, financial firms including Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley have reduced staff in fixed income trading, securitization and
investment banking. Lehman has eliminated 18 percent of its workforce, Morgan Stanley has cut 6.2 percent, and Merrill Lynch & Co. has trimmed 4.5 percent.
The average work week lengthened to 33.8 hours from 33.7 hours. Average weekly hours worked by production workers increased to 41.3 from 41.2, while
overtime increased to 4.1 hours from 4 hours. That brought average weekly earnings up by $3.47 to $603.67 last month.
Hourly Wages
Workers' average hourly wages rose in line with forecasts to $17.86, up 5 cents, or 0.3 percent. Hourly earnings were 3.6 percent higher than a year earlier.
Economists surveyed by Bloomberg had forecast a 0.3 percent increase from the prior month and a 3.6 percent gain for the 12-month period.
Economists are increasingly forecasting a prolonged recession. Martin Feldstein, the Harvard economics professor who heads the research group that determines
when downturns begin, said last month that a contraction had begun.
Stephen Roach, chairman of Morgan Stanley's Asia division, said in a Bloomberg Television interview today in Cernobbio, Italy, that the U.S. ``will stay in recession
long after'' the current financial crisis ends.
``It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,'' Bernanke said in
testimony to Congress April 2. He said he expected unemployment to move ``somewhat higher,'' in line with recent data showing a ``softer labor market.''
Bernanke told lawmakers yesterday that the central bank is ``ready to respond to whatever situation evolves,'' and cited ``considerable stress'' in markets. New York
Fed President Timothy Geithner said policy makers must ``continue to act forcefully.''
Last Updated: April 4, 2008 11:51 EDT

Treasuries Advance After Job Losses in March Exceed Forecasts
By Deborah Finestone and Sandra Hernandez
April 4 (Bloomberg) -- Treasuries rose, led by longer- maturity debt, after a government report showing the U.S. lost more jobs in March than analysts forecast
reinforced speculation the economy is in a recession.
The gains pushed down yields on two-year notes as traders raised bets the Federal Reserve will cut the central bank's target lending rate by as much as a half-
percentage point this month. Debt due in 10 years and more rallied as average hourly earnings increased by the smallest amount since March 2006, easing concern
that inflation will accelerate.
``We're seeing weak employment and job losses in the services side of the economy and not just in manufacturing,'' said Michael Materasso, co-chairman of the
fixed-income policy committee at Franklin Templeton Investments in New York, which manages $141 billion of bonds. ``The economy does need lower short-term
rates and the Fed will go along with that.''
The yield on the two-year note fell 7 basis points, or 0.07 percentage point, to 1.84 percent at 10:54 a.m. in New York, according to bond broker Cantor Fitzgerald
LP. The price of the 1 3/4 percent security due in March 2010 rose 6/32, or $1.25 per $1,000 face amount, to 99 26/32.
The 10-year note's yield fell 9 basis points to 3.59 percent, the biggest drop since March 19. The difference in yields with two-year notes was 164 basis points, the
least since Feb. 4.
The premium investors demand to hold inflation-linked securities compared with nominal debt declined for a third day. The so-called breakeven rate on 10-year
Treasury Inflation Protected Securities dropped 4 basis points to 230 basis points.
`Back Into Play'
U.S. employers eliminated 80,000 jobs in March, compared with a revised 76,000 decrease in February, the Labor Department said in Washington. Economists had
expected a loss of 50,000, according to the median of 79 forecasts in a Bloomberg News survey. The jobless rate rose to 5.1 percent from 4.8 percent.
Traders see a 38 percent chance the Fed will lower the target rate for overnight lending between banks a half- percentage point to 1.75 percent at their next
scheduled meeting on April 30, up from 20 percent yesterday. The rest of the bets were on a quarter-point reduction, according to interest-rate futures on the
Chicago Board of Trade.
``It puts the Fed a little more back into play,'' said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of the 20 primary dealers
that trade with the central bank. ``It looks more and more likely the Fed's going to 1.75 and I would say the two-year note should probably stay anchored around
that level.''
`Significant' Risks
Fed Chairman Ben S. Bernanke acknowledged for the first time on April 2 that a recession is possible because homebuilding, employment and consumer spending
will deteriorate.
San Francisco Fed Bank President Janet Yellen said late yesterday the economy faces ``significant'' risks and officials must be ready to respond.
Yields on two-year notes rose to a five-week high April 2, jumping 10 basis points to 1.895 percent, after a private report by ADP Employer Services showed
companies unexpectedly added 8,000 jobs in March. Yields on 10-year notes climbed to a three- week high of 3.55 percent after the release, which doesn't reflect
hiring by government agencies.
Two-year yields increased 21 basis points the previous day, when UBS AG and Lehman Brothers Holdings Inc. said they would raise capital. Banks and securities
firms have raised $136 billion by selling stakes or announcing plans to do so amid $232 billion of losses on subprime-related securities since the start of 2007.
``Himalaya-Like Guestimates''
Writedowns among the world's biggest financial institutions won't match ``Himalaya-like guestimates'' of more than $600 billion and will slow in the second and third
quarters of this year, according to Lehman.
Financial firms will likely announce another $100 billion in writedowns by the year's end, Lehman Brothers analysts led by New York-based Jack Malvey wrote in
the note.
Treasuries have returned 3.4 percent so far this year, the best gain since 2000, as credit-market losses drove investors to the relative safety of government debt. The
biggest decline in yields so far this year was Jan. 22, the day policy makers cut the benchmark rate in an emergency decision. Two-year rates fell 35 basis points and
10-year rates fell 20 basis points.
The Fed last cut its rate by three-quarters of a percentage point March 18. Two days before that, it said it would lend cash directly to investment banks, and reduced
the interest rate on direct loans by a quarter-percentage point. In an emergency decision March 16, the Fed also voted to authorize a loan against $29 billion of Bear
Stearns Cos. assets so JPMorgan Chase & Co. would buy the company.
Bill Rates
Rates on three-month bills, considered among the safest securities because of their short maturities, dropped 5 basis points to 1.34 percent. They surged 80 basis
points last week, the biggest increase in a five-day period since 1982. They touched 0.387 percent March 20, the lowest level since at least 1954, as investors lost
confidence in financial markets.
The rise in bill rates narrowed the difference between what banks and the U.S. government pay for three-month loans, a gauge of credit risk. The gap is 1.38
percentage points, compared with a three-month high of 2.03 percentage points March 19.

Profits at U.S. Companies Probably Fell

By Peter J. Brennan
April 4 (Bloomberg) -- U.S. corporate earnings probably fell for a third straight quarter as the subprime-mortgage meltdown hammered banks and consumer
spending slowed.
Profit at Standard & Poor's 500 Index companies may have dropped an average of 10.7 percent from a year earlier in the first quarter, according to data compiled
by Bloomberg. The three straight quarters of decline would be the longest such streak in six years.
U.S. financial firms, led by Citigroup Inc., have absorbed more than $230 billion in writedowns and losses on subprime- related assets since the beginning of 2007,
while consumers have curbed spending in response to record gasoline prices and the worst housing slump in a quarter century.
``The financials have had huge losses; they are largely the ones to blame'' for the S&P 500 profit decline, said Milton Ezrati, a market strategist at Lord Abbett &
Co., a Jersey City, New Jersey, investment company. ``Consumers are cutting back on discretionary items like furniture, clothing, vacations and cars, and the earning
predictions are showing that.''
The S&P 500 index dropped 9.9 percent in 2008's first three months, the worst quarterly performance since September 2002.
Citigroup, Merrill
The previous longest decline in profits of S&P 500 companies was five quarters, a streak that ended in March 2002 as the U.S. was emerging from a recession.
S&P 500 earnings fell 23 percent in the fourth quarter of last year, following the third period's 2.5 percent drop. The fourth-quarter decline was the biggest in six
years.
Profits of financial companies in the S&P 500 slumped 54 percent in the first quarter, according to figures compiled by Bloomberg. In the last four weeks, analysts
have reduced their earnings estimates for the group by 29 percent.
Citigroup's loss may reach 81 cents a share, according to analysts surveyed by Bloomberg. A year earlier, Citigroup, the biggest U.S. bank by assets, had profit
excluding some costs of $1.18 a share. Goldman Sachs Group Inc. analysts say Citigroup may take a writedown of as much as $12 billion on debt securities.
Merrill Lynch & Co., the world's largest brokerage, may report a loss of $1.29 a share, analysts predict, compared with a profit of $2.26 a year earlier.
Fed Rescue
Earnings of Bear Stearns Cos., which was close to bankruptcy before a pending acquisition by JPMorgan Chase & Co. in a rescue arranged by the Federal Reserve,
fell to 88 cents a share from $3.82, according to the average analysts' estimate. JPMorgan profit slumped to 75 cents from $1.24, analysts predict.
Banks' writedowns from the current credit crisis may reach $460 billion, Goldman Sachs estimated on March 25. ``There is light at the end of the tunnel, but it is still
rather dim,'' Goldman economists including Andrew Tilton wrote in a note to investors.
Investment banks also have been hurt by a 35 percent drop in merger-and-acquisition fees as the value of announced takeovers fell to $656 billion in the first quarter
from $971 billion a year earlier, according to Bloomberg data.
Consumer Companies
Companies from Black & Decker Corp., the biggest U.S. power- tool maker, to General Motors Corp., the world's largest automaker, are being hurt as the housing
slump and gasoline prices force consumers to rein in spending. Consumer confidence fell to the lowest level since 2003 last month, according to the Conference
Board, a New York-based research group.
``The consumer is getting scared,'' said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting firm. The depressed
housing market ``is going to kill retailers who don't offer real value.''
Profits of consumer discretionary companies such as Mattel Inc., the world's largest toymaker, probably fell 15 percent, according to data compiled by Bloomberg.
Automobiles and auto- parts suppliers will post a collective loss, analysts predict.
In the last four weeks, analysts' estimates for a loss at GM widened to $1 a share from 66 cents. GM on April 1 reported a 19 percent drop in U.S. sales for March.
J.C. Penney Co., the third-largest U.S. department-store chain, cut its first-quarter sales and earnings forecasts on March 28 because of slower consumer spending.
Brunswick Corp., the maker of Bayliner Boats, may report profit of 10 cents a share, less than a third of the year-earlier figure, according to analysts' estimates.
Rate Cuts
U.S. home prices may decline as much as 20 percent by the end of 2008 from their peak in 2006, S&P said March 20. Gasoline rose to a record $3.287 a gallon
for regular unleaded on March 30, more than 61 cents above the year-earlier price, according to AAA, the national automobile-driver group.
To spur spending, the Fed has cut the benchmark federal funds rate two percentage points this year to 2.25 percent, the fastest reduction in two decades.
Energy companies led the quarter's winners, propelled by a jump in U.S. oil futures to a record $111.80 a barrel last month. Earnings of the group probably rose 23
percent, according to Bloomberg data.
Exxon Mobil Corp., the world's largest oil company, may report per-share profit of $2.08, up from $1.62 a year ago, analysts estimate.
Last Updated: April 4, 2008 06:08 EDT

US reports massive job losses

2008-03-08T03:57:00.000-08:00

US reports massive job losses
The subprime mortgage crisis has led to thousands of homes being repossessed [EPA] The US has announced the loss of 63,000 jobs in February, the biggest monthly decline for five years, amid fears that the US economy is about to slip into recession. The Federal Reserve also said on Friday it was to pump cash into the banking system, making up to $200 billion available to fight a slump sparked by the subprime
mortgage crisis.George Bush, the US president, acknowledged that it was "a difficult time" for the US economy but said he had confidence it would prosper in the long term. ''Losing a job is painful and I know Americans are concerned about our economy. So am I," Bush said. February's job losses were the biggest since March 2003 and a major disappointment for analysts, who had been expecting a gain of 25,000 jobs. Avery Shenfeld, a senior economist at CIBC World Markets, said: "It's nearly unheard of to see these numbers outside of recession." The US labour department report also showed a second straight month of losses in non-agricultural jobs. Fed action Ed Lazear, the White House's senior economic adviser, did not rule out negative economic growth for the current quarter. "This quarter will probably be our weakest quarter. Whether you call that a recession or not is something that we won't know for many months," he said. The US central bank has also announced two initiatives to inject cash into the strapped financial market. This month it raised the amounts available in its Term Auction Facility, in which banks bid for loans up to a combined $100bn. It also launched a series of measures expected to pump up to $100 billion's worth of liquidity into the banking system. Congressional attack
As the fallout from the subprime mortgage crisis continued, US lawmakers criticised banking executives for their high salaries at a time when banks were posting
record losses. A session at the House Oversight and Government Reform Committee marked Congress's latest attack on the sky-rocketing compensation of chief executive
officers. "There's merit to pay for performance. But it seems like CEO's hit the lottery even when their companies collapse," said Henry Waxman, a California Democrat and
chairman of the committee. The three executives that appeared before Waxman's panel and said that they earned their pay, while admitting that mistakes were made in the handling of subprime mortgage investments. Angelo Mozilo, the CEO of Countrywide Financial, said: "The past six months have been horrific. This is the worst housing market I have ever seen." US banks have reported losses of tens of billions of dollars after offering loans that borrowers were later unable to repay. The crisis has also affected international lenders, who bought into or offered subprime loans in the US and then contributed to bouts of chaos on international financial markets.

America's economy risks the mother of all meltdowns By Martin Wolf

2008-02-20T07:31:00.000-08:00

America's economy risks the mother of all meltdowns

By Martin Wolf

Tue Feb 19, 1:25 PM ET

"I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall
economy." Alan Greenspan, The Age of Turbulence.
That used to be Mr Greenspan's view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a
true bear. My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor.
Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US
recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a 'catastrophic'
financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more
severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."
Prof Roubini is even fonder of lists than I am. Here are his 12 - yes, 12 - steps to financial disaster.
Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn
and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart
for greener fields. Many more home-builders will be bankrupted.
Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005
and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per
cent, losses would be bigger. That would further impair the banks' ability to offer credit.
Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from
mortgages to a wide range of consumer credit.
Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of
asset-backed securities would then ensue.
Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.
Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial
institutions.
Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt.
Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.
Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more
difficult by the fact that they have no direct access to lending from central banks.
Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.
Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about
solvency.
Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".
These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession
will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve
awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a
financial meltdown.
Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six
quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.
Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary
easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings,
with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed
cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance,
both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.
The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out.
Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government
assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have
complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary
solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.
The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The
US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

-----------
*A Coming Recession in the US Economy? July 17 2006, wwwrgemonitorcom; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008

SOURCE:FT-UK

WEF: 'Global Risks 2008' Press Release

2008-01-23T00:26:00.000-08:00

2008
Highest levels of political and economic uncertainty for a decade
Geneva, Switzerland, 9 January 2008 -

The World Economic Forum released today Global Risks 2008, which highlights the need for new thinking and concerted action on a number of problems. The report expresses fears that the current liquidity crunch will spark a US recession in the next 12 months and calls for new thinking on systemic financial risk in response to the revolution in financial markets over the last two decades. It also recommends a set of principles for country risk management and examines how the financial sector might take on an increasingly important role in risk transfer in the future.
The report also warns that food security will become an increasingly complex political and economic problem over the next few years, with issues of equity and trade-offs between security and other issues making the design of global policy both difficult and necessary. Greater cooperation on managing vulnerabilities associated with cross-border supply chains and concentrations of production may also be needed. Finally, with the dollar price of oil at record highs, the report recommends an improved approach to securing viable energy supplies in the years ahead.
Global Risks 2008, published in cooperation with Citigroup, Marsh & McLennan Companies, Swiss Re, the Wharton School Risk Center and Zurich Financial Services, highlights key areas of risk that will be a focus of discussions by business leaders and public policy-makers at the World Economic Forum Annual Meeting in Davos later this month.
The report is based on input from a network of more than 100 top business leaders, decision-makers, scientists and other leading academics convened throughout 2007 as part of the World Economic Forum’s Global Risk Network. The topics identified in the report will be at the core of the agenda for the Annual Meeting.
Emerging issues in global risk
Global Risks 2008 focuses on four emerging issues which will impact the world economy and society in the decade ahead. While many of the risks cannot be avoided, they can be better understood, managed and mitigated.
• Systemic financial riskA re-pricing of risk in financial markets was predicted by some observers at the beginning of 2007 – including by the Global Risk Network – but the scale and nature of the systemic financial crisis of 2007-2008 has raised fundamental questions as to the vulnerabilities within the current model of financial markets. Diversification of risk may have strengthened stability in good times, but systemic financial risk remains acute. Looking at the year ahead, a US recession is possible and economists are divided on whether consumption-led growth in Asia can drive the global economy. In Europe, the prominence of the United Kingdom’s financial sector makes it vulnerable, while large current account deficits in some central and eastern European economies may prove increasingly unsustainable in 2008.
Changes in financial markets over the past two decades have led to the ownership of risks being decentralized, along with greater opportunities for risks to transmit between individual firms and markets – making effective risk management all the more critical. Under normal market conditions, the financial system has improved its capacity to assume and distribute risk, and has become more stable. But, to mitigate the impact of the types of challenges seen in 2007, the report calls for increased public and private sector collaboration on stress testing, liquidity management, risk assessment and prevention to address what it describes as the “fragmentation of ownership of global risks.” • Food securityIn 2007, prices for many staple foods reached record highs and global food reserves are at a 25-year low, making world food supply vulnerable to an international crisis or natural disaster – in some cases giving rise to political instability with “food riots” which have occurred in 2007. Looking ahead, Global Risks 2008 suggests that the drivers of global food insecurity – population growth, lifestyle changes, use of crops to manufacture biofuels and climate change – are likely to sharpen over the coming decade, positioning the world for a potential long-term trend reversal in food prices and leading to a set of complex challenges to global equity.
• Supply chain vulnerabilityImprovements in technology and global logistics, along with reduced trade barriers, have led to a historic expansion of international and intra-regional trade over the past 20 years. These improvements have generally led to increased efficiency and global prosperity. However, hyper-optimization of supply chains may also increase vulnerabilities to disruption and concentrations of risk. Moreover, these are often not fully understood. Though supply chains can share risk between many parties, they can also cause risks to be aggregated.
All companies and governments who depend on external suppliers face disruptions to their supply chain; building a new culture in this area, along with an international approach to supply chain risk management across private and public sectors, is among the first steps to broader risk mitigation.
• EnergyThe availability of energy resources is key to the global economy, but guaranteeing a safe, secure and sustainable supply – and doing so in line with global commitments to reduce greenhouse gas emissions – is increasingly problematic. With predictions of a 37% increase in oil demand over current levels by 2030, the report sees limited scope for a fall in energy prices over the next decade. This may be good news for oil and gas producers, but it creates an inherent mismatch between those who bear risk and reward, which should be addressed through better dialogue at all levels.
“Global Risks 2008 points to a future of tremendous challenges, but also opportunities for business and government decision-makers to demonstrate their leadership,” said Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum. “The interconnectedness of global risks discussed in this report reflects the need for a collaborative framework for response. The upcoming World Economic Forum Annual Meeting will provide a framework for those discussions.”
David Nadler, Vice-Chairman, Marsh & McLennan Companies (MMC), USA, said: “As the report says, systemic financial risk is the most immediate and, from the point of view of economic cost, most severe risk facing the global economy. With so many potential consequences of the 2007 liquidity crunch unresolved, the outlook at the beginning of 2008 is more uncertain than it was a year ago. The US Federal Reserve has projected direct losses related to sub-prime of US$ 150 billion; non-sub-prime financial losses may be considerably greater. Addressing the systemic financial risk identified in this report will be a key topic for business and political leaders in Davos this year.
“Energy supply is also a crucial issue. The global economy has demonstrated remarkable resilience to increases in energy prices since 2004. But the limits of resilience may be close to being reached. Over the next two decades the supply of primary fossil fuel will become tighter with the world economy becoming much more vulnerable to price shocks as a result. The report urges better dialogue at all levels  between emerging and developed countries and between the corporate sector and government and regulators. A move towards a forward-looking regulatory framework is needed in order to ensure long-term economic viability. This framework should seek to unlock investment and innovation in cleaner energy and, ultimately, deliver an economic price for carbon.”
Risk mitigation: increasing the role of financial markets and better country coordination are keyDespite the financial turmoil of 2007, the financial markets are seen as an increasingly important tool to transfer and mitigate an increasing variety of global risks. The growth of financial markets has opened up new possibilities to help mitigate risks, including the rapid emergence of a new market in insurance-linked securities (ILS), which help provide additional capital to the insurance industry to protect against major catastrophe losses. While the early “cat bonds” were issued into the capital markets to help mitigate losses from wind damage and earthquakes, the ILS market has grown considerably in recent years in the range of risks covered, with total bonds outstanding now at more thanUS$ 34 billion.
Christian Mumenthaler, Member of the Executive Board of Swiss Re, who served for three years as the group’s Chief Risk Officer, said: “The development of the ILS market has increased the ability of insurers and reinsurers to accept peak risks such as US hurricanes. This has become increasingly important because climate change has elevated the frequency and severity of tropical cyclones. The extra insurance capacity available through these instruments helps private companies and governments mitigate and manage these peak risks.”
Besides ILS, a wide variety of other financial instruments are now being developed to transfer insurance risks, including weather derivatives. Mumenthaler added: “The weather derivatives market has grown at an explosive rate in recent years. For example, these instruments can provide rapid payments to governments and farmers who can use them to hedge against too little rainfall and excessive heat in the growing season, along with too much rain in the harvesting season. In this way, both the state and commercial growers can invest in crop production with a greater degree of confidence, helping to optimize food production and security.”
In Global Risks 2007, the Global Risk Network of the World Economic Forum warned of a growing under-appreciation of risk in financial markets, provided a snapshot assessment of a range of global risks for the decade ahead, and recommended the institution of country risk officers and flexible issue-based international coalitions to manage the complexity of the global risk environment.
Country Risk Officer: Establishing principles for country risk management“In order to maintain the benefits of globalization, improved governance of globalization is vital,” said Charles Emmerson, Associate Director of the World Economic Forum and Editor of the report. “In all the focus areas of this year’s report, principles of equity, management of trade-offs and long-term global cooperation will be necessary. The short-term outlook is highly uncertain in 2008, but we must not lose sight of longer term challenges.” (Click on the picture to watch the full 2-minute interview with Charles Emmerson)
In Global Risks 2007, the establishment of country risk officers was recommended to help improve risk management at the national level. In Global Risks 2008, the report looks at the specific example of the United Kingdom’s Civil Contingencies Secretariat and establishes a set of principles for country risk management which may apply across different institutional arrangements. An international forum of country risk officers could potentially offer a much improved capacity to exchange information about inherent cross-border global risks, and also improve the global ability to anticipate and respond to risk.

Notes to editors
Marsh & McLennan Companies (MMC)
MMC is a global professional services firm providing advice and solutions in the areas of risk, strategy and human capital. It is the parent company of a number of the world's leading risk experts and specialty consultants, including Marsh, the insurance broker and risk advisor; Guy Carpenter, the risk and reinsurance specialist; Kroll, the risk consulting firm; Mercer, the provider of HR and related financial advice and services; and Oliver Wyman, the management consultancy. With more than 55,000 employees worldwide and annual revenue of $11 billion, MMC provides analysis, advice and transactional capabilities to clients in more than 100 countries. Its stock (ticker symbol: MMC) is listed on the New York, Chicago, and London stock exchanges.......

Swiss Re
Swiss Re is the world’s leading and most diversified global reinsurer. The company operates through offices in more than 25 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Re is rated “AA-“by Standard & Poor’s, “Aa2” by Moody’s and “A+” by A.M. Best.....

Zurich Financial Services
Zurich Financial Services Group (Zurich) is an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia Pacific, Latin America and other markets. Founded in 1872, the Group is headquartered in Zurich, Switzerland. It employs approximately 58,000 people serving customers in more than 170 countries.

Three articles on Rising Food Prices- From The Economist

2007-12-07T11:38:00.000-08:00

*“THE world’s most vulnerable who spend 60% of their income on food have been priced out of the food market,” is the alarming warning from Josette Sheeran, head of the United Nations’ World Food Programme (WFP). As the price of wheat, maize, corn and other commodities that make up the world’s basic foodstuffs is soaring the poorest people in the poorest countries are the hardest hit. And as prices shoot up helping them is getting tougher too. The WFP’s food costs increased by more than 50% over the past five years. Ms Sheeran predicts that they will increase by another 35% in the next couple of years too.

*“Until two years ago we had too much food, but it was badly and unequally distributed,” says Abdolreza Abbassian, secretary of the intergovernmental group for grains trade at the Food and Agriculture Organisation (FAO), a UN agency. Today about 850m people, mostly women and children, remain chronically hungry while 1.1 billion are obese or overweight.

The end of cheap food
Dec 6th 2007From The Economist print edition

Rising food prices are a threat to many; they also present the world with an enormous opportunity
FOR as long as most people can remember, food has been getting cheaper and farming has been in decline. In 1974-2005 food prices on world markets fell by three-quarters in real terms. Food today is so cheap that the West is battling gluttony even as it scrapes piles of half-eaten leftovers into the bin.
That is why this year's price rise has been so extraordinary. Since the spring, wheat prices have doubled and almost every crop under the sun—maize, milk, oilseeds, you name it—is at or near a peak in nominal terms. The Economist's food-price index is higher today than at any time since it was created in 1845 (see chart). Even in real terms, prices have jumped by 75% since 2005. No doubt farmers will meet higher prices with investment and more production, but dearer food is likely to persist for years (see article). That is because “agflation” is underpinned by long-running changes in diet that accompany the growing wealth of emerging economies—the Chinese consumer who ate 20kg (44lb) of meat in 1985 will scoff over 50kg of the stuff this year. That in turn pushes up demand for grain: it takes 8kg of grain to produce one of beef.
But the rise in prices is also the self-inflicted result of America's reckless ethanol subsidies. This year biofuels will take a third of America's (record) maize harvest. That affects food markets directly: fill up an SUV's fuel tank with ethanol and you have used enough maize to feed a person for a year. And it affects them indirectly, as farmers switch to maize from other crops. The 30m tonnes of extra maize going to ethanol this year amounts to half the fall in the world's overall grain stocks.
Dearer food has the capacity to do enormous good and enormous harm. It will hurt urban consumers, especially in poor countries, by increasing the price of what is already the most expensive item in their household budgets. It will benefit farmers and agricultural communities by increasing the rewards of their labour; in many poor rural places it will boost the most important source of jobs and economic growth.
Although the cost of food is determined by fundamental patterns of demand and supply, the balance between good and ill also depends in part on governments. If politicians do nothing, or the wrong things, the world faces more misery, especially among the urban poor. If they get policy right, they can help increase the wealth of the poorest nations, aid the rural poor, rescue farming from subsidies and neglect—and minimise the harm to the slum-dwellers and landless labourers. So far, the auguries look gloomy.
In the troughThat, at least, is the lesson of half a century of food policy. Whatever the supposed threat—the lack of food security, rural poverty, environmental stewardship—the world seems to have only one solution: government intervention. Most of the subsidies and trade barriers have come at a huge cost. The trillions of dollars spent supporting farmers in rich countries have led to higher taxes, worse food, intensively farmed monocultures, overproduction and world prices that wreck the lives of poor farmers in the emerging markets. And for what? Despite the help, plenty of Western farmers have been beset by poverty. Increasing productivity means you need fewer farmers, which steadily drives the least efficient off the land. Even a vast subsidy cannot reverse that.
With agflation, policy has reached a new level of self-parody. Take America's supposedly verdant ethanol subsidies. It is not just that they are supporting a relatively dirty version of ethanol (far better to import Brazil's sugar-based liquor); they are also offsetting older grain subsidies that lowered prices by encouraging overproduction. Intervention multiplies like lies. Now countries such as Russia and Venezuela have imposed price controls—an aid to consumers—to offset America's aid to ethanol producers. Meanwhile, high grain prices are persuading people to clear forests to plant more maize.
Dearer food is a chance to break this dizzying cycle. Higher market prices make it possible to reduce subsidies without hurting incomes. A farm bill is now going through America's Congress. The European Union has promised a root-and-branch review (not yet reform) of its farm-support scheme. The reforms of the past few decades have, in fact, grappled with the rich world's farm programmes—but only timidly. Now comes the chance for politicians to show that they are serious when they say they want to put agriculture right.
Cutting rich-world subsidies and trade barriers would help taxpayers; it could revive the stalled Doha round of world trade talks, boosting the world economy; and, most important, it would directly help many of the world's poor. In terms of economic policy, it is hard to think of a greater good.
Where government help is really neededThree-quarters of the world's poor live in rural areas. The depressed world prices created by farm policies over the past few decades have had a devastating effect. There has been a long-term fall in investment in farming and the things that sustain it, such as irrigation. The share of public spending going to agriculture in developing countries has fallen by half since 1980. Poor countries that used to export food now import it.
Reducing subsidies in the West would help reverse this. The World Bank reckons that if you free up agricultural trade, the prices of things poor countries specialise in (like cotton) would rise and developing countries would capture the gains by increasing exports. And because farming accounts for two-thirds of jobs in the poorest countries, it is the most important contributor to the early stages of economic growth. According to the World Bank, the really poor get three times as much extra income from an increase in farm productivity as from the same gain in industry or services. In the long term, thriving farms and open markets provide a secure food supply.
However, there is an obvious catch—and one that justifies government help. High prices have a mixed impact on poverty: they hurt anyone who loses more from dear food than he gains from a higher income. And that means over a billion urban consumers (and some landless labourers), many of whom are politically influential in poor countries. Given the speed of this year's food-price rises, governments in emerging markets have no alternative but to try to soften the blow.
Where they can, these governments should subsidise the incomes of the poor, rather than food itself, because that minimises price distortions. Where food subsidies are unavoidable, they should be temporary and targeted on the poor. So far, most government interventions in the poor world have failed these tests: politicians who seem to think cheap food part of the natural order of things have slapped on price controls and export restraints, which hurt farmers and will almost certainly fail.
Over the past few years, a sense has grown that the rich are hogging the world's wealth. In poor countries, widening income inequality takes the form of a gap between city and country: incomes have been rising faster for urban dwellers than for rural ones. If handled properly, dearer food is a once-in-a-generation chance to narrow income disparities and to wean rich farmers from subsidies and help poor ones. The ultimate reward, though, is not merely theirs: it is to make the world richer and fairer.

Food prices Cheap no more
Dec 6th 2007From The Economist print edition

Rising incomes in Asia and ethanol subsidies in America have
put an end to a long era of falling food pricesGerrit BuntrockONE of the odder features of last weekend's vote in Venezuela
was that staple foods were in short supply. Something similar
happened in Russia before its parliamentary election.
Governments in both oil-rich countries had imposed controls on
food prices, with the usual consequences. Such controls have
been surprisingly widespread—a knee-jerk response to one of
the most remarkable changes that food markets, indeed any
markets, have seen for years: the end of cheap food.
In early September the world price of wheat rose to over $400
a tonne, the highest ever recorded. In May it had been around
$200. Though in real terms its price is far below the heights it
scaled in 1974, it is still twice the average of the past 25 years.
Earlier this year the price of maize (corn) exceeded $175 a
tonne, again a world record. It has fallen from its peak, as has
that of wheat, but at $150 a tonne is still 50% above the
average for 2006.
As the price of one crop shoots up, farmers plant it to take
advantage, switching land from other uses. So a rise in wheat
prices has knock-on effects on other crops. Rice prices have hit
records this year, although their rise has been slower. The
Economist's food-price index is now at its highest since it began
in 1845, having risen by one-third in the past year.
Normally, sky-high food prices reflect scarcity caused by crop
failure. Stocks are run down as everyone lives off last year's
stores. This year harvests have been poor in some places,
notably Australia, where the drought-hit wheat crop failed for
the second year running. And world cereals stocks as a
proportion of production are the lowest ever recorded. The
run-down has been accentuated by the decision of large
countries (America and China) to reduce stocks to save money.
Yet what is most remarkable about the present bout of
“agflation” is that record prices are being achieved at a time not
of scarcity but of abundance. According to the International
Grains Council, a trade body based in London, this year's total
cereals crop will be 1.66 billion tonnes, the largest on record
and 89m tonnes more than last year's harvest, another bumper
crop. That the biggest grain harvest the world has ever seen is
not enough to forestall scarcity prices tells you that something
fundamental is affecting the world's demand for cereals.
The meat of the questionTwo things, in fact. One is increasing wealth in China and India.
This is stoking demand for meat in those countries, in turn
boosting the demand for cereals to feed to animals. The use of
grains for bread, tortillas and chapattis is linked to the growth of
the world's population. It has been flat for decades, reflecting
the slowing of population growth. But demand for meat is tied
to economic growth (see chart 1) and global GDP is now in its
fifth successive year of expansion at a rate of 4%-plus.
Higher incomes in India and China have made hundreds of
millions of people rich enough to afford meat and other foods.
In 1985 the average Chinese consumer ate 20kg (44lb) of meat
a year; now he eats more than 50kg. China's appetite for meat
may be nearing satiation, but other countries are following
behind: in developing countries as a whole, consumption of
cereals has been flat since 1980, but demand for meat has
doubled.
Not surprisingly, farmers are switching, too: they now feed
about 200m-250m more tonnes of grain to their animals than
they did 20 years ago. That increase alone accounts for a
significant share of the world's total cereals crop. Calorie for
calorie, you need more grain if you eat it transformed into meat
than if you eat it as bread: it takes three kilograms of cereals to
produce a kilo of pork, eight for a kilo of beef. So a shift in diet
is multiplied many times over in the grain markets. Since the late
1980s an inexorable annual increase of 1-2% in the demand for
feedgrains has ratcheted up the overall demand for cereals and
pushed up prices.
Because this change in diet has been slow and incremental, it
cannot explain the dramatic price movements of the past year.
The second change can: the rampant demand for ethanol as fuel
for American cars. In 2000 around 15m tonnes of America's
maize crop was turned into ethanol; this year the quantity is
likely to be around 85m tonnes. America is easily the world's
largest maize exporter—and it now uses more of its maize crop
for ethanol than it sells abroad.
Ethanol is the dominant reason for this year's increase in grain
prices. It accounts for the rise in the price of maize because the
federal government has in practice waded into the market to
mop up about one-third of America's corn harvest. A big
expansion of the ethanol programme in 2005 explains why
maize prices started rising in the first place.
Ethanol accounts for some of the rise in the prices of other
crops and foods too. Partly this is because maize is fed to
animals, which are now more expensive to rear. Partly it is
because America's farmers, eager to take advantage of the
biofuels bonanza, went all out to produce maize this year,
planting it on land previously devoted to wheat and soyabeans.
This year America's maize harvest will be a jaw-dropping 335m
tonnes, beating last year's by more than a quarter. The increase
has been achieved partly at the expense of other food crops.
This year the overall decline in stockpiles of all cereals will be
about 53m tonnes—a very rough indication of by how much
demand is outstripping supply. The increase in the amount of
American maize going just to ethanol is about 30m tonnes. In
other words, the demands of America's ethanol programme
alone account for over half the world's unmet need for cereals.
Without that programme, food prices would not be rising
anything like as quickly as they have been. According to the
World Bank, the grain needed to fill up an SUV would feed a
person for a year.
America's ethanol programme is a product of government
subsidies. There are more than 200 different kinds, as well as a
54 cents-a-gallon tariff on imported ethanol. That keeps out
greener Brazilian ethanol, which is made from sugar rather than
maize. Federal subsidies alone cost $7 billion a year (equal to
around $1.90 a gallon).
In theory, what governments mandate, they can also scrap. But
that seems unlikely with oil at the sort of price that makes them
especially eager to promote alternative fuels. Subsidies might be
trimmed, of course, reducing demand occasionally; this is
happening a bit now. And eventually, new technologies to
convert biomass to liquid fuel will replace ethanol—but that will
take time. For the moment, support for the ethanol programme
seems secure. Hillary Clinton and John McCain used to be
against ethanol subsidies, but have changed their minds. Russia
and Venezuela are not the only countries that like to meddle in
food markets for political reasons.
So demand for grain will probably remain high for a while.
Demand, though, is only one side of the equation. Supply forms
the other. If there is a run of bumper harvests, prices will fall
back; if not, they will stay high.
Harvests can rise only if new land is brought into cultivation or
yields go up. This can happen fairly quickly. The world's cereal
farmers responded enthusiastically to price signals by planting
more high-value crops. And so messed-up is much of the rich
world's farming systems that farmers in the West have often
been paid not to grow crops—something that can easily be
reversed, as happened this year when the European Union
suspended the “set aside” part of its common agricultural policy.
Still, there are limits to how much harvests can be expanded in
the short term. In general, says a new report by the International
Food Policy Research Institute (IFPRI), which is financed by
governments and development banks, the response tends to be
sticky: a 10% rise in prices yields a 1-2% increase in supply.
In the longer run, plenty of new farmland could be ploughed up
and many technological gains could be had. But much of the
new land is in remote parts of Brazil, Russia, Kazakhstan, the
Congo and Sudan: it would require big investments in roads and
other infrastructure, which could take decades—and would
often lead to the clearing of precious forest. Big gains could be
had if genetically modified foods were brought into production
or if new seed varieties were planted in Africa. But again, that
will take time. Moreover, GM foods will not live up to their
promise unless they shed the popular suspicion that dogs them,
especially in Europe. And some of the new land—dry, marginal
areas of Africa, Brazil and Kazakhstan—could be vulnerable to
damage from global warming. By some measures, global
warming could cut world farm output by as much as one-sixth
by 2020. No less worryingly, high oil prices would depress the
use of oil-based fertilisers, which have been behind much of the
increase in farm production during the past half-century.
It is risky to predict long-run trends in farming—technology in
particular always turns out unexpectedly—but most forecasters
conclude from these conflicting currents that prices will stay high
for as much as a decade. Because supplies will not match
increases in demand, IFPRI believes, cereal prices will rise by
between 10% and 20% by 2015. The UN's Food and
Agriculture Organisation's forecast for 2016-17 is slightly
higher. Whatever the exact amount, this year's agflation seems
unlikely to be, as past rises have been, simply the upward side
of a spike.
If prices do not fall back, this will mark a break with the past.
For decades, prices of cereals and other foods have been in
decline, both in the shops and on world markets. The IMF's
index of food prices in 2005 was slightly lower than it had been
in 1974, which means that in real terms food prices fell during
those 30 years by three-quarters (see chart 2). In the 1960s
food (including meals out) accounted for one-quarter of the
average American's spending; by 2005 the share was less than
one-seventh.
In other words, were food prices to stay more or less where
they are today, it would be a radical departure from a past in
which shoppers and farmers got used to a gentle decline in food
prices year in, year out. It would put an end to the era of cheap
food. And its effects would be felt everywhere, but especially in
countries where food matters most: poor ones.
A blessing and a curseIf you took your cue from governments, you would conclude
that dearer food was unequivocally a bad thing. About a score
of countries have imposed food-price controls of some sort.
Argentina, Morocco, Egypt, Mexico and China have put
restraints on domestic prices. A dozen countries, including
India, Vietnam, Serbia and Ukraine, have imposed export taxes
or limited exports. Argentina and Russia have done both. In all
these places governments are seeking to shelter their people
from food-price rises by price controls. But dearer food is not a
pure curse: it produces winners as well as losers.
Obviously, farmers benefit—if governments allow them to keep
the gains. In America, the world's biggest agricultural exporter,
net farm income this year will be $87 billion, 50% more than the
average of the past ten years. The prairie farmers of the
Midwest are looking forward to their Caribbean cruises.
Other beneficiaries are in poor countries. Food exporters such
as India, South Africa and Swaziland will gain from increased
export earnings. Countries such as Malawi and Zimbabwe,
which used to export food but no longer do so, also stand to
gain if they can boost their harvests. Given that commodity
prices have been falling for so long in real terms, this would be
an enormous relief to places that have suffered from a relentless
decline in their terms of trade.
In emerging markets an income gap has opened up between
cities and countryside over the past few years. As countries
have diversified away from agriculture into industry and
services, urban wages have outstripped rural ones. Income
inequality is conventionally measured using a scale running from
zero to one called the Gini coefficient. A score of 0.5 is the
mark of a highly unequal society. The Asian Development Bank
reckons that China's Gini coefficient rose from 0.41 in 1993 to
0.47 in 2004. If farm incomes in poor countries are pushed up
by higher food prices, that could mitigate the growing gap
between city and countryside. But will it?
Guess who losesAccording to the World Bank, 3 billion people live in rural
areas in developing countries, of whom 2.5 billion are involved
in farming. That 3 billion includes three-quarters of the world's
poorest people. So in principle the poor overall should gain
from higher farm incomes. In practice many will not. There are
large numbers of people who lose more from higher food bills
than they gain from higher farm incomes. Exactly how many
varies widely from place to place.
Among the losers from higher food prices are big importers.
Japan, Mexico and Saudi Arabia will have to spend more to
buy their food. Perhaps they can afford it. More worryingly,
some of the poorest places in Asia (Bangladesh and Nepal) and
Africa (Benin and Niger) also face higher food bills. Developing
countries as a whole will spend over $50 billion importing
cereals this year, 10% more than last.
Rising prices will also hurt the most vulnerable of all. The World
Food Programme, the main provider of emergency food aid,
says the cost of its operations has increased by more than half in
the past five years and will rise by another third in the next two.
Food-aid flows have fallen to their lowest level since 1973.
In every country, the least well-off consumers are hardest hit
when food prices rise. This is true in rich and poor countries
alike but the scale in the latter is altogether different. As Gary
Becker, a Nobel economics laureate at the University of
Chicago, points out, if food prices rise by one-third, they will
reduce living standards in rich countries by about 3%, but in
very poor ones by over 20%.
Not all consumers in poor countries are equally vulnerable. The
food of the poor in the Andes, for example, is potatoes; in
Ethiopia, teff: neither is traded much across borders, so
producers and consumers are less affected by rising world
prices. As the World Bank's annual World Development
Report shows, the number of urban consumers varies from over
half the total number of poor in Bolivia, to about a quarter in
Zambia and Ethiopia, to less than a tenth in Vietnam and
Cambodia.
But overall, enormous numbers of the poor—both urban and
landless labourers—are net buyers of food, not net sellers. They
have already been hard hit: witness the riots that took place in
Mexico over tortilla prices earlier this year. According to
IFPRI, the expansion of ethanol and other biofuels could reduce
calorie intake by another 4-8% in Africa and 2-5% in Asia by
2020. For some countries, such as Afghanistan and Nigeria,
which are only just above subsistence levels, such a fall in living
standards could be catastrophic.
So it is no good saying “let them eat cake”: there are strong
welfare arguments for helping those who stand to lose. But the
way you do it matters. In general, it is better to subsidise poor
peoples' incomes, rather than food prices: this distorts price
signals the least and allows farmers to benefit from higher
prices. Where it is not possible to subsidise incomes (because
to do so requires a decent civil service), it is still possible to
minimise the unintended consequences if food subsidies are
targeted and temporary. Morocco fixed bread prices (the food
of the poor) during Ramadan, the Muslim month of fasting; at
the same time, it cut tariffs on food imports to increase
competition.
AP
But a problem tooIn contrast, Russia shows how not to do it. It
imposed across-the-board price controls on milk, eggs, bread
and other staples, benefiting everyone whether they needed help
or not. Food is disappearing from shelves and farmers are
bearing the brunt. As Don Mitchell of the World Bank points
out, “if you want to help consumers, you can do it without
destroying your producers but only if you go about it in the right
way.” In reality, many of the recent price controls are blatant
politicking. About half the countries that imposed price controls
did so before elections or other big political events. Russia's are
due to run out just after next year's presidential election. Funny,
that.
There is one last important knock-on effect of agflation. It is
likely to help shift the balance of power in the world economy
further towards emerging markets. Higher food prices have
increased inflation around the world, but by different amounts in
different countries. In Europe and America food accounts for
only about one-tenth of the consumer-price index, so even
though food prices in rich countries are rising by around 5% a
year, it has not made a big difference. There have been clucks
of concern from the European Central Bank and a consumer
boycott of pasta in Italy, but that is about all.
In poor countries, in contrast, food accounts for half or more of
the consumer-price index (over two-thirds in Bangladesh and
Nigeria). Here, higher food prices have had a much bigger
impact. Inflation in food prices in emerging markets nearly
doubled in the past year, to 11%; meat and egg prices in China
have gone up by almost 50% (although that is partly because
pork prices have been pushed up by a disease in pigs). This has
dragged up headline inflation in emerging markets from around
6% in 2006 to over 8% now. In many countries, inflation is at
its highest for a decade.
Central bankers are determined to ensure that what could be a
one-off shift in food prices does not create continuing inflation
by pushing up wages or creating expectations of higher prices.
So they are tightening monetary policy. China increased interest
rates in August, Chile in July, Mexico in May. The striking thing
about these rises is that they are the opposite of what has been
happening in some rich countries. The Federal Reserve reduced
rates by 50 basis points in September and 25 points in
October; the Bank of Canada cut rates this week. The indirect
effect of food-price rises has therefore been to widen the
interest-rate differential between rich and emerging markets.
And all this is going on as the economic balance of power is
shifting. Growth in America and Europe is slowing; China and
India are going great guns. Financial confidence in the West has
been shaken by the subprime-mortgage crisis; capital flows into
emerging markets are setting records.
This shift will be tricky to handle. Such transitions always are.
The risk is of a bubble in emerging markets. As Simon Johnson,
the IMF'S director of research, wryly notes, “every bubble
starts with a change in the real economy.” Food markets are an
obvious place to start. How emerging countries fare—and how
poor consumers cope—depends on their economic policies.
The imposition of food-price controls was not exactly a good
start.

An expensive dinner
Nov 3rd 2007From Economist.com

Alarm is growing about rising food prices
AP“THE world’s most vulnerable who spend 60% of their income on food have been priced out of the food market,” is the alarming warning from Josette Sheeran, head of the United Nations’ World Food Programme (WFP). As the price of wheat, maize, corn and other commodities that make up the world’s basic foodstuffs is soaring the poorest people in the poorest countries are the hardest hit. And as prices shoot up helping them is getting tougher too. The WFP’s food costs increased by more than 50% over the past five years. Ms Sheeran predicts that they will increase by another 35% in the next couple of years too.
For many years the least developed nations have worried about food security, especially countries at war and those battling droughts and other climatic hardships. Meanwhile the world’s richest nations have produced more than enough for their needs and spent more time and effort worrying about the problems related to an abundance of food. These range from the health risks associated with ballooning rates of obesity to subsidies for uncompetitive farmers, particularly from the European Union. Despite efforts to tackle spending on farm subsidies, over 40% of the entire EU budget still goes towards supporting agriculture.
“Until two years ago we had too much food, but it was badly and unequally distributed,” says Abdolreza Abbassian, secretary of the intergovernmental group for grains trade at the Food and Agriculture Organisation (FAO), a UN agency. Today about 850m people, mostly women and children, remain chronically hungry while 1.1 billion are obese or overweight.
Food is scarcer now thanks to market liberalisation, which helped to cut excess production and lower stocks. At the same time demand for grains and other food commodities has shot up in China, India and other countries with rapidly growing economies. The biofuel industry is gobbling up an increasing share of the corn and sugar crops. And this year floods and droughts around the world destroyed much of the harvest in countries such as Britain, which had one of the wettest years in recent history, and Australia, which had one of the driest.
Concern about the cost of food is even spreading beyond the world’s poor countries. Last month Italians took to the street in Rome and Milan to protest against an increase in pasta prices. They are eating less too: Italians’ pasta and bread consumption dropped 7.4% and milk consumption fell by 2.6% in the first eight months of the year according to Coldiretti, a farmers’ association.
Efforts to find solutions have been complicated by political manipulation. This month the Russian government introduced price controls in the run-up to parliamentary elections in December. This will temporarily help the country’s poor but leave them more exposed to the impact of price increases after controls are lifted. Jacques Diouf, head of the FAO, predicts that more countries will introduce food-price controls while others will scrap import tariffs on food or increase subsidies for food production.
And efforts to alleviate one problem, finding an alternative to oil, has brought strong condemnation from a proponent of another, feeding the world’s starving poor. Jean Ziegler, the UN’s independent expert on the right to food, calls the growing use of crops to replace petrol as a crime against humanity and wants a five-year moratorium on biofuel production.
Periods of high prices followed by times of low prices are common in agricultural markets. What makes the current cycle different from previous periods of high prices is the rise has hit nearly all food commodities. In the past farmers producing a plentiful crop attracting low prices would switch to one in shorter supply that would earn them more. And stocks are so tight at the moment that there is not much of a buffer if bad weather next year effects crops again, according to the FAO’s Mr Abassian.
Prices will probably remain high for the next year or two while the world is adapting to food scarcity. What happens next will reveal the resilience of the world’s food-supply system, predicts Ms Sheeran. Her programme, she says, is battling with a host of adverse circumstances. In addition to higher prices for food the WFP has to cope with climatic change, a rapidly increasing world population and the decline in the rich world’s aid budgets. Ms Sheeran refers to this as the post food-surplus era. The fat probably won’t get any thinner but the effects on the world’s poorest and hungriest could be devastating.

Two Articles on UK Housing market

2007-12-06T07:57:00.000-08:00

FEW HOMEOWNERS WILL BENEFIT FROM INTEREST RATE CUT
Thursday December 6,2007
Nicola McCafferty for express.co.uk

THE Bank of England cut its interest rates today for the first time in two years, yet only some homeowners are to reap the benefits.

The Bank’s base rate will fall by 0.25 per cent, yet the cut would knock a mere £16 a month off the cost of a typical £100,000 mortgage - providing the cut is passed on in full.
Homeowners were warned that despite the cut, many mortgage lenders are likely to delay reducing their mortgage rates and others are expected to pass on only some of the reduction.
Some mortgage lenders may not reduce rates at all.
Yet for Halifax and Nationwide customers, Christmas will come early.
Both lenders have said they would be passing on the 0.25 per cent reduction to borrowers from January 1.
The move comes despite predictions from commentators that lenders would delay reducing their mortgage rates, with many expected to pass on only some of the reduction, while others were expected to not cut their rates at all.
The decision by Halifax and Nationwide, which was announced within minutes of base rates being lowered to 5.5 per cent, puts pressure on other groups to follow suit.
The Bank’s cut in interest rates follows fears that the UK economy is facing a sharp slowdown.
Calls for a cut in interest rates intensified this week after evidence was found that confidence in the house market and retail sector were crumbling.
Only this morning express.co.uk reported that house prices have fallen for the third month in a row, prompting calls for an interest rate cut in an attempt to steady the market.
Values dropped by 1.1 per cent in November, the biggest monthly fall for almost a year and the first time prices have plunged for three consecutive months since early 1995.
The slide pushed annual house price inflation down to 6.3 per cent, its lowest level since March this year, said the country's biggest mortgage lender.
Stuart Law, chief executive of property investment group Assetz, urged the monetary committee to drop interest rates or face a tirade of criticism.
"There's no reason not to reduce interest rates now. A failure to take immediate action could result in a more panicked move in 2008 as the Bank scrambles to regain control of an escalating credit crunch," he said.

HOUSE PRICES PLUNGE FOR THIRD MONTH
House values have dropped by 1.1 per cent

Thursday December 6,2007 By Sarah O'Grady , Property Correspondent HOUSE prices have fallen for the third month in a row, prompting calls for an interest rate cut in an attempt to steady the market.
Values dropped by 1.1 per cent in November, the biggest monthly fall for almost a year and the first time prices have plunged for three consecutive months since early 1995.
The slide pushed annual house price inflation down to 6.3 per cent, its lowest level since March last year, said the country’s biggest mortgage lender.
The odds on the Bank of England cutting interest rates from 5.75 per cent when its Monetary Policy Committee meets today were slashed after Halifax revealed the figures. Howard Archer, chief UK and European economist at Global Insight, said: “This third successive and deeper fall raises concern that the housing market is headed for a sharp correction – particularly as it follows very weak Bank of England mortgage approvals data for October.
“Evidence is coming thick and fast that house prices are cooling markedly in the face of slowing activity, increased affordability pressures and tightening lending practices. There is undeniably a very real and growing risk that the
The housing market is headed for a sharp correction. Howard Archer, economist housing market could see a sharp correction.
“We now believe that there are increased worries within the Bank that the economy is headed for a sharp downturn.”Stuart Law, chief executive of property investment group Assetz, urged the monetary committee to drop interest rates or face a tirade of criticism.
“There’s no reason not to reduce interest rates now. A failure to take immediate action could result in a more panicked move in 2008 as the Bank scrambles to regain control of an escalating credit crunch,” he said.
“It must face up to the clear and present danger of an economic slowdown and cut rates immediately.
“We need to follow the example set by the US and Europe by offering further liquidity into the market and dropping base rates quickly, perhaps by as much as half of one per cent.
“If the Bank fails to act quickly enough and continues to ignore indicators, we could see rates drop to below five per cent in 2008, as the committee will have to overcompensate to avoid an economic downturn.”
Calls for immediate action have grown louder from industry in recent days, as firms grapple with the fall-out from this summer’s credit crunch and the blow to confidence caused by the run on Northern Rock.
The TUC said: “The signs last week were that economic growth, already predicted to fall in 2008, will decline even further than previously expected. In our view, this is the greater threat and a cut is needed to boost economic growth.”
Tesco, the country’s biggest retailer, also called on the Bank to cut rates, dismissing fears about food price inflation as “hype”.
The senior economist at the Royal Institution of Chartered Surveyors, David Stubbs, said: “These figures provide yet more evidence of a slowdown in the housing market. Higher interest rates coupled with tighter lending criteria are denying many first-time buyers access to today’s constrained property market.
“Confidence among home buyers remains shaky since the Northern Rock affair, as today’s consumer confidence figures emphasise.
“We believe that there is good reason for the Bank of England to deliver a precautionary interest rate cut to guard against the risk of a sharper than expected downturn in the economy and the housing market.” The latest fall pushed the average cost of a home further below the £200,000 barrier to £194,895.
Consumer confidence saw a record drop in November, alongside a sharp drop in activity in the services sector.The Nationwide said its main consumer confidence index dropped by 12 points to 86 in November.
The fall was the biggest recorded in a single month since the index was first launched in May 2004, and the slide put the index back to levels last seen in February this year.
Nationwide blamed continued uncertainty about the credit crunch, higher food prices and petrol breaking through the £1-a-litre barrier.
But despite signs that the housing slowdown is well under way, worries about inflationary pressures may persuade the monetary committee to keep interest rates on hold.

Two Articles on UK Economy

2007-12-05T14:12:00.000-08:00

The City of London's tumble
After the fall
Nov 29th 2007 From The Economist print edition
KOBAL

Britain's most spectacular moneymakers have tripped up. Over the next year or so, the fall will hurt not just them but Gordon Brown and the rest of the country too
“I WOULD rather see finance less proud and industry more content,” said Winston Churchill in 1925, shortly before he took the fateful decision to subject Britain's northern manufacturing heartland to an overvalued pound by returning to the gold standard. Over the past decade finance has seldom been more proud—and nowhere more so than in the booming City of London. Once again industry has been the poor relation, suffering from the strength of sterling, while northern regions have fallen further behind a more prosperous south.
This autumn the proud City has taken a fall. Bank shares have fallen by nearly 20% since the summer as investors worry about potential losses linked to dodgy mortgages in America. Banking jobs are being axed and financiers are no longer looking forward to the usual Christmas cheer of bumper bonuses. Yet in a bleak irony, the biggest casualty to date has been in Newcastle, the north-eastern base of Northern Rock. The mortgage lender's woes have undermined confidence in the ability of one of Britain's poorest regions to build a post-industrial future.
No one can gauge yet quite how serious the City setback will be or how long it will last. Although a prolonged banking crisis, such as the one that crippled the Japanese economy in the 1990s, cannot be ruled out, the current difficulties are still most likely to be a temporary reverse. Yet the impact over the next year or so will be painful, not only for those who work in the City but also for the economy and the public finances. As the shockwaves ripple out from London's financial district, they could undermine the regional foundations of Labour's long electoral hegemony.
Over the past decade, financial services have grown much faster than the economy as a whole, whereas manufacturing has barely grown at all (see chart). At the start of this decade, the financial sector—banking and securities, insurance and specialist services like shipbroking—made up 5.5% of national output; by 2004 that share had jumped to 8.3%. Over the same period manufacturing dwindled from 17.9% to 14.1%. The financial sector's expansion has continued apace: by 2006 it made up 9.4% of the economy, according to provisional official estimates.

Finance is more important to the economy in Britain than it is in other countries. What makes the difference is the City's role as a global financial hub, where leading banks and moneymen congregate to do business with one another. As a centre for international finance, London heads the league. Its foreign-exchange markets are huge, with over twice New York's share of trading; it dominates off-exchange dealing in derivatives; and last year it hosted the most new share issues, by value. London's specialist wholesale financial services and markets, which now extend well beyond the historic “square mile” round St Paul's Cathedral to encompass Canary Wharf in the east and Mayfair in the West End, make up a third of Britain's financial sector.
The recent City-led expansion of finance in Britain has meant that a sector worth almost a tenth of the economy has been responsible for 30% of overall GDP growth over the past three years. The unpleasant corollary is that the financial crisis will apply the brakes. National output is expected to expand by about 3% in 2007. But according to CEBR, an economic consultancy that monitors the City, GDP growth will decrease in 2008 to 1.4%, its slowest since 1992, as banks curb their lending and trading activities.
Although most other forecasters are less gloomy, the government has good reason to worry about a finance-led economic downturn. In the past decade Britain's financial sector has contributed about 30% of all corporation-tax revenues. For all the attention devoted to how some escape their fair share of taxes, the taxman has also reaped handsome returns from the City's high fliers, who make up many of the top 1% of earners contributing 22% of income-tax receipts. The fiscal dividend has been vital in paying for Labour's big public-spending increases.
But now the deteriorating fortunes of the financial sector threaten the health of the public finances. Alistair Darling, the chancellor of the exchequer, conceded in October that borrowing would overrun by £4 billion ($8.3 billion) in 2007-08 and £6 billion in 2008-09, raising the total budget deficit to £38 billion and £36 billion respectively. But these higher estimates, representing the Treasury's first stab at the impact of the banking crisis, may still be too optimistic. The government has got its sums wrong about revenues from the financial sector before, points out Robert Chote, director of the Institute for Fiscal Studies, a think-tank. It was wrongfooted by the dotcom crash in Labour's second term, when revenues fell by more and for longer than it had expected.

Changing the mixA finance-led downturn will have wider social consequences too. London acts as a huge turntable, sucking in migrants from abroad but spinning out existing residents to the rest of the country. As the City slows, so too will its demand for foreign labour. After several years in which national immigration figures have been higher than expected, next year's may surprise by coming in lower than expected. “It is pretty certain that if the London economy does hiccup there will be a slowdown in immigration to Britain,” says John Salt, head of the Migration Research Unit at University College London.
London may also become less popular with rich foreigners, who have given it an increasingly plutocratic feel in recent years. With less money to be made, some may be put off staying by the prospect of having to pay a special annual charge of £30,000 from April 2008 if they claim non-domicile status, which protects foreign income from taxation so long as it is not remitted to Britain. The “non-dom” tax will affect only those who have lived in Britain for seven or more years but it already seems to be affecting sentiment.
The most important effect of the City slowdown may be to change the regional balance of economic advantage, which poses a potent political threat to the current government. After Labour's fourth successive defeat at the polls in 1992, Giles Radice, then one of its MPs, wrote an influential pamphlet called “Southern Discomfort” arguing that the party would continue to fail so long as it stayed stuck in its northern strongholds and put off the aspirant voters of the south. Tony Blair got the message and won a landslide in 1997 by wooing southern voters still smarting from the economic pain of the housing crash in the early 1990s. He won another thumping victory in 2001, as London and the south thrived in Labour's first term.
The surge in southern prosperity over the past decade has been greatest in London. In 1995 output per person in the capital was 28% higher than the British average; by 2005 it was 36% greater. Only two other regions gained ground: the south-east (11% above the national average in 1995; 15% above it in 2005) and the south-west (8% below the national average in 1995; 6% below it in 2005). Scotland, Wales, Northern Ireland and the other six regions in England (essentially the Midlands and the north) all lost ground (see map).(n/a)

Not only is London one of Europe's most prosperous regions, but also it is one of the biggest city economies in the world. In a recent ranking by PricewaterhouseCoopers (PWC), an accountancy firm, its GDP was sixth highest—ahead of several national economies, including Sweden's and Switzerland's. Southern regions outside the capital have gained from its dynamism. For example, Reading, in the heart of the Thames Valley to the west of London, boasts the highest income per person among the 55 biggest towns outside London. The local economy is buoyed by a thriving IT sector including the British headquarters of Microsoft and Oracle; it has also attracted big financial companies such as Prudential and ING. “Overseas, people assume that the Thames Valley is London,” argues Christina Howell of the local chamber of commerce.
The south has also gained in wealth through its booming housing market. Over the past decade house prices have risen most in the south-west and London (after Northern Ireland, a special case thanks to the return of peace) and least in Scotland. International money and big City bonuses have pushed up property prices in choice areas of the capital to the highest in the world, according to a recent study by Knight Frank, an estate agency. The golden touch of City chequebooks has extended far beyond London, causing, for example, astonishing rises in the cost of holiday homes in favoured resorts on the coast of Cornwall in the south-west.
When Mr Blair pulled off an historic third-term victory in 2005, southern voters were grumpier: there was an unexpectedly sharp swing against Labour in constituencies around the capital. One reason was the deteriorating quality of life for many people caused by traffic congestion and overcrowding on commuter trains. A second was that public services in the south face greater strains than in the rest of Britain because public payscales are in the main set nationally, and London's higher cost of living makes it hard to attract staff.
The third and most important reason for their discontent was that the early years of this century were not so good for the London economy: the City was hit by the downturn in international finance after the dotcom crash. Research by John Hawksworth, an economist at PWC, has unveiled a stark difference in performance between the second half of the 1990s and the first half of the current decade. Over the ten years to 2005, disposable incomes grew fastest in London. But that was because the capital did so well in the late 1990s; between 2000 and 2005 income growth in London trailed a bit behind the national average.
These figures do not include the effects of the City's boom in the past couple of years. But they suggest that there may be another political backlash if London now suffers as the economic brakes are slammed on. Since the capital's economy has generally outpaced GDP growth over the past decade, the slowdown to 1.4% that CEBR is forecasting for it next year—in line with the economy as a whole—will be especially painful. Even when London was outstripped by the rest of Britain in 2001, it still managed to expand by 2.0%.
Furthermore house buyers in and around the capital will be pummelled by rising mortgage costs arising from the credit crunch, a blow that will hit them hard since housing costs already gobble up a bigger share of their household budgets than in the rest of the country. And they can expect no consolation prize in terms of housing-market gains, since house-price growth will slow to zero both nationally and in the south by this time next year, according to Fionnuala Earley, an economist at the Nationwide Building Society.

The ripple effectLondon may have outstripped the rest of the country in the past decade but this has not been at the latter's expense. Rather, the capital's economic vigour has boosted growth elsewhere in a number of ways. For one thing, there is extensive trade between London and the regions. About half of it is in business and financial services. In 2003 London sold £66 billion of such services to the regions but also bought some £42 billion of them, according to a recent report by the Centre for Cities, a think-tank. Trade links are strongest with the south-east, but they are significant with other regions especially the Midlands.
Provincial Britain also benefits as the capital's high rents and labour costs push routine activities out into less expensive locations. This is happening all the time, points out Ian Gordon, professor of human geography at the London School of Economics (LSE): “Given London's high costs, firms are constantly looking for ways to move work out to places where it can be done more cheaply.”
Many of the moves are to the south-east, but firms also move farther afield such as to the north-west of England. “If you don't need to do operations in London, why would you?” asks Ivan Royle of Bank of New York Mellon, which opened a big office in Manchester two years ago. Expanding in Canary Wharf, where the bank has its main operation in Britain, would have meant higher rents, pricier services and a tighter market for talent. Manchester's cheaper costs and big pool of graduates (its university is Britain's largest) clinched the deal. Nor are these all “back office” jobs: the bank's 750-strong Manchester staff includes postgraduates.
Jobs in finance now loom larger in the economies of nearly all big towns than they did a decade ago, especially those that have direct transport links to London. The shift is devoutly sought by local leaders anxious to emulate the capital's winning economic formula. “Regional city bosses have adopted a London-lite strategy,” explains Tony Travers, a local-government guru at the LSE. They, too, want to fire up their economies by attracting jobs in financial and business services and by encouraging knowledge-intensive activities linked to local universities.
One worry is that the best and the brightest still seem to be lured to the capital. A recent study based on the 2001 census showed that the flow of professionals and managers to London from Britain's 26 next largest cities was considerably more than the traffic in the opposite direction. Indeed, the capital's share of recent graduates seems to be rising. Ms Howell of the Thames Valley Chamber of Commerce explains that a stint with a London firm is seen as the best start to a career in many occupations such as law and banking.
On the other hand, London still spins out many more people to the rest of the country than it attracts in domestic migration. Some of these are retirees, but moves, often to the countryside rather than cities, are also triggered when people start families and need more space and better public services. Those who leave have acquired knowledge and experience during their stay in the capital, which “creates a hugely beneficial skill transfer from London to the rest of the country,” says Douglas McWilliams, the head of CEBR.
These migration patterns are closely tied to the housing market, which also helps to spread prosperity across the country. Typically a boom in the capital's economy pushes up local house prices. This prompts Londoners to move out of the capital with bulging wallets, which in turn pushes up house prices in the rest of Britain. This pass-the-baton pattern has been repeated over the past decade.
Newspapers are full of financial woes these days, and there are doubtless more to come. But despite the gloom of the moment, history suggests that the overall economy and the City will both bounce back. London has been buffeted before in its post-war resurgence as an international financial centre. In the mid-1970s, for example, there was a serious banking crisis. In the early 1990s banks made big losses and midway through the decade Barings, a centuries-old bank once dubbed the sixth great power of Europe, collapsed.

Put out more flagsThe City's capacity to roll with such punches and then regain the upper hand suggests not only that it is in the fortunate position of operating in a buoyant sector—as international finance expands in response to globalisation—but also that it enjoys some prized natural advantages. Global financial businesses tend to throng together in just a few cities where they can be sure of drawing upon a big and highly skilled specialist workforce. Once a leading financial centre is established—and the City has had centuries of experience—its position tends to be self-reinforcing, since businesses and talent are attracted to the cluster like bees to pollen.
There is a more specific reason why London's economy may prove resilient this time: the impact of the £9 billion that is being spent on preparations to host the Olympic games in 2012. The building work for the games, spread over the next few years, will help to offset the likely curtailment of some commercial-property developments elsewhere in the capital. This specific boost to the metropolitan economy will come at a time when northern regions, which have especially benefited from Labour's big-spender ways, will be feeling the pinch as public budgets tighten.
The longer-term outlook for London remains bright, according to PWC, whose study projects that it will become the world's fourth biggest city economy by 2020, driven in particular by strong growth in business and financial services. That will be welcome to politicians who have found that the capital's clout enables them to punch beyond Britain's weight. “The City's lustre has burnished Labour's image,” says Mr Travers. But others will worry about the capital's increasing dominance. It has come to seem, for many people, a sort of laboratory in which a rawer, less-cohesive Britain is emerging; a crowded, hustling place of vaulting earnings for the rich and of widening income disparities, which drains talent and wealth from the rest of the country.
Despite these fears, those who cheer as the City falters, will be wrong. The gains from London's position as a global financial hub, a source of envy to other countries, outweigh the losses. Every economy needs an engine-room: better one manned by bankers than none at all.

Is Britain's economy heading for the perfect storm?

Sean O'Grady, The Independenat Economics Editor Published: 05 December 2007

The storm clouds are gathering over the jobs market; the climate on the high street is growing distinctly chilly; a typhoon of bad debt is buffeting the banks. Could a "perfect storm" be about to hit the British economy?
The signs couldn't be much bleaker. The switchback in sentiment since the credit crisis began in the summer has been violent. The Nationwide Consumer Confidence Index recorded its largest drop yesterday, and joins the GfK/NOP survey earlier this week in suggesting that a wave of pessimism not seen for years is washing over the economy.
House prices have begun to fall, albeit slightly; commercial property is seemingly on the brink of collapse on a par with that seen in the early 1990s. The buy-to-let market is vulnerable. The Bank of England has, unprecedentedly, voiced concerns about the grim prospects for real estate. And the Financial Services Authority has warned of the "very real prospect" of the global credit crunch getting much worse. It is that bad.
Shopkeepers are looking forward to a black Christmas. Sir Philip Green, the boss of Top Shop and BHS, said last night on Sky TV that "business is very, very tough". The British Retail Consortium says that sales grew only marginally in November, having slowed markedly in October. JD Sports, ScS furniture and Greene King are the latest household names warning of setbacks. About 4.4 million credit-card customers still haven't cleared debts they ran up last Christmas, according to MoneyExpert.com.
We're less ready to spend, particularly on "big ticket" items – furniture, fridges, cars and so on. We're more pessimistic about our finances. We don't want to take on more debt and we want to rebuild our savings. The credit markets are seizing up again. That means banks are becoming much, much choosier about who they lend to, and are charging ever higher rates, despite the efforts of the authorities to keep money markets functioning normally. No lending; no spending.
That unwillingness to lend – the credit crunch – has started to affect businesses too, though firms remain generally more upbeat than consumers. Manufacturing firms, and in particular those in the car industry, are happy, a veritable ray of sunshine. However, manufacturing makes up only 15 per cent of the economy. In the financial sector, responsible for more than half of the recent growth in the UK's GDP, the mood is glum.
After months defying gravity, share prices have suffered some dramatic falls. City bonuses will be cut this year – and next – along with recruitment and investment. Barclays, HSBC and other banks have reported billions in losses, while the future of Northern Rock is uncertain.
Growth in the construction sector eased to a 14-month low in November, according to the Chartered Institute for Purchasing and Supply. The gentle rise in unemployment over the past 18 months may accelerate. The accountants KPMG say that "what we are seeing is that the credit crunch is tightening its grip over the economy... an underlying weakening, with both demand for permanent staff and vacancies down on the levels earlier this year."
Everyone from the Treasury to the IMF has trimmed their forecasts for UK growth; from close to 3 per cent for 2008, down to nearer 2 per cent. The IMF says that even this is now too optimistic. Is it time to start talking about the "R-word" – recession, and the possibility that the economy might shrink?
The difficulty is that the credit crisis is a process that feeds on itself rather than an event that can be declared "over". It began with the collapse of the US sub-prime mortgage market and the housing crash there, problems which are intensifying. As more sub-prime customers default – because of the credit crunch – more banks record losses and stop lending, and more properties are dumped on to the depressed US housing market. That depresses confidence and spending, and the screw turns again.
On this side of the Atlantic we feel the chill because our banks are exposed to sub-prime and because the US economy is the world's biggest. If it slows, it drags us down with it. And the mood of economic gloom – Northern Rock, headlines on house-price crashes, higher prices for fuel at forecourts and food at checkouts – is reinforcing itself. Confidence is the magic ingredient in any economy; it is evaporating fast. There's no knowing how bad it could get.
The most pernicious aspect of this downturn is how it could turn not so much into a recession, but into "slowflation" – slow growth plus inflation. A depressed economy can co-exist with high inflation, as the world found in the 1970s. Low demand and high input costs (such as oil at $100 [£48] a barrel; wheat prices at record highs) squeeze profits and employment and cut the real value of wages. It also makes it tougher for the Bank of England to allow interest rates to drift lower.
But the really bad weather would arrive if the Chinese economy stumbled. Next year, more than half the world's growth will derive from China, India and other emerging economies. Were they to falter – say because the Shanghai stock market bubble burst – the world would almost certainly lurch into recession.
In all events, the worst of the slowdown will hit us towards the end of 2008, going into the spring and summer of 2009; the point when a general election is due. By then the public finances would be well out of control, though that may be the least of ministers' worries. Gordon Brown might not have sowed the seeds of the coming economic storm, but he may well reap the whirlwind.
Business as usual?
Keith Bowan: Equity analyst at Hargreaves Lansdown Stockbrokers
"There is an air of unease among stockbrokers at the moment. In recent weeks the market has been trying to factor in the credit crisis and what it means going forward. Obviously this has affected the bankers most, but it has trickled down to other areas. People in property have been severely hit, as have house building stocks. But further down, even the pub operators have faced trouble. There's certainly an air of caution that has descended on investors ever since Northern Rock – there's no doubt about that – and I'd say the mood is still cautious going into 2008. The stock market acts as a barometer of where things will be in the next six to twelve months, so investors must broadly expect conditions going forward to be difficult."
Ron Turnbull: Finance director of SCS Upholstery, Sunderland
"Clearly our sales have been worse this year than we forecast, and significantly down on the same period last year. We've been suffering for some time from the interest rate increases, and these are now filtering through to the customer.
"The effect of turmoil in the American sub-prime sector has had a big influence on the confidence of consumers over here. But it's not just that they're feeling more anxious because they see savers queuing up outside Northern Rock; they've actually got much less disposable income than they've had for a long time."
"Banks are less willing to lend to customers, even cutting down on lending to each other. Meanwhile essential spends like utility costs and council tax are rising way above the rate of inflation. All of this is coming together to make consumers much more cautious with their spending, and it is businesses like ours, which are vital to a healthy economy, that are suffering the consequences."
Barnaby Stutter: Store worker, Brixton Cycles Co-operative
"Like any other, our business is not 100 per cent recession- proof. But partly because we're a workers' co-operative, and partly because we've got a lot of fluidity, I think we'll survive any coming troubles. We can move from selling bikes to fixing them; pubs and restaurants, who really are suffering, don't have that sort of option.
"There's a snowball effect: the more people worry about it, the worse it becomes. Our culture seems to thrive on anxiety and people are ready to panic about what they're told to panic about. But retailers on the high street expecting a big Christmas bonanza are going to be disappointed.
"Realists always sleep well at night, and being realistic about the forthcoming festive season means lowering our expectations of it."
Carl Lester: Birmingham fashion boutique manager
"People do seem to be spending less at the minute. I've got two branches selling designer clothes in Birmingham, and overall the business is down.
"I think people who might once have shopped here once a month are coming more like once every two. Also, customers seem to be thinking more about what they already have before they spend.
"We've talked ourselves into a recession, and all of a sudden it seems like we're going to get one. I'm not too worried, as my business survived the same thing happening in the 90s."
Tony Brooks: Owner of the Cluny pub and restaurant, Newcastle
"I'm in no doubt that this is the start of the worst trading conditions in the 28 years I've worked in the industry. If you read the trade papers they're full of terrifying figures about the difficulty of the current climate. But in reality it's even worse than they make out.
"The pub trade in particular is coming under heavy attack from the Government on several fronts. Supermarkets selling ridiculously cheap alcohol make it impossible for us to compete, while the smoking ban has been a massive drain on our appeal. And new planning regulations are so tough it's proving harder than ever for us to make money. Some weeks, pubs are down 20 to 30 per cent on the same period last year.
"The broader economic conditions are making our life hell. Higher interest rates and unaffordable mortgages mean that disposable incomes are fast shrinking. Every consumer has priorities; our industry relies on there being some change in people's pockets after those priorities have been met. Today that spare change is disappearing.
"I'm not exaggerating in saying the next few weeks are going to be very painful, and 2008 will be the worst year ever for our industry, with more than 2,000 pubs almost certain to close."
Peter Clayton: Chief executive of the Association of Professional Recruitment Consultants
"As with any sector, there are noticeable trends in recruitment that are an indication of the health (or sickness) in our present condition. What we've seen over the past few months is a move to contract placements rather than permanent placements, which is a sure sign that employers are feeling shaky. Permanent placements have dropped by about 30 per cent in the last quarter – a massive shift.
"These trends haven't been such a prominent factor in the recruitment sector for several years. Employers on the whole are feeling very anxious and less willing to increase their payrolls by expanding staff numbers. Businesses are starting to recruit themselves rather than through agencies which, again, is a sign of anxiety.