Who's To Blame For The Mortgage Crisis?

If you're having a hard time getting your head around exactly what happened in the historic meltdown of America's home-mortgage market, you're not alone.

As the wife-and-husband investigative team Leslie and Andrew Cockburn suggest in their new documentary, "American Casino," nobody fully understands it: Not the bankers and brokers who sold subprime mortgages (often using deceptive tactics or disingenuous language), not the Wall Street wizards who carved them up into ever more esoteric financial instruments, not the free-market wise men like former Fed chair Alan Greenspan or former Sen. Phil Gramm, and certainly not the ordinary citizens who believed they were fulfilling the American dream and wound up losing their homes, their financial security and their self-respect.

Actually, the Cockburns meet one guy in "American Casino" who understands the whole mess better than most, a California real estate investor named Jeff Greene who smelled the end of the housing bubble around 2006 and bet $1 billion against the mid-decade exuberance of Wall Street. Sitting in his walled and gated beach compound in Malibu, Greene calmly tells the camera that the opportunity for his successful hedge bet (which has yielded $500 million so far) involved massive pain for millions of homeowners.

We meet some of those people too; the Cockburns focus in particular on the African-American community of Baltimore, a city devastated by the tidal wave of foreclosures. Of course foreclosed properties can be found in virtually every neighborhood of every town and city, and at every income level. But Latinos and African-Americans are several times more likely to be affected than whites, and while the problem is undeniably complicated, that almost certainly reflects the enduring legacy of racism. In the 1990s and 2000s, neighborhoods that had previously been "redlined" by traditional lenders became targeted by unregulated and unscrupulous vendors of subprime mortgages, who neither knew nor cared whether borrowers were likely to default on those loans. As we now know, the results were toxic.

One of the film's sad ironies is that middle-class homeowners like Denzel Mitchell, a Baltimore high-school teacher, or Patricia McNair, a family therapist, might well have qualified for conventional loans from normal banks. (One survey mentioned in the film suggests that at least half the people who applied for subprime mortgages in 2006 could have qualified for prime mortgages.) Instead, they were enticed into too-good-to-be-true first and then second mortgages that adjusted sharply upward, which they couldn't realistically afford. Both people are aware that their own lack of financial sophistication is partly to blame for their predicament, but that does nothing to lessen the heartbreak as McNair and her husband have to leave the appealing family home where her adult children grew up, or as Mitchell must abandon his organic vegetable garden and the Tuskegee Airmen-themed bedroom for his little boys.

But if you want to blame somebody for what happened to Mitchell, McNair and millions of other Americans, the place to point the finger is at the fervid deregulation advocated by Greenspan and enacted by Congress under the whip of Gramm and other free-market ideologues. Such laissez-faire reforms created a wide-open marketplace where bankers and brokers could sell whatever extortionate mortgage deals they wanted to whomever they wanted, while lying to consumers about what they were getting and lying to lenders about the borrower's income and assets. Meanwhile, as one anonymous former Bear, Stearns banker tells the Cockburns, Wall Street securities dealers carved up packages of mortgages into abstruse, "fourth-dimensional" instruments to be sold to "idiots."

"American Casino" is of necessity a fragmentary tale; it was being filmed in 2008 as the crisis broadened and deepened, with events unfolding too fast for the Cockburn cameras. But while the mortgage crisis still awaits a rigorous deconstruction along the lines of Alex Gibney's "Enron: The Smartest Guys in the Room," this film stands as an intimate, terrifying document that renders an incomprehensible slice of recent history in human terms. While the stories of Denzel Mitchell and Patricia McNair made me want to weep, the film's most memorable images stem from the Sisyphean task of Jared Dever, a bright and handsome local official in Riverside County, Calif., whose job is to control the county's mosquito epidemic, largely caused by the fetid, abandoned swimming pools behind foreclosed suburban homes.

Dever patrols a nightmarish, new-but-decrepit landscape straight out of the fiction of J.G. Ballard, carefully checking empty houses for signs of meth labs or marijuana grow zones before attacking the pools, whose algae-green water is full of abandoned patio furniture, tires and sports equipment, along with millions of mosquito larvae and the minnows who live on them. I'm not sure that hosing down the whole subdivision with Malathion is any kind of answer. Civilization didn't leave much of an imprint on that place. Now that the bankers have sucked out all its supposed economic value, we might as well drain the pools, knock down the houses and let the coyotes and rattlesnakes take over.

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Source:

http://www.salon.com/ent/movies/btm/feature/2009/09/02/casino/index.html?source=rss&aim=/ent/movies/btm/feature

Tags:

Salon, American Casino, Leslie and Andrew Cockburn, documentary, bankers, brokers, subprime mortgages, Jeff Greene, redlined, Phil Gramm, Alan Greenspan, Global Economic News,

Posted via email from Global Business News

United Future World Currency

Russian President Dmitry Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a “united future world currency.”

“Here it is,” Medvedev told reporters today in L’Aquila, Italy, after a summit of the Group of Eight nations. “You can see it and touch it.” The coin, which bears the words “unity in diversity,” was minted in Belgium and presented to the heads of G-8 delegations, Medvedev said.

The question of a supranational currency “concerns everyone now, even the mints,” Medvedev said. The test coin “means they’re getting ready. I think it’s a good sign that we understand how interdependent we are.”

Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the U.S. dollar’s future as a global reserve currency. Russia’s proposals for the G-20 meeting in London in April included the creation of a supranational currency.

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Source:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aeFVNYQpByU4

http://www.futureworldcurrency.com/

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Posted via email from Global Business News

Budget Deficit Tops $1Trillion For First Time

Nine months into the fiscal year, the federal deficit has topped $1 trillion for the first time.

The imbalance is intensifying fears about higher interest rates and inflation, and already pressuring the value of the dollar. There's also concern about trying to reverse the deficit — by reducing government spending or raising taxes — in the midst of a harsh recession.

The Treasury Department said Monday that the deficit in June totaled $94.3 billion, pushing the total since the budget year started in October to nearly $1.1 trillion. The deficit has been propelled by the huge sum the government has spent to combat the recession and financial crisis, combined with a sharp decline in tax revenues. Paying for wars in Iraq and Afghanistan also is a major factor.

The country's soaring deficits are making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. It could force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer-term.

"These are mind boggling numbers," said Sung Won Sohn, an economist at the Smith School of Business at California State University. "Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run."

Government spending is on the rise to address the worst financial crisis since the Great Depression and an unemployment rate that has climbed to 9.5 percent. Congress already approved a $700 billion financial bailout and a $787 billion economic stimulus package to try and jump-start a recovery, and there is growing talk among some Obama administration officials that a second round of stimulus may be necessary.

This has many Republicans and deficit hawks worried that the U.S. could be setting itself up for more financial pain down the road if interest rates and inflation surge. They also are raising alarms about additional spending the administration is proposing, including its plan to reform health care.

President Barack Obama and other administration officials, including Treasury Secretary Timothy Geithner, have said the U.S. is committed to bringing down the deficits once the country has emerged from the current recession and financial crisis.

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Source:

http://www.mercurynews.com/business/ci_12827891?source=email

Tags:

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IKEA is as Bad as Wal-Mart

My mother still owns, and uses, the same vacuum cleaner she bought early in her marriage, just after World War II. She still lives in the house my father -- not a carpenter by trade, but an electrician -- built in the early 1950s with the help of his brothers, a small but sturdy Cape Cod-style dwelling with hardwood floors and solid wood doors that close with a hearty, satisfying clunk (as opposed to the echoey click of hollow-core doors).

Today the idea of anything -- a household appliance, a piece of furniture, a house -- being built to last is almost laughable. When your vacuum cleaner stops sucking, you most likely haul it out to the curb and trek to Target or a big-box home-goods store to replace it. Even if you could readily find someone to repair it, the trouble and the cost would be prohibitive. If you need a bookcase, there's always IKEA: Sure, you'd prefer to buy a sturdily built hardwood version that doesn't buckle under the weight of actual books, but who has extra dough to spend on stuff like that? The IKEA bookcase is good enough, for now if not forever.

That cycle of consumption seems harmless enough, particularly since we live in a country where there are plenty of cheap goods to go around. But in her lively and terrifying book "Cheap: The High Cost of Discount Culture," Ellen Ruppel Shell pulls back the shimmery, seductive curtain of low-priced goods to reveal their insidious hidden costs. Those all-you-can-eat Red Lobster shrimps may very well have come from massive shrimp-farming spreads in Thailand, where they've been plumped up with antibiotics and possibly tended by maltreated migrant workers from Burma, Cambodia and Vietnam. The made-in-China toy train you bought your kid a few Christmases ago may have been sprayed with lead paint -- and the spraying itself may have been done by a child laborer, without the benefit of a protective mask.

"Cheap" is hardly a finger-waggling book. This isn't a screed designed to make us feel guilty for unknowingly benefiting from the hardships of workers in other parts of the world. And Shell -- who writes regularly for the Atlantic -- isn't talking about the shallowness of consumerism here; she makes it clear that she, like most of us, enjoys the hunt for a good deal. "Cheap" really is about us, meaning not just Americans, but citizens of the world, and about what we stand to lose in a global economic environment that threatens the very nature of meaningful work, work we can take pride in and build a career on -- or even at which we can just make a living.

Discount chains pretend to be the most democratic of enterprises, willing and able to fill our every need at a price we can afford: Ingenious slogans like "Design for All" (Target) and "Save money. Live Better" (Wal-Mart) make that point pretty well. Shell asserts that an excess of cheap goods -- and the drive to make and sell them ever more cheaply -- is putting a deadly squeeze on workers worldwide. Most liberal-leaning citizens are aware of the profit-making schemes of Wal-Mart and, even if we actually shop there, find them distasteful (although Shell notes that among economists, the chain has its defenders).

But Shell asserts that even outlet malls and seemingly benign, friendly, progressive stores like IKEA are part of the problem; along with more obvious bad guys like Wal-Mart, they perpetuate a cycle that, far from nurturing creativity and innovation in the marketplace, ultimately benefits a relative few at the very top of the economic chain. Shell notes that before retiring in February 2009, "Wal-Mart CEO Lee Scott Jr. took home in his biweekly paycheck what his average employee earned in a lifetime." You might say that, for Scott, the good news is that everybody can afford to shop at Wal-Mart; the better news is that he himself doesn't have to.

Shell begins by outlining the history of mass production in America (perhaps not surprisingly, firearms were among the first items to be mass-produced) and the rise of the discount chain. In the late 1800s a sickly farmer's son named Frank W. Woolworth opened the first "five-and-dime"; later, foreshadowing a future that workers around the world now seem doomed to live out, he quipped, "We must have cheap labor or we cannot sell cheap goods. When a clerk gets so good she can earn better wages elsewhere, let her go."

The understanding is that she'll have somewhere else to go, where her skills and talents are wanted or needed, considered something worth paying for. But increasingly in our current work climate, more skills only make a worker more expensive and possibly more demanding, not more desirable. With meticulousness and daring, Shell approaches this problem and the myriad thorny issues twined around it, incorporating the research and views of an assortment of economists, political scientists and law professors to build her case. At the core of her argument is the idea that the wealth of cheap goods available to us doesn't make our lives better; instead, it fosters an environment that endangers not just the jobs of American workers but the idea of human labor, period.

It's impossible to grapple with the global economy without addressing the tricky subject of China, and Shell does so with the right amount of clear-eyed empathy. She notes that China as a nation has grown wealthier while its poor have become poorer. According to figures released by the World Bank, between 2001 and 2003 the income of the poorest 10 percent of China's 1.3 billion people had fallen by 2.4 percent, to less than $83 per year. In that same period, the country's economy grew by 10 percent, and its richest people became 16 percent richer.

Many of China's poor work in factories, earning ever-shrinking pay under inhospitable or dangerous conditions, as the American conglomerates who do business there press the Chinese government to revise or reverse regulations that might make these laborers' work lives more tolerable. The government, understandably eager for China to take its place at the global-commerce table, is all too eager to comply. A Shanghai journalist makes a piercing comment to Shell: "We do not yet have the luxury to concern ourselves too much with things like human rights."

But Shell is careful to point out that China isn't the source of the "cheap goods" problem. She quotes Mark Barenberg, a professor of law at Columbia University and an expert on international labor law: "The severe exploitation of China's factory workers and the contraction of the American middle class are two sides of the same coin." The idea is that when global corporations squeeze labor in China and other developing nations, they're able to use the threat of low-wage competition to, as Shell puts it, "roll back decades of hard-won gains in wages, benefits, and dignified treatment for workers in the United States." In other words, employers in the United States can easily use the threat of downsizing and outsourcing to gain more power over, and squeeze more juice out of, their employees -- who, in turn, enjoy increasingly less protection from unions.

While the Chinese are hardly the villains of Shell's story, certain Swedes have plenty to answer for: Shell's chapter on IKEA is the most gently damning in the book. Shell is quick to admit that IKEA products -- from bookshelves to tables to lamps -- are very nicely designed. And the ingenuity of designing furniture so that it can be shipped efficiently, compactly and cheaply, with an eye toward environmental concerns, is admirable. But Shell also points out the hypocrisy inherent in IKEA's philosophy.

As a clever IKEA commercial, directed by Spike Jonze, points out, an old lamp (or bookcase or table) doesn't have feelings; any piece of furniture can and should be replaced at any time. The ad, and the whole IKEA approach, suggests that objects have no lasting meaning or value. They're disposable; when we tire of them, we should just throw them out. Then why, Shell asks, does IKEA personify its products by naming them, à la the Lack coffee table or the Kura loft bed? "If IKEA thinks it's crazy to care deeply about objects, why," she asks, "does it sell a wok named after a girl?"

IKEA makes money, and lots of it, by passing on to the consumer the cost of assembling its products, thus turning the consumer into part of its workforce: Depending on how you look at it, we either save money by putting IKEA furniture together ourselves, or we pay for the privilege of putting IKEA furniture together ourselves.

Regardless, these tables and bookcases aren't, and aren't intended to be, heirloom pieces. But Shell wonders if our expectations are too low. We no longer expect craftsmanship in everyday objects; maybe we don't feel we even deserve it. "Objects can be designed to low price," she writes, "but they cannot be crafted to low price." But if we stop valuing -- and buying -- craftsmanship, the very idea of making something with care and expertise is destined to die, and something of us as human beings will die along with it: "A bricklayer or carpenter or teacher, a musician or salesperson, a writer of computer code -- any and all can be craftsmen.

Craftsmanship cements a relationship between buyer and seller, worker and employer, and expects something of both. It is about caring about the work and its application. It is what distinguishes the work of humans from the work of machines, and it is everything that IKEA and other discounters are not."

What's more, IKEA is the third-largest consumer of wood in the world and uses timber that comes mostly from Eastern Europe and the Russian Far East, where, Shell points out, "wages are low, large wooded regions remote, and according to the World Bank, half of all logging is illegal." IKEA president and CEO Anders Dahlvig asserts that the timber his company uses is harvested legally, and the company does employ forestry experts to monitor the company's suppliers. But Shell points out that IKEA has only 11 forestry monitors, not nearly enough to keep a watchful eye on all those suppliers worldwide, and five of those specialists are devoted to China and Russia, a vast spread of territory by itself. Dahlvig says that hiring more inspectors would cost too much; he'd have to pass the cost on to the consumer.

Would enlightened consumers pay a little more, maybe, to buy products made from wood that had been, unquestionably, legally harvested? Maybe -- but it's not the consumer's choice to make, at least not right now. And if there's one thing that makes reading this eye-opening book an ultimately frustrating experience, it's that Shell can't offer many helpful solutions to this tangle of economic and moral problems, aside from urging us to be more aware as consumers.

Still, she does cite one example of an organization that at least tries to get it right: Wegmans, a chain of supermarkets with stores located mostly in the suburbs of New York state, Pennsylvania, New Jersey, Virginia and Maryland, offers its employees job-training programs, health insurance and retirement benefits. The company operates on the supposition that if it treats its employees respectfully, they'll be better prepared (and more willing) to serve the needs of customers. The approach seems to work: Wegmans profits financially by fostering and retaining customer loyalty, and its employee turnover rate is low -- roughly 6 percent, measured against an industry-wide rate of more than 30 percent. The company also buys a large percentage of its produce from small, local farmers, and has been doing so for 20 years.

If "Cheap" is a harrowing document of the pursuit of profit at the expense of our basic humanity, the example set by Wegmans -- Shell saves it for the end of the book -- sounds almost too good to be true, the kind of crazy business idea that, according to the logic of outfits like Wal-Mart, shouldn't work. In reality, it's one of the foundations of good business: Treat your employees well, and they'll serve you well in return. The cost may be higher, but the price is right.

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Source: http://www.salon.com/books/review/2009/07/12/cheap/index.html?source=rss

Tags: IKEA, Walmart, China, Cheap labor, low-cost producer, Outsourced manufacturing, World Bank, Columbia University, Russian forests and timber, Global Economic News, Global Development News, Salon,

Posted via email from Global Business News

BP Wins Iraq Oil Contract

An oil consortium led by British Petroleum has won a contract to develop a large oil field in Iraq, as dozens of international firms compete for the rights to the nation's oil and gas reserves.

BP, along with China's CNPC, secured the contract for the Rumaila oil field on Tuesday, the largest of Iraq's six oil fields on offer to foreign and state-owned companies. The contract race is the first opportunity for global energy giants to gain a hold in the country since the Baath party nationalised the Iraq Petroleum Company in 1972, seven years before former president Saddam Hussein took power. The Rumaila field is estimated to hold 3.3 trillion cubic feet of oil reserves, but also lies in Diyala province, which has seen some of Iraq's worst violence in recent years.

Security concerns

A total of 32 firms, including US and European giants ExxonMobil and Shell and companies from China, India and other Asian states, are chasing the opportunity to get 20-year service contracts to develop six giant oil fields and two gas fields. Three fields were offered by midmorning on Tuesday but only one deal was struck, as several foreign companies rejected the terms laid down by the government. Nuri al-Maliki, Iraq's prime minister, has sought to address company concerns over poor security damaging business prospects and that contracts could be voided by future governments.

He said that the government would "offer security protection, offer all guarantees for their investments and offer all the facilities needed to ensure the success of this process". But Mahmoud Almusafir, a former Iraqi diplomat, told Al Jazeera that there were still questions over the transparency of oil contracts in the country. He said: "This American propaganda [is] telling people that now Iraq is free to do whatever.

"But ... who is setting the price and who is controlling? "Militias from Al Dawa party are controlling the country. They are under the American umbrella; the American occupation," he said. The country's oil industry has suffered from years of neglect and sanctions, and Iraq is hoping foreign investment will bring in the expertise to help raise production levels.

'Benefits for Iraqis'

Oil Minister Hussein al-Shahristani told Iraqi public television: "Our principal objective is to increase our oil production from 2.4 million barrels per day to more than four million in the next five years." He said increasing production to that level would push an extra $1.7tn into government coffers over the next 20 years. Shahristani has said $30bn of the sum would go to the companies that extract the oil and the rest "would finance infrastructure projects across Iraq - schools, roads, airports, housing, hospitals". The oil deposits, holding known reserves of 43 billion barrels of crude, are in southern and northern Iraq while the gas concessions are west and northeast of Baghdad.

Companies awarded deals will have to partner with Iraqi government-owned firms, principally the South Oil Company (SOC), and share management of the fields despite fully financing their development. They will be paid a fixed fee per barrel, not a share of profits and the fee will only be paid once a production threshold set by the government is reached. "This raises the question of the profitability of the contract," a source involved in the bidding told the AFP news agency. "The companies are the ones investing, but have a big problem with the fact that management will be shared," the source said.

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Source: http://english.aljazeera.net/news/middleeast/2009/06/200963093615637434.html

Tags: Iraqi Oil, BP, Sinopec, BP Consortium, Oil Minister Hussein al-Shahristani, Baath party, nationalized, Iraq Petroleum Company, Global Economic News, Global Development News, Global Best Practices,

Posted via email from Global Business News

Greenspan Fears Inflation

The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment. The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies. Corporate debt, as a consequence, has been upgraded and yields have fallen. Previously capital-strapped firms have been able to raise considerable debt and equity in recent months. Market fears of bank insolvency, particularly, have been assuaged.

Is this the beginning of a prolonged economic recovery or a false dawn? There are credible arguments on both sides of the issue. I conjectured over a year ago on these pages that the crisis will end when home prices in the US stabilise. That still appears right. Such prices largely determine the amount of equity in homes – the ultimate collateral for the $11,000bn of US home mortgage debt, a significant share of which is held in the form of asset-backed securities outside the US. Prices are currently being suppressed by a large overhang of vacant houses for sale. Owing to the recent sharp drop in house completions, this overhang is being liquidated in earnest, suggesting prices could start to stabilise in the next several months – although they could drift lower into 2010.

In addition, huge unrecognised losses of US banks still need to be funded. Either a stabilisation of home prices or a further rise in newly created equity value available to US financial intermediaries would address this impediment to recovery.

Global stock markets have rallied so far and so fast this year that it is difficult to imagine they can proceed further at anywhere near their recent pace. But what if, after a correction, they proceeded inexorably higher? That would bolster global balance sheets with large amounts of new equity value and supply banks with the new capital that would allow them to step up lending. Higher share prices would also lead to increased household wealth and spending, and the rising market value of existing corporate assets (proxied by stock prices) relative to their replacement cost would spur new capital investment. Leverage would be materially reduced. A prolonged recovery in global equity prices would thus assist in the lifting of the deflationary forces that still hover over the global economy.

I recognise that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. My hypothesis will be tested in the year ahead. If shares fall back to their early spring lows or worse, I would expect the “green shoots” spotted in recent weeks to wither.

Stock prices, to be sure, are affected by the usual economic gyrations. But, as I noted in March, a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it.

For the benevolent scenario above to play out, the short-term dangers of deflation and longer-term dangers of inflation have to be confronted and removed. Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge. If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply. Annual price inflation in the US is significantly correlated (with a 3½-year lag) with annual changes in money supply per unit of capacity.

Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.

The Federal Reserve, when it perceives that the unemployment rate is poised to decline, will presumably start to allow its short-term assets to run off, and either sell its newly acquired bonds, notes and asset-backed securities or, if that proves too disruptive to markets, issue (with congressional approval) Fed debt to sterilise, or counter, what is left of its huge expansion of the monetary base. Thus, interest rates would rise well before the restoration of full employment, a policy that, in the past, has not been viewed favourably by Congress. Moreover, unless US government spending commitments are stretched out or cut back, real interest rates will be likely to rise even more, owing to the need to finance the widening deficit.

Government spending commitments over the next decade are staggering. On top of that, the range of error is particularly large owing to the uncertainties in forecasting Medicare costs. Historically the US, to limit the likelihood of destructive inflation, relied on a large buffer between the level of federal debt and rough measures of total borrowing capacity. Current debt issuance projections, if realised, will surely place America precariously close to that notional borrowing ceiling. Fears of an eventual significant pickup in inflation may soon begin to be factored into longer-term US government bond yields, or interest rates. Should real long-term interest rates become chronically elevated, share prices, if history is any guide, will remain suppressed.

The US is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation. Even absent the inflation threat, there is another potential danger inherent in current US fiscal policy: a major increase in the funding of the US economy through public sector debt. Such a course for fiscal policy is a recipe for the political allocation of capital and an undermining of the process of “creative destruction” – the private sector market competition that is essential to rising standards of living. This paradigm’s reputation has been badly tarnished by recent events. Improvements in financial regulation and supervision, especially in areas of capital adequacy, are necessary. However, for the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources. The alternative of political allocation of resources has been tried; and it failed.

Source: http://www.ft.com/cms/s/0/e1fbc4e6-6194-11de-9e03-00144feabdc0.html?nclick_check=1

Tags: Alan Greenspan, The Federal Reserve System, Inflation, Global Economic News, Medicare, Fiscal Policy, Economics, US Economy, Bond Yields, Interest Rates, Creative Destruction, Free market forces,

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UK Economy Shrinks Most In 50 years

The UK economy shrank by the most in more than half a century in the first three months of the year, according to revised figures which were much weaker than originally estimated.

The 2.4 per cent decline in gross domestic product was sharper than the 1.9 per cent initially calculated, the Office for National Statistics reported, and was greater than the 2.1 per cent fall expected by economists. About half the revision was due to the introduction of new construction sector data and the rest was bacause of more complete services sector figures showing a sharper decline.

Not since 1958 has the quarter-on-quarter decline in GDP been greater, while the 4.9 per cent drop compared to a year earlier was the largest since records began in 1948. “‘You’ve never had it so bad’ seems the most apt summary of the state of the UK economy in Q1,” said Ross Walker, economist at RBS. “Although to some extent this is ‘old news’, it does serve to emphasise the size of the hole out of which the UK must climb.”

The precipitous decline in GDP in the first quarter reflected the fallout after the credit crisis escalated dramatically from September of last year onwards and highlights the depth of the recession that the UK has been suffering. But since the end of the first quarter there have been growing signs that the economy is stabilising. Manufacturing output actually grew in March and April, while survey data suggested the economy has returned to growth.The respected economics thinktank, the National Institute for Economic and Social Research, said it thought the economy began to grow again in April.

“The survey data suggest we have at least stopped digging, but the economy remains on course for a lacklustre pace of recovery,” Mr Walker said. The Bank of England has warned that the economy faces a slow recovery, as banks remain fragile and lending weak.

The output of the construction was revised down to show a 6.9 per cent decline from the first estimate of a 2.4 per cent drop. However, the fall in output was actually less severe than the 9 per cent fall that a more recent ONS revision had suggested, which had led many to expect GDP to be revised down sharply. Services output, which makes up about three quarters of the UK economy, was revised down to see a drop of 1.6 per cent rather than the 1.2 per cent orginally reported.

“Revisions to GDP are larger than usual, reflecting greater uncertainty in measurement during a period of rapid change in economic activity,” the ONS said. The GDP figures confirmed that the recession began in the second quarter of last year, after the economy shrank by 0.1 per cent in the April to June period, rather than the 0.0 per cent decline originally reported.

The economy contracted by 4.9 per cent from its peak in the first quarter until the first quarter this year. That is worse than the 2.5 per cent drop in the 1990s recession, but less than the 5.9 per cent fall in the early 1980s recession. Despite the dramatic contraction in the economy rating agency Fitch reconfirmed the top triple-A rating on the UK’s sovereign debt at stable - along with the US, France and Germany - refusing to follow rival Standard & Poor’s which recently changed the UK’s debt outlook to negative.

The household saving ratio fell to 3 per cent from 4 per cent in the final quarter of last year, as households’ real disposable income dropped by 2.4 per cent due to lower earnings, but consumption did not fall as sharply. Business investment fell by 7.1 per cent during the quarter. Inventories made a smaller drag of 0.4 percentage points out of the 2.4 per cent fall in GDP, compared to the previous estimate of 0.6 percentage points.

“The UK national accounts ... underline the fact that the economic recovery is built on very fragile foundations,” said Capital Economics. “With the annual rate pulled down from -4.1 per cent to -4.9 per cent, average GDP growth in 2009 now looks likely to be -4 per cent or weaker rather than the -3.5 per cent we previously expected.

“Note too that the breakdown is not pretty, with the renewed fall in the household saving ratio from 4 per cent to 3 per cent underlining that the adjustment in the household sector has a long way yet to go.”

Source: http://www.ft.com/cms/s/0/971b65f6-6551-11de-8e34-00144feabdc0.html

Tags: UK, UK Economy, Economic contraction, Capital Economics, UK National Accounts, Triple-A rating, GDP, Fitch, FT, Global Economic News, S&P, Standar and Poor’s, Inventories, Office for National Statistics,

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The Scramble For Iraq's Sweet Oil

With proven oil reserves of around 112 billion barrels and up to another 150 billion barrels of probable reserves, Iraq is the greatest untapped prize for international oil companies. To put that in context, if Iraq does turn out to have around 300 billion barrels of oil, it will rival the world's biggest producer Saudi Arabia - which has around 160 billion barrels of proven reserves.

So it is little wonder that giant international oil companies are lining up to get back into Iraq after the industry was nationalised in the 1970s and the oil majors were kicked out. On June 30 major companies - including Exxon, Shell, BP and Total - will gather at Iraq's oil ministry in Baghdad for a two-day meeting to take part in the first bidding round for oil service contracts.

However, what the oil companies will be entitled to if they secure a contract has become one of the most controversial elements of the bidding process. The companies want a long-term share of the oil they produce under a Production Sharing Agreement, which allows them to book reserves in advance and tell the market exactly how much oil they expect to produce.

This is exactly the type of contract that Iraqis in the oil industry are opposed to. They argue oil companies should be awarded Technical Service Agreements, meaning they will be paid solely to develop Iraq's oil fields. Fayad al-Nema, general manager of Iraq's South Oil Company, has written to Hussein al-Shahristani, the Iraqi oil minister, outlining his company's objections.

Iraqi objections

"We in the South Oil Company, that is all of its leadership, reject the first bidding round because it is against the interests of Iraq's oil industry." Al-Nema, and others, argue that it would serve the national interest better if foreign companies were brought in on a short-term basis only, until Iraqi firms are capable of managing and developing the oil fields themselves.

Oil workers' unions in Iraq have also spoken out against the contracts. Hassan Joumah, president of the Federation of Iraqi Oil Workers Union, says: "Unfortunately, there are many problems with the first round of the allocation of Iraq's oil contracts, which have given huge advantages to the foreign companies to invest in Iraq's oil.

"Giving such returns to foreign companies will put Iraq's economy in the hands of foreign companies." The Iraqi oil workers gained some concessions including establishing joint operating companies.

Under this arrangement, international oil firms will not receive a share of Iraq's oil but they will be working in the country for the next 20 years with a 75 per cent stake in the operation. Over the last two weeks, al-Shahristani has been forced to defend the terms of the contracts before parliament.

He argues that without outside help Iraq can not boost its oil production levels, warning lawmakers: "We will not achieve our desired goals and our country will fall behind." However, the contracts on offer are not the only controversy surrounding the exploitation of Iraqi oil.

KRG dispute

Iraq's newest oil field is not in the desert of western Iraq or the barren landscape of the south near Basra. It is in the semi-autonomous region of northern Iraq which is controlled by the Kurdistan Regional Government (KRG).

The Norwegian company DNO has already excavated the Tawke oil field in this region. Its owners proudly show off their new field and their enthusiasm is contagious; they have discovered the type of oil Iraq is renowned for - what oil experts here call "sweet oil". It is easy to produce and costs less than $2 to get out of the ground. Within a couple of years they hope to be exporting 200,000 barrels per day from here.

But Iraq's federal government says contracts signed by the KRG are illegal and refuses to recognise them. The main bone of contention is who controls Iraq's oil and gas reserves. The Iraqi constitution should provide the answer, but conflicting articles in the document have exacerbated the power struggle between Baghdad and the KRG over the management of these resources.

Both sides have teams of lawyers and consultants arguing that the constitution gives them the right to sign contracts and manage the resources. Falah Kadhim Al-Khawaja, an Iraqi oil expert in Amman, says the central government in Baghdad is right.

"Based on the constitution, there is a clause that says oil and gas is the property of the Iraqi people and the central government is responsible for the budget. So the Iraqi budget is based on oil and gas revenues. How can the central government plan without having control of oil and gas resources?"

Nevertheless, the KRG has pushed ahead and signed dozens of oil contracts with foreign companies. Interestingly, the world's biggest oil companies, Exxon, Shell, BP and Chevron, have avoided signing contracts with the KRG. They do not want to risk the wrath of the federal government, opting instead to wait for the most lucrative contracts for the super-giant fields in the rest of the country.

Until recently, the Tawke oil field was caught in the middle of the dispute. Since early 2009, the oil field has been ready to begin exporting around 60,000 barrels a day. Instead, the KRG told DNO to delay exporting until it the conflict with Baghdad is resolved.

So DNO filled up its main exporting pipeline with water and waited.

Pipeline politics

At the end of May, the KRG gave DNO the go-ahead to begin pumping oil out of the country through the northern Iraq-Turkey pipeline.

However, the tension between Baghdad and the KRG is far from resolved. Ashti Hawrami, the KRG's oil minister, accuses the federal government of being "afraid of good news". "They are afraid [that] oil flowing from Kurdistan shows Baghdad in an even worse light. They failed and this will highlight their failure even more," she says. This is the KRG's first foray into the oil-producing business and, as Hawrami likes to remind people, the regional authorities "do not want a single penny out of it".

The oil revenues will all go to the federal government and the KRG will receive its 17 per cent share of the national budget to manage its region. Al-Shahristani, however, insists: "Any contracts for field development that is not approved by the federal government of Iraq has no standing with the Iraqi government and the oil companies have no right to work on Iraqi territory."

The pipeline politics are likely to continue unless a deal is reached between the two parties.

Source: http://english.aljazeera.net/focus/2009/06/20096288505111580.html

Tags: Iraq, Kurdistan, KRG, Ashti Hawrami, Baghdad, DNO, Norway, Al-Shahristani, Iraqi Sweet Crude, Federation of Iraqi Oil Workers Union, Tawke Oil field, Exxon, Shell, BP, Total, Iraq's South Oil Company, Global Economic News,

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Italy Intercepts Billions in Fake Treasuries From Japanese

Ever since two middle-aged men with Japanese passports were caught in Italy this month trying to smuggle a purported $134.5 billion in United States government bearer bonds into Switzerland, the Internet has been abuzz with theories.

Was the Japanese government, or some other creditor nation, secretly trying to dump Treasury bonds to drive down the value of the dollar? Had the Italian mafia stolen the equivalent of 1 percent of the American gross domestic product, using the paper, which supposedly was instantly convertible into cash, to run a giant scam?

Adding spice was the whole Bond — James Bond — aspect of the tale. A crowded customs checkpoint near the Alps; two men traveling on a local train, professing that they had nothing to declare; and a false-bottom suitcase containing United States government bonds made out in stratospheric denominations.

In all, the Italian financial police and customs guards confiscated 249 paper bonds, each supposedly worth $500 million, and 10 bonds with a face value of $1 billion each.

Too bad the bonds were fake.

“The whole thing is a total fraud,” Stephen Meyerhardt, a spokesman for the Treasury Department, said Thursday. “They don’t look anything like real securities, which in any case were never issued in any of those denominations.”

The highest denomination ever issued by the Treasury Department was $10,000, he said. The Italian financial police claimed some of the paper was “Kennedy bonds” from the 1930s, but no such bonds ever existed. And the total of Treasury bearer bonds still outstanding is a mere $105 million; the Treasury has been issuing bonds in electronic form since 1986.

But none of this has stopped the rumor mill from grinding away. After reports of the seizure began to trickle out of Italy, the blogosphere sprang into action, the ponderings fueled by suspicions that the mainstream media was willfully ignoring the tale.

The story took on greater life after Italian authorities — who have refused to talk about the scandal — declined to declare the bonds fakes until they were examined by Washington. After all, although the Guardia di Finanza suspected the bonds were false, if they were not, the Italian treasury stood to profit from a law that permits the government to pocket up to 40 percent of the total value of cash or securities smuggled into the country over the legal export limit, which is 10,000 euros.

Repeated telephone calls to the prosecutors’ office in Como, Italy, that is handling the investigation were not returned.

Darrin Blackford, a spokesman for the United States Secret Service, which was contacted by the Italian financial police and the prosecutor’s office to determine the “legitimacy of the seized financial instruments,” said that his agency had verified the bonds were “fictitious instruments and were never issued by the United States government.”

Col. Rodolfo Mecarelli, the provincial commander of the financial police in Como, said the investigations were focused on “understanding who these men were and where they were from.”

Or where they might have been going. “Switzerland may not have been their final destination,” he said in a recent interview. “They could have taken a plane anywhere.”

Also unknown are the whereabouts of the two men, who were released after being stopped in early June. Italian law does not call for the criminal arrest of persons found to be taking funds without permission to another country. It might have been another matter if the police had determined immediately that the bonds were false.

“The men were questioned, but not arrested,” said Naoki Oyakawa, an official at the Japanese consulate in Milan, which contacted judicial officials in Como after reading about the seizure in the Italian papers.

He said the two men had valid Japanese passports, but he would not elaborate further on their identities. “We don’t know where they are now,” he said. “We have had no contact with the two men. They have not asked us for our help.”

What the bonds were for remains unclear. “It’s not the sort of thing that you can just go into a bank and convert,” said Colonel Mecarelli. “But they may have been useful to guarantee business deals among people who don’t use cash.”

Agencies that deal with financial crimes, including Europol, declined to comment while the Italian investigation was still under way. The Treasury Department says it is stumped, too. “I can’t speak to the motives of the person or persons who tried to do this,” Mr. Meyerhardt said. “I would guess that they were trying to find someone foolish enough to buy the securities for real money.”

Source: http://www.nytimes.com/2009/06/26/business/global/26fake.html?_r=1&partner=rss&emc=rss

Tags: Italy, Japan, USA, Fake US Treasuries, Colonel Mecarelli, Kennedy bonds, Switzerland, Como, US Treasury Department, Milan, US Secret Service, James Bond, Global Economic News,

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Healthcare Makes A Miraculous Recovery

Obama gets drug companies to cut senior drug bills by $80 billion. Suddenly, his plan is no longer dead

WASHINGTON -- Last week didn't bring much good news for the Obama administration's drive to overhaul healthcare. Congressional budget wonks announced the draft legislation the Senate was working on would cost more than anyone expected; the industry players the White House had worked hard to bring into the reform process started grumbling about the whole thing. By the weekend, conventional wisdom inside the Beltway had more or less already declared reform dead.

Which made Monday's announcement by President Obama that the lobbying arm for the nation's drug manufacturers had agreed to cut the costs of drugs for seniors by $80 billion over the next decade something of a confusing spectacle. If the chances for getting anything done on healthcare had dwindled away, what was the president doing bringing back his campaign slogans -- and, more confusingly still, smiling confidently?

"To those who, here in Washington, who've grown accustomed to 'sky is falling' prognoses and the certainties that we cannot get this done, I have to repeat -- revive an old saying we had from the campaign: Yes, we can," Obama said. "We are going to get this done."

So the deepest significance of the deal between the government and PhRMA, the drug lobby, may well have been what it meant politically. Yes, the announcement means Medicare patients will no longer have to deal with an odd "doughnut hole" in their drug coverage; before Monday, the government pays for seniors' prescriptions if their annual cost is under $2,700 or more than $6,100, but not if the price is in between.

But more important, the news gave the administration a public relations victory -- the president just saved the government, and seniors, $80 billion -- to kick off a week where Obama plans to play offense, not defense, on healthcare. On Tuesday, the president will hold a midday news conference, where he'll have a chance to pitch his plans, and on Wednesday, the White House will host ABC News all day, culminating in a live, prime-time town hall on health reform.

"There was this feeding frenzy last week," one administration official admitted. But White House aides -- who like to insist that they're not paying attention to day-by-day news cycle battles, even as they manage events carefully to fit them -- aren't close to panicking yet. "There will be lots of developments every day about little provisions, and ultimately [very little of it] matters until you get a final bill."

Obama certainly didn't seem ruffled on Monday. He repeated the administration's main theme about healthcare -- you may like the coverage you have, but if the current system isn't changed, you won't be able to afford it for much longer. "Our goal -- our imperative -- is to reduce the punishing inflation in healthcare costs while improving patient care," Obama said. "And to do that we're going to have to work together to root out waste and inefficiencies that may pad the bottom line of the insurance industry, but add nothing to the health of our nation."

Among healthcare policy experts, that's become common knowledge, but the administration isn't finding it as easy to sell to the rest of the country -- or even to Congress. Obama has taken to quoting liberally from a New Yorker article about healthcare cost disparities in two neighboring Texas cities; administration officials have realized the story lays out their case pretty well. What's tricky about pitching the reform plan is that surveys show most voters actually like the care they have. In the last two weeks, Democratic and Republican pollsters have both reported fairly broad satisfaction with existing healthcare options. Obama's challenge is to convince people the system will soon gobble up an unsustainable share of the budget -- both on the federal level and where their own paychecks are concerned -- unless it's changed.

That task won't be easy, but advocates say it's certainly still possible. "People need to put aside the instant gratification bug and appreciate that it's going to take a while to get through the details," said Jackie Schechner, a spokeswoman for Healthcare for America Now, a union-backed group pushing for reform. Even the price tag doesn't have to scare voters off. "They say it's expensive to fix it, and then somebody gets their next insurance bill." Republicans, though, plan to focus their rhetoric on how much the reforms would cost -- more than $1.6 trillion, according to the Congressional Budget Office, though that number is likely to change once the legislation is finished.

Meanwhile, the aspect of the reform that Congress is most upset about doesn't seem to be particularly controversial with actual voters: including a government-funded insurance option to compete with private plans. A CBS News/New York Times poll found 72 percent of respondents liked the idea. "Free puppies and ice cream isn't as popular as that," the administration official joked.

Even Republicans had to acknowledge that the public seems less than terrified. "Indeed, 'government bureaucrats' are scarcely less appealing than 'insurance bureaucrats," a GOP polling memo by Whit Ayres and Ed Gillespie reported on Monday. By the end of this week, the pundits may start declaring healthcare reform is as good as done. Last week's panic was probably premature. This week's celebration will be, too.

Source: http://www.salon.com/news/feature/2009/06/23/healthcare/index.html?source=rss&aim=/news/feature

Tags: Obama, Congressional Budget office, Phrma, Pharma lobby groups, Big Pharma, Healthcare for America now, GOP, New Yorker, Global Economic News, Pollsters, Senate, Beltway,

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World Bank Cuts 2009 Global Growth Forecast

The World Bank has cut its 2009 global growth forecast, saying the world economy will shrink by 2.9 percent and warning that a drop in investment in developing countries will increase poverty.

"The global recession has deepened," the Washington-based multilateral lender said in a report.

Global trade is expected to plunge by 9.7 percent this year, while total gross domestic product for high-income countries contracts by 4.2 percent, the bank said. It said economic growth in developing countries should slow to 1.2 percent — but excluding relatively strong China and India, developing economies will contract by 1.6 percent.

The bank's latest forecast is a sharp reduction from its March prediction of a 1.7 percent global contraction, which it said then would be the worst on record. Economic damage to developing countries "has been much deeper and broader than previous crises," warned the report, issued Sunday in Washington.

"Unemployment is on the rise, and poverty is set to increase in developing economies," it said. The global economy should start to grow again in late 2009, but "the expected recovery is projected to be much less vigorous than normal," the report said. It said banks' ability to finance investment and consumer spending would be hampered by the overhang of unpaid loans and devalued assets.

"To break the cycle and revive lending and growth, bold policy measures, along with substantial international coordination, are needed," the World Bank said. Investment and other financial flows to developing countries plunged by an estimated 39 percent in 2008 to $707 billion, the World Bank said. It said foreign direct investment in developing countries is projected to drop by 30 percent this year to $385 billion.

Eastern Europe and Central Asia have been hit hardest and the region's gross domestic product is expected to plunge by 4.7 percent this year, the bank said. It said growth should recover next year to 1.6 percent.

GDP in Latin America and the Caribbean should shrink by 2.3 percent this year before rebounding to expand by 2 percent in 2010, the report said. In the Middle East and North Africa, growth is expected to fall by half this year to 3.1 percent, while that of sub-Saharan Africa will drop to 1 percent from an annual average of 5.7 percent over the past three years, the bank said.

East Asia should post a 5 percent expansion, supported in part by China's stimulus-fueled growth, the bank said.

Source: http://www.mercurynews.com/business/ci_12663954?source=email

Tags: World Bank, GDP, Investment, Credit, China, India, Eastern Europe, Central Asia, Caribbean, North Africa, Global Economic News, Developing Economies, Global Trade, Global recession, Unemployment, Global Development News, Global Blog Network, Economics,

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