The 2007-08 Financial Crisis In Review

 

The 2007-08 Financial Crisis In Review

by Manoj Singh

When the Wall Street evangelists started preaching "no bailout for you" before the collapse of British bank Northern Rock, they hardly knew that history would ultimately have the last laugh. With the onset of the global credit crunch and the fall of Northern Rock, August 2007 turned out to be just the starting point for big financial landslides. Since then, we have seen many big names rise, fall, and fall even more. In this article, we'll recap how the financial crisis of 2007-08 unfolded. (For further reading, see Who Is To Blame For The Subprime Crisis?, The Bright Side Of The Credit Crisis and How Will The Subprime Mess Impact You?)

 

Before the Beginning
Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times. In 2001, the U.S. economy experienced a mild, short-lived recession. Although the economy nicely withstood terrorist attacks, the bust of the dotcom bubble, and accounting scandals, the fear of recession really preoccupied everybody's minds. (Keep learning about bubbles in Why Housing Market Bubbles Pop and Economic Meltdowns: Let Them Burn Or Stamp Them Out?)

 

To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy. Cheap money, once out of the bottle, always looks to be taken for a ride. It found easy prey in restless bankers - and even more restless borrowers who had no income, no job and no assets. These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new ray of hope. More home loans, more home buyers, more appreciation in home prices. It wasn't long before things started to move just as the cheap money wanted them to.

 

This environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold. The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years. The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. "Lick your candy now and pay for it later" - the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow. (For more reading on the subprime mortgage market, see our Subprime Mortgages special feature.)

 

But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to repackage candy loans into collateralized debt obligations (CDOs) and pass on the debt to another candy shop. Hurrah! Soon a big secondary market for originating and distributing subprime loans developed. To make things merrier, in October 2004, the Securities Exchange Commission (SEC) relaxed the net capital requirement for five investment banks - Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER), Lehman Brothers, Bear Stearns and Morgan Stanley (NYSE:MS) - which freed them to leverage up to 30-times or even 40-times their initial investment. Everybody was on a sugar high, feeling as if the cavities were never going to come.

 

The Beginning of the End
But, every good item has a bad side, and several of these factors started to emerge alongside one another. The trouble started when the interest rates started rising and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% (which remained unchanged until August 2007).

 

Declines Begin
There were early signs of distress: by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.

 

This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During February and March 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy.

 

Investments and the Public
Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out.

 

According to 2007 news reports, financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting. By June, Bear Stearns stopped redemptions in two of its hedge funds and Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds. But even this large move was only a small affair in comparison to what was to happen in the months ahead.

 

August 2007: The Landslide Begins
It became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the United State's borders. The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. By that time, central banks and governments around the world had started coming together to prevent further financial catastrophe.

 

Multidimensional Problems
The subprime crisis's unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet.

 

The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JP Morgan Chase (NYSE:JPM), Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.

 

By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.

 

The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their own versions of bailout packages, government guarantees and outright nationalization.

 

Crisis of Confidence After All

• The financial crisis of 2007-08 has taught us that the confidence of the financial market, once shattered, can't be quickly restored.
• In an interconnected world, a seeming liquidity crisis can very quickly turn into a solvency crisis for financial institutions, a balance of payment crisis for sovereign countries and a full-blown crisis of confidence for the entire world.
• But the silver lining is that, after every crisis in the past, markets have come out strong to forge new beginnings.

 

To read more about other recessions and crises, see A Review Of Past Recessions.

 

 

by Manoj Singh, (Contact Author | Biography)

 

Manoj Singh is a central banker and a freelance writer. Apart from writing for Investopedia, he and his spouse write a weekly column on economics and finance for a financial daily.

 

http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

Chief of I.M.F. Urges Continued Stimulus Efforts

Chief of I.M.F. Urges Continued Stimulus Efforts

By MATTHEW SALTMARSH
Published: November 24, 2009

PARIS — The chief of the International Monetary Fund urged the world’s major economies on Tuesday to retain their economic stimulus programs until there were durable signs of a recovery, including an end to rising unemployment.

Dominique Strauss-Kahn, head of the International Monetary Fund, on Monday. He urged the world’s advanced nations to continue with their stimulus programs until they return to a solid economic footing.

“A premature exit is the main danger,” Dominique Strauss-Kahn, managing director of the I.M.F, said during an interview at the fund’s office here. “We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon.”

Mr. Strauss-Kahn, who was visiting Europe this week, added that “the bigger risk is of growth not coming back, a jobless recovery and to believe that we are out of the woods.”

The comments place the I.M.F. firmly on the side of the major Western governments, the primary backers of the fund, in calling for retention of state support like aid for banks and automakers and tax breaks for consumers.

The I.M.F.’s position contrasts starkly with the prescription it gave to Asian countries grappling with a different economic crisis a decade ago.

Then, the fund, which is based in Washington, lent money to countries including South Korea, Indonesia and Thailand. But it linked its support to harsh financial medicine like high interest rates and a restrictive fiscal policy aimed at balancing budgets. The conditions were blamed for prolonging the downturn in the region.

The I.M.F. has “learned a lot from the Asian crisis — that one-size-fits-all doesn’t work and that you have to adapt to the constraints of the country,” Mr. Strauss-Kahn said.

In the current context, continuing the stimulus entails risks, according to some economists and politicians, like impoverishing future taxpayers, creating excessive reliance on foreign creditors, keeping unproductive banks afloat and even stoking inflation.

Some economists are worried that the splurge in government spending could push the public finances of some countries close to the brink. Rising deficits have caused strains in bond markets, reflecting worries about the possibility of default and the ability of investors to digest the surge in supply.

In Europe, borrowers like Ireland and Greece have come under particular strain. There has been speculation that the government in Britain — where the budget deficit is projected to rise above 13 percent of gross domestic product next year — may face more severe balance of payments difficulties.

A recent report by Variant Perception, a research firm based in Charlotte, N.C., said the British fiscal situation was “already on a par with some of the worst financial crises in the postwar period that have precipitated currency crises.”

Mr. Strauss-Kahn acknowledged the dangers. “I understand the concerns about deficits and they are not unfounded,” he said. “Defaults, of course, are a concern, but they are not likely.”

He stressed that in the event of extreme strains in government bond markets, systemically important borrowers would find support either from multilateral lenders or central banks.

He also acknowledged concerns about commercial banks becoming too dependent on ultracheap financing from the major central banks.

Over all, he said, the fund was more confident about the global outlook than it was in September, when it last released economic projections. This suggests that, excluding a dip in activity in December, it would raise its key forecasts in the update in January. “The U.S. recovery appears to be stronger than we thought in September,” he said. “What I see in the global figures now is that things are moving faster than expected.”

Regarding currency adjustments, Mr. Strauss-Kahn said that the euro appeared “somewhat overvalued,” while the renminbi was “still undervalued.” A rise in the value of the Chinese currency would be a logical element in the country’s “shift from an export-driven economy to one that was more dependent on domestic demand,” he said.

The I.M.F. has been asked by the Group of 20 to study ways to allow banks to pay for their own bailouts. It is expected to report on the matter in April. One option it will examine is a tax on financial transactions.

Meanwhile, the announcement last week by Hungary that it would forgo the next installment of an I.M.F. loan was “the best news of the year,” Mr. Strauss-Kahn said. Other countries in the region — like Ukraine, Latvia, Romania and Serbia — still face “challenges,” he said.

After the crisis, the I.M.F. will continue to offer technical advice and training as well as taking “a more formal role linked to the G-20 as a kind of think tank and institution to help implement the follow-up to G-20 meetings,” he said. Further out, it may even become a lender of last resort.

http://www.nytimes.com/2009/11/25/business/global/25imf.html?ref=economy

Economists' letter spells out what went wrong

Economists' letter spells out what went wrong

Last Updated: 7:13PM BST 11 May 2009

Comments 3 Comment on this article

Dear Sir,

The prevailing view amongst the commentariat (reflected in the recent deliberations of the G20) that the financial crash of 2008 was caused by market failure is both wrong and dangerous. Government failure had a leading role in creating the conditions that led to the crash.

Central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk.

US government policy encouraged high-risk lending through support for Fannie Mae and Freddie Mac (which had explicit government targets of providing over 50pc of mortgage finance to poor households) and through the Community Reinvestment Act and related regulations.
Regulators and central bankers failed to use their considerable powers to stop risks building up in the financial system and an extension of regulation will not make a future crash less likely.

Much existing banking regulation exacerbated the crisis and reduced the effectiveness of market monitoring of banks. The FSA, in the UK, has failed in its statutory duty to “maintain market confidence”.

The tax and regulatory systems encourage complex and opaque methods of increasing gearing in the financial system.

Financial institutions that have made mistakes have lost the majority of their value. On the other hand, regulators are being rewarded for failure by an extension of their size and powers.
Evidence suggests that serious systemic problems have not arisen amongst unregulated institutions.

As such, no significant changes are needed to the regulatory environment surrounding hedge funds, short-selling, offshore banks, private equity or tax havens.

A revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline. These should include:

• Making bank depositors prior creditors. This will provide better incentives for prudent behaviour and make a call on deposit insurance funds less likely.
  
• Provisions to ensure an orderly winding up, recapitalisation or sale of systemic financial institutions in difficulty. Banks must be allowed to fail.
  
• Enhancing market disclosure by ensuring that banks report relevant information to shareholders.
  

This should be reinforced with central bank action to ensure that:

• Proper use is made of lender-of-last-resort facilities to deal with illiquid banks.
  
• The growth of broad money is monitored together with the build-up of wider inflationary risks.

Yours faithfully,

Dr James Alexander, Head of Equity Research, M&G; Prof Michael Beenstock, Professor of Economics, Hebrew University of Jerusalem; Prof Philip Booth, Professor of Insurance and Risk Management, Cass Business School; Dr Eamonn Butler, Director, Adam Smith Institute; Prof Tim Congdon, Founder, Lombard Street Research; Prof Laurence Copeland, Professor of Finance, Cardiff Business School; Prof Kevin Dowd, Professor of Financial Risk Management, Nottingham University Business School; Dr John Greenwood, Chief Economist, Invesco; Dr Samuel Gregg, Research Director, Acton Institute; Prof John Kay, St John’s College, Oxford; Prof David Llewellyn, Professor of Money and Banking, Loughborough University; Prof Alan Morrison, Professor of Finance, University of Oxford; Prof D R Myddelton, Emeritus Professor of Finance and Accounting, Cranfield University; Prof Geoffrey Wood, Professor of Economics, Cass Business School.

http://www.telegraph.co.uk/finance/financetopics/recession/5309591/Economists-letter-spells-out-what-went-wrong.html

Who is to blame for the economic crisis? The Ministers.

Ministers 'to blame' for financial crisis

Governments and central bankers must take the blame for the financial crisis - not bankers, investors and others in the market, according to a new study.

By Edmund ConwayLast Updated: 7:38AM BST 12 May 2009
Comments 6 Comment on this article

In a comprehensive analysis of the causes for the financial and economic crisis, the Institute of Economic Affairs (IEA) has concluded that the disaster was caused by authorities' mistakes rather than market failures. In an associated letter to The Daily Telegraph, the IEA, supported by a number of leading economists, including Tim Congdon and John Kay, said that despite these failures regulators were being rewarded with more responsibilities.

The study suggests that hedge funds and tax havens should not be unduly punished, and that in the future central banks and regulators should pay greater attention to imbalances building up in the economy. The detailed analysis, Verdict on the Crash, will come as a further blow for Gordon Brown, claiming that the system he created to monitor the financial and economic system was found entirely wanting and is in need of a major overhaul.

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How President Obama managed to unlock the G20 Summit

http://www.telegraph.co.uk/finance/financetopics/recession/5309590/Ministers-to-blame-for-financial-crisis.html

What is the most important lesson from financial crisis?

Updated: Monday May 4, 2009 MYT 11:32:51 AM

What is the most important lesson from financial crisis?

OMAHA, Nebraska: Billionaires Warren Buffett and Charlie Munger said Sunday the most important lessons of the recent financial turmoil are that companies should borrow less and build a system of severe disincentives for failure.
Berkshire Hathaway Inc.'s top two executives offered that frank assessment of businesses' role in the current recession at a news conference held a day after 35,000 attended the company's annual meeting in Omaha.
The two men also said most of the nation's biggest banks are not too big to fail, but consumers shouldn't be worried about bank failures because of the protections built into the system.
Buffett said having severe disincentives for failure and proper incentives for success is key to ensuring large financial institutions are run well.
He said people didn't become more greedy in the last decade, but the system allowed people to take advantage of it.
"I think the most important lesson is the world needs a whole lot less leverage," said Buffett, who is Berkshire's 78-year-old chief executive and chairman.
In speaking of disincentives, Buffett suggested that if an executive would be shot if the company fails, then the company would definitely borrow more carefully.
Buffett said Fannie Mae and Freddie Mac show that intense regulation can't prevent problems because those mortgage finance firms were some of the most regulated companies before government seized control of them amid mounting mortgage losses.
But Buffett said assigning blame for the economic mess doesn't make a ton of sense because so many people made mistakes.
"I think that virtually everyone associated with the financial world contributed to it," Buffett said.
Munger, Berkshire's 85-year-old vice chairman, said a combination of factors caused the financial mess.
He said the nation tolerated way too much debt, immorality and stupidity, and now it's paying the price.
"We have failed big-time on multiple fronts," Munger said.
He said gross immorality persisted in the consumer credit and derivatives businesses, and many people were taken advantage of.
Then the accounting profession failed to catch problems and tolerated too much foolishness, Munger said.
He said accounting rules that allow companies to report huge profit just before failing doesn't make sense.
"We do not need insane accounting that rewards people that can't handle the temptation," Munger said.
But it still might be hard to get Congress to pass sensible rules for investment banks and derivatives, Munger said, because of the amount of lobbying investment banks have done.
"We're going to have a hell of a time getting this fixed the way it should be fixed," Munger said.
Buffett said he's not sure how the government will handle the results of the stress tests officials are conducting on the 19 largest U.S. banks, but he doesn't think the government should rule out the failure of most of the banks.
"These 19 banks are not too big to fail," Buffett said.
"You can make a deal for any but the top four on the list."
To prove his point Buffett pointed to the examples of Wachovia and Washington Mutual banks, which both failed in the past year and were sold to competitors.
The stress tests are supposed to determine which banks would need more cash if the economy weakens further.
Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, which means some banks would be forced to raise money.
Buffett said consumers should not worry about bank failures because the Federal Deposit Insurance Corp. is there to protect them with the resources it collects by charging banks fees, so taxpayers don't pay when the FDIC rescues banks.
"I'm not worried at all about a run on the banks," said Buffett, whose company holds large stakes in Wells Fargo & Co., US Bancorp, M&T Bank, Bank of America and Sun Trusts Banks
Given the age of Buffett and Munger, there is always speculation on who might replace them.
Buffett said Sunday that investors would know if either had health problems.
"If I know of anything serious - or anything that might be interpreted as serious - health problems, Berkshire would disclose it," Buffett said.
"We don't want rumors flying around."
But Munger joked there might be a high threshold for disclosing anything about his health: "In my case, I'm so nearly dead anyway that it's a minor detail."
Both Munger and Buffett said they feel great.
Berkshire's Class A stock lost 32 percent in 2008, and Berkshire's book value - assets minus liabilities - declined 9.6 percent, to $70,530 per share.
That was the biggest drop in book value under Buffett and only the second time its book value has declined.
But Buffett always measure's the company's book value performance in relation to the S&P 500, which fell 37 percent in 2008, so he's not bothered by stock price fluctuations.
"We don't consider it our worst year by miles," Buffett said Sunday.
Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms.
Berkshire also has major investments in such companies as Coca-Cola Co. and Burlington Northern Santa Fe Corp.

On the Net: Berkshire Hathaway Inc.: www.berkshirehathaway.com
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Prophetic words that predicted the greatest financial collapse

House of Cards - Origins of the Financial Crisis ''Then and Now''

"Let's hope we are all wealthy and retired by the time this house of cards falters."--Internal email, Wall Street, 12/15/06

Prophetic words that predicted the greatest financial collapse since the Great Depression. The current global economic collapse has its roots in the sub-prime mortgage crisis.

http://www.cnbc.com/id/28993790

"House of Cards" Show Times

Global downturn deeper that feared, says IMF

April 22, 2009

Global downturn deeper that feared, says IMF

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world

The savage slump in the world’s leading economies is set to be even deeper than previously feared, with recovery next year now unlikely to materialise, the International Monetary Fund warned today.

In a grim assessment of global prospects, the IMF once again drastically cut its forecasts for key economies across the world. It blamed the continuing blight from severe financial stresses for a still worsening global outlook.

For Britain, the fund inflicted a double blow on Alistair Darling minutes after the Chancellor unveiled his Budget. It predicted that the UK economy will now shrink by 4.1 per cent this year — markedly worse than Mr Darling’s own new projection for a 3.5 per cent decline, and said that the recession would drag on into 2010, with a further drop of 0.4 per cent in GDP next year. The Chancellor has predicted a recovery with 2010 growth of 1.25 per cent.

The fund’s hard-hitting report warned that, despite a blizzard of far-reaching official efforts to bail-out banks and stem financial turmoil, governments had failed to halt a vicious downward spiral as intense financial strains and deteriorating economic conditions feed off each other.

Calling for still more “forceful action” by governments on both sides of the Atlantic, the IMF said that halting the slump in the global economy and restoring growth now depended critically on governments “stepping up efforts to heal the financial sector”.

But a day after the fund predicted that cumulative losses for banks in the US, Europe and Japan from the credit crisis will hit $4 trillion, it also warned that, even if economic recovery is secured, it is set to be anaemic and “sluggish relative to past recoveries”.

The latest IMF forecasts, in its twice-yearly World Economic Outlook, project that what it says will be by far the worst world recession since the Second World War will mean a worldwide plunge in economic output (GDP) of 1.3 per cent. That compares with its January forecast which foresaw meagre world growth of just 0.5 per cent, still weak enough to be classed as a global recession.

In the leading economies of the West, the IMF now expects GDP to plummet this year by a vicious 3.8 per cent, down from the 2 per cent drop it expected in January.

It also now expects no revival in 2010, with the advanced industrial economies as a whole set to stagnate with zero growth. That contrasts with the recovery to 1.1 per cent growth that the fund was able to envisage only four months ago.

The bleak new assessment saw forecasts cut for every Western economy this year. The US economy, at the epicentre of the global financial firestorm, is forecast to shrink by 2.8 per cent this year and then to stagnate in 2010. The IMF has abandoned its hopes of a resurgence of American growth to 1.6 per cent next year, and cut its US forecast for this year by a further 1.2 percentage points.

In the eurozone, the report said that the plight of Europe’s big economies would also worsen, with the 16-nation bloc as a whole suffering a 4.2 per cent collapse in GDP this year, and set to shrink by another 0.4 per cent in 2010.

Germany is tipped to be worst hit with a GDP plunge of 5.6 per cent this year, and a further 1 per cent next year. Only France is predicted to see some imminent relief from the gloom, with as 3 per cent decline in 2009 forecast to be followed by modest 0.4 per cent growth after the new year.

The IMF said there were dangers that even its grim new assessment could be too rosy a view, if what it repeatedly called the “corrosive” downward spiral of financial and credit stresses aggravating economic woes was not arrested. “A key concern is that policies may be insufficient to arrest the negative feedback,” it said.

The fund attacked failures by governments to tackle the banking and credit crisis effectively enough. “Announcements have too often been short on detail and have failed to convince markets; cross-border coordination of initiatives has been lacking, resulting in undesirable spill-overs; and progress in alleviating uncertainty related to distressed [toxic] assets has been very limited.”

It renewed its warning a day before that an angry public backlash against banks, bankers and the financial industries could prevent governments from taking the decisive and extensive action needed to stem the threat.

Even once growth is eventually restored to the world’s key economies, the IMF added that the long-term damage from the recession and financial turmoil meant that “there will be a difficult transition period, with output growth appreciably below rates seen in the recent past”.

In a rare glimmer of hope, it conceded, however that: “Recent data provide some tentative indications that the rate of contraction [in the main economies] may now be starting to moderate.”

http://business.timesonline.co.uk/tol/business/article6147495.ece

Warsaw alternative looks less risky than the Anglo-American model

Warsaw's solution to crisis could yet be a masterstroke

Poland is following the Korean road to recovery. Controlled government deficits and a big currency fall seem to be stabilising its fragile economy.

By Martin Hutchinson
Last Updated: 9:52PM BST 17 Apr 2009

The country isn't in desperate straits. It wants $20bn (£13.5bn) from the International Monetary Fund. The facility would be only a precautionary flexible credit line, similar to Mexico's. Such a line, granted to countries with policies that the IMF deems sound, provides a backstop to existing foreign exchange reserves.

When Korea and other east Asian countries lost foreign support in 1997, they responded with austerity plans. Sharp currency devaluations made life at home more expensive, but supported exports. Governments preferred spending cuts to exploding deficits. Within a couple of years, Seoul and the others were running balance-of-payments surpluses that enabled them to repay or refinance debt and resume economic growth.

The Polish economy was bound to suffer from the decline in world trade and the drying up of foreign investment, which had peaked in 2007 at 5pc of GDP. But the country had fairly low government expenditure, at 25pc of GDP, a modest fiscal deficit and a free-market economic structure. It also had the freedom to let the zloty fall, since it was not tied to the euro, unlike the Baltic states, Slovakia and Bulgaria. The currency has dropped 30pc against the euro. That has kept exports stable in zloty terms, while imports are slightly down. The effective devaluation has also lessened the risk of deflation. Polish inflation is around 3.6pc.

It's too early for final judgement on the Polish approach. After all, the current account deficit is still expected to be 5pc of GDP in 2009 – a sum that has to be financed by foreigners.

But the Warsaw alternative looks less risky than the Anglo-American model of large "stimulus" programmes, huge budget deficits and rapid monetary expansion. In a small economy, such policies would have been likely to lead to a zloty collapse and a government debt crisis. Poland is right to look to Asia.

http://www.telegraph.co.uk/finance/breakingviewscom/5173214/Warsaws-solution-to-crisis-could-yet-be-a-masterstroke.html

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Stocks to fall AT LEAST another 40%! Here's why ...

On Mon, 2/9/09, Money and Markets <eletter@moneyandmarkets.com> wrote:

Stocks to fall AT LEAST another 40%! Here's why ...
by Martin D. Weiss, Ph.D.

With the U.S. economy now reeling from the fastest job collapse since the Great Depression ...
With the Treasury Secretary ready to introduce yet another bank bailout plan this week ...
And as we suffer through the uncontrollable bust of the largest-ever speculative bubble of all time ...
You don't need a Ph.D. in economics to recognize that there's much more pain to come.
But how much pain? And precisely how FAR can the stock market decline? Not many people can provide that answer with precision.
But of all the analysts I know in the world today, one of those who provides the most reasoned — and most well-documented — answer is, not surprisingly, far away from Wall Street.
He is Claus Vogt, writing from Berlin.
Claus is the co-editor of Sicheres Geld, the German-language edition of our Safe Money Report.
He also edits the German edition of our International ETF Trader. And unlike nearly all his peers in Germany, Claus delivered overall gains in the high double digits last year, even as global markets tumbled.
Perhaps most impressive, thanks largely to Claus' input, the bank he advises was one of the very few in Europe that actually made good money for their clients last year.
The key to his success: The ability to watch the U.S. economy from afar, track it closely, and forecast it accurately.
A case in point: Well before the U.S. housing bubble burst, Claus Vogt and co-author Roland Leuschel wrote the book, Das Greenspan Dossier, in which they predicted:
"When the U.S. real estate bubble bursts, it will not only trigger a recession and a stock market crash, but it will jeopardize the whole financial system, especially Fannie Mae and Freddie Mac, the two U.S. — mortgage giants taking center stage in this huge bubble."
Amazingly, in that one short paragraph, they captured the full range of events unfolding today — a scenario that almost every Wall Street or Washington expert missed by a mile.
That's why I have asked Claus to contribute more regularly to Money and Markets. That's also why I have asked him to tell us how far the U.S. stock averages are likely to fall — and why.
The report below is his answer.

Why U.S. Stocks Could Fall
AT LEAST Another 40%
by Claus Vogt
Every major fundamental indicator relied upon by stock market analysts is unanimously pointing to a stock price plunge of at least another 40% from current levels. That would take ...
The S&P 500 down to the 500 level ...


The Dow Jones Industrials to below 5000, and ...


The Nasdaq to the low 900s.
Don't be surprised. To understand why, you need only step back from the trees and see the obvious chain of cause and effect:
You know that the major factor behind the current business cycle was — and is — a worldwide housing bubble and bust.
You also know that the bubble was driven by the speculative surge in mortgages and equity loans.
What you may not know is that, according to former Fed Chairman Alan Greenspan, that bubble accounted for 50% to 70% of GDP growth in recent years.
So it should come as no surprise that as soon as the mortgages and equity loans dried up, consumption and GDP growth began to take a huge hit.
Worse, the real estate bubble distorted the entire structure of the U.S. economy:
It created grossly misplaced investments — second homes nobody really needed, massive numbers of people drawn into the real estate business as brokers and lenders, plus a whole new industry built around mortgage-backed securities.


It created broad instability — too much consumption, too little savings, too many imports of goods from China and elsewhere — not to mention a huge current account deficit.


It fostered unsound risk-taking by the financial sector — from Bear Stearns to Lehman Brothers, from Washington Mutual to Citibank, from Merrill Lynch to the hedge fund industry. And ...


The end result was one of the largest, most unstable and most risky economic environments of modern times.
But now, with the bursting of the bubble,
The U.S. faces the monumental task of bringing this highly distorted economy back into alignment and putting the country back on a sound footing.
Investments that are not viable must be abandoned or aborted. A new equilibrium must be found. New price levels for stocks and all assets must be reached.
The two words commonly associated with this natural process? Recession and depression!
But you ask: Why so severe? And why must stocks fall so far?
For the simplest answer, consider the rule of thumb that has almost always held true concerning speculative bubbles: The bigger the bubble, the greater the distortions; and the greater the distortions, the graver the inevitable correction.
This rule alone leads me to expect a long, severe decline in the economy and the stock market; and this basic reasoning, in itself, supports my forecast for a 40%-or-more plunge in the broad stock market averages. But let's also take a look at the rest of my supporting arguments ...
Argument #1
U.S. Home Prices Continue to Fall
Consider the facts:
Despite the unprecedented home price declines to date, the median price of an American home (compared to the median income a family earns) is still 15% above its average level of recent decades. In other words, homes are still overpriced by 15% or more.


If you take the bubble years of 2002 — 2006 out of the equation, as any reasonable analyst would, then U.S. home prices are actually 20% out of whack.


But that assumes the median income of U.S. households will not go down. If you factor in declines in income, home prices can fall even further.


Moreover, once a bubble has burst, price corrections don't typically stop at some average statistical level; they overshoot to the downside.
Bottom line: You can expect home prices to continue to tumble. And you can expect all the ugly financial consequences of falling home prices to stay with us in the coming quarters — huge losses and bankruptcies in the banking sector.

Argument #2
The Current Crisis Is GLOBAL, Hitting
The Whole World Simultaneously
And Providing No Outside Support
To Offset U.S. Domestic Weakness
In 1990, when Japan's real estate bubble burst, the rest of the world was booming, helping Japan's export industry.
Unfortunately we don't have that kind of a cushion today. Quite the contrary, instead of relief from exports to other countries, the U.S. export sector is getting slammed by falling overseas demand. And a rising dollar will only make U.S. goods more expensive abroad, depressing demand and aggravating this problem.
Additionally, as usual in bad times, there are already strong hints of protectionism emerging around the word; the same kind of beggar-thy-neighbour policies that aggravated the Great Depression are gaining traction globally.

Argument #3
Based on Earnings, Stocks
Are Still FAR From Cheap
Let's start with the most widely followed fundamental indicator: P/E or the price/earnings ratio.
Right now the trailing 12-month P/E of the S&P 500 is 18. In other words, the average stock in the index is selling for 18 times its earnings of the past year.
That, in itself, is a very high multiple. It means that, on average, investors will have to wait a full 18 years before the investment they make in a company is matched by the accumulated earnings of the period (assuming the company can maintain its current level of profits).
Yes, 18 times earnings is much lower than it was in 1999 or 2000. But historically, 18 is still very high — even considering today's low interest rates.
See for yourself by taking a look at the following graph going all the way back to 1925. In this graph ...

Source: http://www.decisionpoint.com/

The black line shows the S&P 500 Index ...


The red line shows how the S&P would have behaved if it had a constant P/E of 20, a level considered overvalued, and ...


The green line shows how it would have behaved if it had a P/E of 10, which is borderline undervalued.
For 70 long years, from 1925 to 1995, the S&P rarely reached the overvalued level and even more rarely exceeded it. In contrast, this graph makes it very clear that the period between 1995 and 2008 is an extreme aberration in terms of this all-important stock market fundamental. It leaves no doubt that ...
In the long history of the U.S. stock market, stocks have almost always been much more moderately priced. But in the current period, stocks have been, and remain, broadly overpriced.
That alone argues for lower stock prices. But the argument is even stronger when you look at these two-decade spans:
The 1930s and 1940s, plus


The 1970s and 1980s
These two periods included secular (long-term) bear markets. And as you can see, during those periods, the S&P 500 often fell to levels corresponding to a P/E of less than 10.
That was especially true when the cyclical downturns in the market were accompanied by severe recessions, similar to what we're already experiencing today. Indeed ...
The P/E of the S&P 500 dropped to 7 during the recession of the mid-1970s — and it did it again in the recession of the early 1980s.
Even if the economic contraction could somehow be less severe this time ... even assuming no decline in corporate earnings ... and even if the P/E only declines from its current level of 18 to about 10 ... that alone would take the S&P 500 Index to my target level of 500 or lower!
Thus ...
If the P/E of the average S&P stock were to plunge to 7 again, the market would fall to much lower levels, and ...


If you factor in falling corporate earnings, it could fall STILL further.
So you can see that 500 for the S&P Index is not just a reasonable target. It's actually a conservative target, erring on the side of predicting fewer adverse consequences than may actually be the case.

Argument #4
Based on Dividend Yields, U.S.
Stocks Are Equally Overvalued
The dividend yield of the S&P 500 stocks — how much you can earn in dividends per dollar invested — draws an equally bleak picture:
After being extremely depressed during the recent bubble years, the dividend yield of the S&P 500 has recovered somewhat to 3.39%. But despite this improvement, history tells us that the current level still signals a highly overvalued market.


Solid, long-term buying opportunities don't come until you can get a dividend yield of 6% or more. But to reach that level, the dividend yield on S&P stocks needs to rise by 2.61 percentage points (3.39 + 2.61 = 6.00).


Assuming no further dividend cuts or cancellations, to get those extra 2.61 points in yield, the price of the average S&P 500 stock would have to fall by 43.5%. (A stock selling for, say, $100 today and yielding 3.39% would have to fall to $56.50 to yield 6.00% — a stock price decline of 43.5%.)
In sum, the message from this fundamental indicator fully supports the conclusion I reached based on the P/E ratio: The market would have to fall by AT LEAST 40% or so — and that's assuming there are no further dividend cuts. But with dividend cuts inevitable, stocks will have to fall even further to match the 6% yield that might make them attractive again.



Argument #5
Earnings Are Falling, and
Doing So Conspicuously!
Earnings and earnings estimates are already down substantially since 2007, with no sign of let-up.
The following chart shows you the S&P 500 along with the GAAP-based earnings for its component stocks.
As you can see, the earnings are already down from $85 at the top of the cycle to $46 in the fourth quarter of last year. And earnings estimates for the first quarter 2009 are nearly 10% lower, at $42.
The dire situation we're in today: Companies' lack of pricing power — and a recession that leaves hardly any sector unscathed — virtually guarantees further declines in earnings, making the current market valuations even further out of line.




Source: http://www.decisionpoint.com/

Argument #6
Earnings Will STAY Depressed
Longer Than Usual!
Among S&P 500 companies, profit margins reached an all-time high during this cycle, meaning that they must now fall back to a more normal level. This is what has happened in every major recession, and it's what almost inevitably will happen this time as well.
Specifically ...
In 1966, profit margins hit a high of 6% and then fell back to 3.5% in 1970.


In 1978, they rallied back up to 6% and then came all the way down to 2% by 1986.


In 1997, they rose again to 5.5% and fell back to below 3% in 2002. And now ...


In 2006, propelled by the big debt and high leverage of the recent bubble, they reached a record high of more than 8%.
But now, having started on a downward path again, it's highly improbable that profit margins will recover anytime soon.

Argument #7
Debt and Leverage Are Gone!
The facts here are even more shocking:
At the top of this cycle, the profits of the financial sector reached up to 30% of all S&P 500 earnings — thanks to psychedelic leveraging and drunken risk-taking.


Now, nearly all the extreme leverage in the financial sector — and nearly all the leverage financial institutions were providing other industries through 2007 — is no more.
Without a doubt, the forced sobering of the banking industry will have a long-lasting impact, and there is no way we can expect an early comeback of the old greedy days of Wall Street.

Argument #8
The Undeniable History of
Speculative Bubbles
Throughout history, after the bursting of every speculative bubble, prices almost invariably revert back to the level corresponding to the beginning of the bubble. In other words ...
Whatever boost the bubble gives to prices and values ... the ensuing bust inevitably takes it ALL back.
This held true for the global stock market bubble that burst in 1929 and for the Japanese stock and real estate bubbles that burst in the early 1990s. And if you go all the way back to the South Sea bubble, which burst in 1720, you will see this very same pattern.
So our task is simple: To identify the price level of the S&P 500 at the juncture when this entire moon shot was first launched.
And based on objective measures like the S&P's dividend yield or P/E ratio, we know quite well where and when that was:
The U.S. stock market bubble began in 1995, when the S&P 500 broke above the 500 level ... and it reached its climax in 2000, when the P/E ratio of U.S. stocks reached nosebleed levels of 38 on the S&P 500 and more than 200 on the Nasdaq.
Plus, there can now be little doubt that ...
Ever since 2000, the U.S. stock market has been in a protracted bear market!
To be sure, after the first two years of the bear market in 2000-2002, the Fed engineered a real estate bubble, which, in turn, produced a parallel stock market rally that prevailed during most of the middle years of this decade.
But now we can look back at the entire mid-decade rally and see it for what it really was: A mere interlude in a nine-year bear market (so far!) that began at the turn of the millennium.
So, looking back at history and looking ahead, it would not be unusual in the least to see the S&P 500 fall all the way back to the original starting level of approximately 500 for the S&P, validating and revalidating my forecast.

Will This Bear Market and Recession EVER End?
Of course it will, eventually. And when it does, incredible bargain opportunities will abound. But to make sure you can buy them, you must do two things:
(1) Keep your assets intact and ...
(2) Wait patiently for that day.
Wait for the damage of the bust to play itself out. Wait for P/E ratios to come back down to their lower range, corresponding to deep recessions of the past. Wait for at least 6% dividend yields. Then, start thinking about investing in a recovery.
Plus, there's one more thing you can do: Starting right now, you can grow your assets significantly DURING the decline.
Later this month, I will show you precisely how I'm planning to accomplish each of those goals with a new million-dollar contrarian portfolio I am managing.
I will make the trek from Berlin to Palm Beach, join Martin in an online video seminar, and lay it all out for you piece by piece, step by step.
Stand by for the invitation via email. And in the meantime, I look forward to getting your personal and direct input into how you think a dream portfolio should be handled in these tough times.
Best wishes from Berlin,
Claus

This financial crisis is now truly global

This financial crisis is now truly global
The financial crisis has moved from Wall Street to all streets, as the economic shock causes strains and suffering in every part of the world economy.

By Adrian Michaels
Last Updated: 9:11PM GMT 20 Feb 2009

In Florida, a state devastated by tumbling house prices and repossessions, the inhabitants are arming themselves against recession, with requests for concealed weapon permits up 42 per cent in the past 45 days. In Moscow, the murder rate has climbed by 16 per cent. At Tetsuya's – the most exclusive and expensive restaurant in Sydney – the waiting list has shrunk from three months to 24 hours.

Over the past few months, we were told that we were caught in the worst economic crisis for 20 years, then 30, then 80, then 100. It can't be long before someone points out that really, all things considered, the Black Death was comparatively pleasant. But beyond the hyperbole, one thing is clear: what began as a financial problem in certain debt-soaked nations is battering the economies of dozens of others, as well as millions of people working in almost every trade. It will change behaviour and alter the pecking order of the world's economies. There will be social unrest and changes of regime. Received wisdom, whether about the benefits of free trade, globalisation or European integration, may be cast on to a bonfire of recrimination. Estimates of how long the pain will last range from a year to a decade. Bring out your dead.

Among the most significant developments has been the realisation that the most prudent countries – such as Germany, Japan and China – will suffer as badly as the spendthrifts, or even worse. Despite the whiff of hubris that wafted from Berlin when the banks of Britain and America went into meltdown, Germany's economy contracted by two per cent in the last quarter of 2008, compared with 1.5 per cent for Britain's. The problem was that the Chinese and Germans were too thrifty: their countries' growth was reliant on sales of goods to countries that were borrowing. Now that Americans can't afford its products, China's exports have collapsed, down 17.5 per cent in January from a year earlier.

Americans can't spend because their house prices have crumpled, their shares have plummeted and their banks will not – or cannot – lend them any money. Insecurity is also forcing cutbacks: January saw the highest monthly jump in unemployment in 34 years. The equally worried Chinese seem to want to save still more: imports into China fell 43 per cent in January compared with the year before. Yet if no one at home or abroad wants to buy their goods, the result will be massive unemployment: some 20 million people are already said to have lost their jobs. As they head home from the coastal manufacturing belt, their government is trying to force-feed them consumer goods; 80 per cent of all white goods sold in December were subsidised.

As demand dries up, the arteries of global trade are hardening. Lufthansa's air freight division is putting 2,600 staff on short-time working, while cargo ships have so many empty containers that shipping rates are a tenth of what they were at last year's peak. The knock-on effects are complex, but painful. "For Rent" signs dot empty storefronts on the once sought-after stretch of New York's Madison Avenue, where the vacancy rate rose by 50 per cent in 2008. Rents have dropped by a third as the ladies who lunch think twice about coffee at Barneys, or frocks from Versace. This falling appetite for luxury goods helps explain why half of India's 400,000 diamond workers have lost their jobs. More than 40 have committed suicide.

Or take car sales, which Carlos Ghosn, the chief executive of Renault-Nissan, estimates could fall by 21 per cent across the world this year. Car companies are begging governments for handouts – but that won't shift their products from showrooms. Among other things, lower car sales mean fewer catalytic converters, which means that platinum does not need to be mined so intensively. The price of platinum has fallen by half, and the world's largest producer, Anglo Platinum, which operates mostly in South Africa, is axing 10,000 jobs.

And so the rural Chinese are not the only ones heading home. Thanks largely to a construction boom, Spain was responsible for a third of the new jobs created in the eurozone in 2006 and 2007, but is now losing 40,000 a week, and is offering subsidies for migrants to leave (some immigrants are instead digging in, selling home-cooked food at illegal markets around Madrid). Thai factories and farms used to rely on Burmese expats; aid workers report that thousands of them are now being rounded up and sent home. Malaysia has banned the hiring of foreigners in certain sectors, while the Philippines, which has 10 per cent of its population working abroad, is braced for family incomes to tumble. Remittances from overseas are a lifeline for the world's poorest: Africans working in the developed world have been sending back $40 billion a year to support their impoverished relatives, but the World Bank predicts that this could drop substantially this year.

Even when the crisis is not causing outright misery, it is transforming behaviour. In Britain, employers seem to be choosing to fire women rather than men – but in America, more than 80 per cent of those losing their jobs have been male; as a result, women are making up an increasing percentage of the workforce. Of course, not every extraordinary trend or statistic can be blamed on the economic crisis – but it is certainly true that cheap, home-based pursuits are making a comeback, and frippery is out. Australians spent 13 per cent less on eating out in the last quarter of 2008, while a Manhattan dentist is pitching his teeth-whitening services with the phrase "Make me an offer".

The challenge is to come up with a political response that does not make things worse. Western countries used to preach openness, free movement of people, the breaking down of barriers. Now the instinct is to raise the shutters and protect voters' livelihoods. Social unrest is spreading; particularly at risk are the nations of central and eastern Europe, which fervently embraced the free market after the Berlin Wall came down. As their workers headed west, their businesses loaded up on debt to fuel breakneck expansion; now, they can't meet their obligations, especially as the region's biggest banks were sold to Italians and Austrians, who might repatriate cash to focus on domestic demands. "The mess in central and eastern Europe is a clear result of globalisation," says Hans Redeker, a strategist at European bank BNP Paribas. "It should be no surprise to see [Western] banks acting increasingly locally while trying to please domestic governments."

The world's leaders promise to stop protectionism, but their actions speak differently. A joint statement this week from Gordon Brown and Silvio Berlusconi, Italy's prime minister, said: "Protectionist measures reduce worldwide growth, deny us the benefits of global trade and confine millions to poverty." Yet both countries are propping up their car industries. Congress wants to protect the American steel industry; the French government is spending more on newspaper advertising.

However restless they are, electorates need to remember that a lack of protectionism lay behind a huge increase in prosperity for millions of people. That is not easy when jobs are being lost. A cleaned-up banking system is a top priority – but the debate has only just started about how our banks are to look, who will run them and how they will be regulated. "The history of financial crises," warns Michael Pettis, professor of finance at Peking University, "shows a mismanagement of the regulatory framework that comes out of them."

Above all, consumers are somehow going to have to change their behaviour. Americans are certain to be more prudent during the immediate crisis, but they need to maintain that more hostile attitude to debt when it is over. It will be just as hard to persuade the Chinese, Japanese and Germans to start spending, in order to supplement export-led growth with domestic demand. "The world doesn't need more stuff to sell," explains Prof Pettis. "It needs more buyers."

As they mature, Asian economies will in time have better pension and health systems, which will help persuade people that there is a safety net for hard times, and tease money out from under the mattress. "Surplus countries have to spend their income and enjoy themselves," says Charles Dumas, an analyst at Lombard Street Research. "The purpose of an economy is to consume." Right now, though, the main objective is survival.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4736387/This-financial-crisis-is-now-truly-global.html

Dr Doom says US govt bonds next bubble to burst

Dr Doom says US govt bonds next bubble to burst

SINGAPORE, Feb 23 – As usual, Dr Marc Faber, the author of The Gloom Boom and Doom Report and contrarian views, did not disappoint the masochist in us as he gave his spiel on the causes of the current economic turmoil at a dialogue on Friday organised by The Business Times in partnership with Julius Baer, one of Switzerland's leading wealth managers.

His topic “Were You Born Before Or After 2007”, that is, before or after the global economies began their steep decline, got nearly 400 bankers and businessmen intrigued enough to spend four-and-a-half hours at the Ritz Carlton Singapore.

Luckily lunch was served before Dr Doom, as Dr Faber is often called, took the floor. The picture he painted was indeed gloomy, with no end in sight of what appears to be a very long tunnel.

The present credit crisis caused by ultra expansionary monetary policies was very serious, he said – as if the audience of bankers and business were not already aware of this.

He went on to add that non-financial credit growth has declined from an annual rate of 16 per cent in late 2006 to between 1 and 2 per cent now.

The deleveraging taking place among financial intermediaries is negative for the American economy that is addicted to credit growth, he pointed out. The United States' trade and current account deficits will shrink further and diminish international liquidity. This is bad for asset prices.

“We had an unprecedented global economic boom between 2002 and 2007. A colossal global economic bust is now following,” he said.

And worse might follow, as he noted: There was still one bubble more to be deflated – US government bonds.

Adding more fuel to his fire of gloom was his warning that regardless of the policies followed by the US government and its agencies, the American consumer was in a recession, which will only deepen.

“Expansionary monetary policies, which caused the current credit crisis in the first place, are the wrong medicine to solve the current problems. They can address the symptoms of excessive credit growth, but not the cause,” he noted.

Expansionary fiscal and monetary policies will, after a bout of deflation, lead to much higher inflation rates, which will have a negative impact on the valuation of equities in real terms, he observed.

“But what options does the Federal Reserve have with a total credit market debt to GDP (Gross Domestic Product) of more than 350 per cent?” he asked rhetorically.

And if that was bad enough, he raised the spectre of war looming on the horizon, noting that geopolitical tensions were on the rise. He predicted that commodity shortages, especially of oil, would lead to increased international tensions and to what he called resource nationalism.

The shortage of oil would be caused not only by increased demand from China and India, but also the Middle East. “Not only do they (the Middle East) produce oil, they produce too many babies,” he said in one of the few light moments of his dialogue.

The good doctor, however, had some upbeat investment advice: In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.

There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.

Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.

However, what was lacking at the talk were solutions to the current crisis. And answers. When can we see the light at the end of the tunnel? How long is the tunnel that we are in? – Today

http://www.themalaysianinsider.com/index.php/business/18977-dr-doom-says-us-govt-bonds-next-bubble-to-burst

The Global Recession

The Global Recession, Graded on a Curve

By FLOYD NORRIS
Published: February 19, 2009
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.

Stock prices in the United States have fallen sharply since the end of 2007, but the situation is even bleaker in some other countries.

In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.
Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago.
In the United States, you would now have about $53. That fact — coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement — has severely depressed sentiment and spending.
But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be around $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland.
Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where you would have just $3 left of your hypothetical $100.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere. “Our exports have been hurt more by the global recession than their exports have been hurt by our recession,” said Roger Kubarych, an economist at the Unicredit Group in New York.
Nowhere does the situation appear more dire now than in Eastern Europe.
Many of those countries had been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants — in part because lenders know the United States can print more of them if it needs to.
Eastern European countries have no such printing presses, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 percent to 10 percent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink 20 percent this year.
The latest collapses are both a cause of and a result of worries about the health of banks in the region, many of which are owned by Western European banks. Some of those banks did a fine job of pushing “affordable” mortgages that are turning out to be just the opposite, endangering both borrower and lender.
The details differed from the subprime lending that was a major cause of the destruction of capital in the American banking system. There were no “Ninja” loans (no income, no job or assets) that would produce exploding monthly payments within a couple of years. Instead, the banks pushed mortgages denominated in foreign currencies — largely the euro and the Swiss franc — where interest rates were much lower than in the local currency markets.
The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as he or she borrowed, and has a monthly payment that has increased by a similar amount. Even if the home’s value has not fallen and the homeowner’s job is safe, he or she may be in desperate straits. In fact, unemployment is rising and house prices are falling.
It has been noted in what Donald H. Rumsfeld called the “old Europe” that the European countries in the direst straits tend to be the ones that accepted American financial advice with the most enthusiasm. Now, however, few Americans seem to be interested.
Part of the Obama plan to revive the American financial system is an expansion of the TALF program, announced but not carried out by the Bush administration. That program — short for Term Asset Backed Securities Loan Facility — is supposed to stimulate financing for things like credit cards and student loans.
But the loans are not for just anybody. At least 95 percent of the money must go to American borrowers. “It is a ‘Lend America’ program,” said Mr. Kubarych.
When world leaders gather, there is a lot of talk about coordinated policies. When the leaders go home, it is every country for itself. Unfortunately, as the United States ought to have learned, doing better than anyone else may not be nearly enough.
Floyd Norris’s blog on finance and economics is at nytimes.com/norris.

http://www.nytimes.com/2009/02/20/business/economy/20norris.html?fta=y

Nowhere Near End of Crisis: Dr. Doom

Nowhere Near End of Crisis: Dr. Doom
By: Reuters 20 Feb 2009

Nouriel Roubini, one of the few economists who foretold much of the current financial turmoil, Friday said the United States is nowhere near the end of the banking and credit crisis.

"We are still in the third and fourth innings," Roubini told Reuters in an interview, using a baseball analogy to drive home his view that the current cycle is only nearing its midpoint.

"And it's getting worse," said Roubini, a professor at New York University's Stern School of Business and chairman of RGE Monitor, an independent economic research firm.

On Feb. 10, Treasury Secretary Timothy Geithner unveiled his newest bailout plan for banks, including the government's so-called "stress tests" involving all banks with more than $100 billion in capital. Regulators will analyze the banks' books far more closely than previously to see if they have the capital to endure worsening conditions.

"It is the step to form an objective way to decide which banks are illiquid and which ones are insolvent and to take over the insolvent bank," Roubini said. "We have to take over some banks."

Bank of America [BAC 3.79 -0.14 (-3.56%) ] and Citigroup [C 1.95 -0.56 (-22.31%) ] shares plummeted for a sixth straight day Friday, hammered by fears that the U.S. government could nationalize the banks, wiping out shareholders.

Nationalization or receivership of a bank need not be a permanent issue, Roubini added.

"I think of it being a temporary measure -- take them over and clean them up and sell them back to the private sector," Roubini said. "No one is in favor of long-term government ownership of the banking system."

For example, IndyMac was bankrupt and taken over in July.

"Less than six months later the very same group of private investors was willing to buy back the assets and the deposits," he said.

"So it doesn't have to be under government control for years and years. You can do it actually relatively quickly."

All told, Roubini said he sees negative economic growth throughout 2009, predicting that the unemployment rate could reach roughly 10 percent in the next year.

http://www.cnbc.com/id/29301301

Roubini tells Geithner to nationalise US banks

Roubini tells Geithner to nationalise US banks
Tim Geithner must nationalise some of America's biggest banks and take the total toll of the US bail-out to around $2 trillion, according to one of the world's most prominent economists.

By James Quinn Wall Street Correspondent
Last Updated: 1:12AM GMT 16 Feb 2009

Nouriel Roubini – the man feted with having foreseen the financial crisis before almost any of his peers – has warned that the US Treasury Secretary must go significantly further than his detail-light bail-out plan delivered last week, and argues that the Obama administration should move swiftly to take public ownership of those major US banks which are failing.

Professor Roubini, who worked with Mr Geithner in the Clinton administration, told The Daily Telegraph: "Many US banks are insolvent, even the major ones." While nationalisation is "a politically- charged decision" which needs to handled carefully, he said it needs to take place "sooner rather than later" for the sake of the wider economy.

Professor Roubini calculated that, on top of the existing $700bn (£491bn) of American taxpayers' money allocated to solving the banking crisis, Mr Geithner may need to ask the US Congress for between $1,000bn and $1,250bn in extra funds. "Sooner rather than later, they'll need more money," he added.

Prof Roubini, professor of economics and international business at NYU Stern, New York University's business school, is highly critical of Mr Geithner's bail-out plan, which he unveiled to much market chagrin last Tuesday.

The New York-based academic believes that although his former boss (the two worked together when Mr Geithner was under-secretary of international affairs at the Treasury in the dying days of the Clinton era) is moving in the right direction, he is either unwilling or unable to be direct enough when it comes to taking the tough decisions.

Prof Roubini also has some stern advice for the British government, itself facing yet another banking crisis this week as it considers whether to increase its ownership of Lloyds Banking Group.

"In the UK, the government has taken over those banks in distress through a number of measures. But the question now is whether they want to go from de facto ownership to de jure?

"It's necessary and I think that's the way we're going in the UK," he continues, saying he would be "supportive" of such a decision. Politicians "might not want it," he adds "but it is strong in action," before going on to explain that it is better for markets that governments nationalise banks quickly, resolve problems whilst in public ownership, before returning them to the market.

Prof Roubini argues that the UK is very similar to the US in terms of its economic position due to its analogous problems – both suffered housing and consumer credit bubbles – but is even more concerned about Germany, which produced dismal gross domestic product figures at the end of last week.

"Germany did not have the same excesses as the UK, but even the German banks had significant exposure to other types of excesses in lending, and they're weak," he says.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4634398/Roubini-tells-Geithner-to-nationalise-US-banks.html

Nouriel Roubini trusts Timothy Geithner to get it right on US banks

Nouriel Roubini trusts Timothy Geithner to get it right on US banks
Nouriel Roubini can see that the 'N' word might be a little difficult for Western governments to swallow right now. But for him, it's the right – indeed, the only – route to follow.

By James Quinn, Wall Street Correspondent
Last Updated: 2:34PM GMT 16 Feb 2009

Nouriel Roubini predicted the current financial crisis and now argues that many US banks should be nationalised
The "N" word, of course, is nationalisation: nationalisation of failing banks which are continuing to wreak havoc on the world's economies.

"Many US banks are insolvent, even the major ones," argues Roubini, professor of economics and international business at NYU Stern, New York University's business school, without naming names. "Call it nationalisation, or if you don't like the dirty N-word, use 'receivership' or whatever is palatable."

Call it what you want, says Roubini, but without nationalisation of some of the major banks in both the US and the UK, the banking crisis will get worse and the current recession deepen.

"If the problem of banks is one of liquidity, you can do anything you like, which seems to me what the US Treasury wants to do," he says, with reference to US Treasury Secretary Tim Geithner's slightly-fumbled banking bail-out plan launched last week to much disregard from Wall Street.

"But if the banks are insolvent, none of these will work," says Roubini of Geithner's three-part plan which includes stress-testing major banks to see if they need more public capital.

"To see which banks are insolvent, a stress test is a step to making these tough decisions," he says, tough decisions which are so politically charged that they need to be "done right" due to the number of stakeholders involved who face being wiped out if nationalisation were to occur.

"Triage the banks that are solvent but illiquid, and those that are beyond redemption need to be nationalised. But it's urgent to do it sooner rather than later. Let's not wait another 12 months."

Roubini, one of the world's foremost experts on the current banking crisis, argues that until now, the US government, like many of its European counterparts, has been busy "trying to provide manna to everyone" without actually working out who needs what.

So why, given that Geithner appears to know some of what is needed, does Roubini think he didn't go the whole hog last Tuesday?

"The benevolent view of what they've done is realise the problem, but maybe not go as far as they might like to. A month into the [Obama] administration, saying "we're going to take over most of the US banks" because they're insolvent - that might lead to being accused of being Bolshevik," he surmises.

The second reason Geithner may have held back, Roubini adds, is that perhaps he and the rest of Obama's economic team – including senior adviser Larry Summers and chairman of the White House Council of Economic Advisers Christina Romer – were banking on the economy recovering somewhat later in the year, which might lead to less stress being placed on bank assets. "A sense of cautiousness, perhaps?" he says.

Based on Roubini's forecast for the US economy, such caution is perhaps a little unwise.

He estimates that a "broad recession" – will continue well into next year, with some form of recovery into 2011. But even that is not certain, he argues, saying there is a "risk" that the current recession does not create a U-shaped curve as the majority do, but that the US ends up like Japan of the 1990's with "nasty L-shape stagnation."

"In a banking crisis, some banks are so under-capitalised that they might as well just take them over," he argues, pointing out that often it is better from a capitalist-friendly perspective to take them over, clean them up in public ownership, and sell them off again, than it is to leave them flailing for help on the open market.

Roubini, who turns 50 in March, makes his comments with a degree of inside knowledge. Although he is no way connected to the Obama administration – and is an independent economist whose only commercial tie is as chairman of economic analysis firm RGE Monitor – he did work with Geithner at the tail-end of the Clinton administration.

When Geithner was promoted to under-secretary for international affairs, Roubini became his adviser, working together for just under a year.

"I trust him," he says, despite acknowledging that he may not quite have got his ducks in a row yet. "He's someone I know well and I have great respect for him."

Why then did Geithner get it so wrong, with his ill-timed and ill-structured banking bail-out which was in many ways smothered by the ongoing debate on the now-passed $787bn fiscal stimulus package?

"You cannot blame him," says Roubini, pointing out that he's facing the "worst economic crisis since the Great Depression" and also that he is just one of a number of high-level economic advisers working under Obama. Although he does concede that his old boss could have waited for a few weeks to "get it right."

Getting it right, in Roubini's eyes of course, means nationalisation, which will invariably involve Geithner returning to the US Congress for additional funds on top of the existing $700bn bail-out fund. "Sooner rather than later, they'll need more money," estimating that $1 trillion to $1.25 trillion of extra money needs to be injected in to the US financial system to revive it, having previously warned that credit losses from US institutions will total $3.6 trillion by the time the crisis is over.

"If you do it fast, you will get private money. But if you take time, and mix good apples with bad apples, then private investors won't want to get involved," he warns.

Aware that going back to the US Congress for an extra $1 trillion of taxpayer's money will be a hard sell for Geithner, Roubini stresses that sum would not necessarily be the final cost. "That's not necessarily the total loss for the taxpayer, as the net costs are less than the headline number due to interest payments and the hope that most of the capital will be repaid."

"They'll get to that point, it's just a matter of when," shrugs Roubini, who, nationalisation or not, will no doubt be watching the actions of his former boss with keen interest.


http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4639504/Nouriel-Roubini-trusts-Timothy-Geithner-to-get-it-right-on-US-banks.html