Recession And Depression: They Aren't So Bad

Recession And Depression: They Aren't So Bad
by Chris Seabury (Contact Author Biography)

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Recessions and depressions have occurred many times throughout history. To many, they bring fear and uncertainty, but they are actually a natural part of the economic cycle. Unfortunately, there are a lot of myths surrounding market cycles, but in order understand them, we must look beyond these myths. In this article, we'll examine recession and depression, how they work and what they really mean for investors.

What Is a Recession?

First, let's take a look at recessions. There are two definitions of recession:

• one defines a recession as two consecutive quarters of negative economic growth, and
• the second (according to the National Bureau of Economic Research (NBER)) defines a recession as a significant decline in national economic activity that lasts more than just a few months.
  

How It Works

The growth of our economy rests upon the balance between the production and consumption of goods and services. As the economy grows, so do incomes and consumer spending, which continues the cycle of growth. However, because the world is not perfect, at some point, the economy has to slow. This slow down could be caused by something as simple as an oversupply, where producers manufacture too many goods. When this happens, the demand for those goods will drop. This causes earnings to slow, incomes to drop and the equity markets to fall. (To learn more, read Understanding Supply Side Economics.)

Historical Examples
Since the mid-1850s the U.S. had 32 recessions, and according to the NBER, most have varied in length, with the average recession lasting 10 months. The shortest recession on record lasted six months, from January 1980 to July 1980. Two of the longest recessions lasted for 16 months. These were the recessions of November 1973 to March 1975 and July 1981 to November 1982.

What Is a Depression?

A depression is a severe economic catastrophe in which real gross domestic product (GDP) falls by at least 10%. A depression is much more severe than a recession and the effects of a depression can last for years.

It is known to cause calamities in banking, trade and manufacturing, as well as falling prices, very tight credit, low investment, rising bankruptcies and high unemployment. As such, getting through a depression can be a challenge for consumers and businesses alike, given the overall economic backdrop. (To learn more, read The Importance Of Inflation and GDP.)

How It Works
Depressions occur when a number of factors come together at one time. These factors start off with overproduction and decreasing demand and are followed by fear that develops as businesses and investors panic. The combination of excess supply and fear causes business spending and investments to drop. As the economy starts to slow, unemployment rises and wages drop. These falling wages cause consumers to cut back spending even more, putting additional pressure on unemployment and wages. This begins a cycle in which the purchasing power of consumers is eroded severely making them unable to make their mortgage payments; this forces banks to tighten their lending standards, which eventually leads to bankruptcies.

Historical Examples
Throughout history, there are several examples of depressions. The most well-known is the Great Depression of the 1930s. However, this one title actually covers two depressions that took place during that time. The first depression occurred from August 1929 to March 1933, during which GDP growth declined by 33%. The second depression ran from May 1937 to June 1938, during which GDP growth declined by 18.2%. In addition, the Great Depression was preceded by another economic depression, which occurred from 1893 to 1898. (To learn more, read What Caused The Great Depression?)

What Can We Learn?

Recessions and depressions provide us with both negatives and positives that we can use to gain a greater understanding of how they work and how to survive them.

Negatives of Recessions and Depressions

There are many negative consequences of recessions and depressions. Let's take a look at a few:

1. Rising unemployment
Generally, rising unemployment is a classic sign of both recessions and depressions. As consumers cut their spending, businesses cut payrolls in order to cope with falling earnings. The difference between the two is that the unemployment rate in a recession is less severe than in a depression. As a basic rule, the unemployment rate for a recession is in the 5-11% range; by contrast, the unemployment during the first period of the Great Depression (1929-1933) went from 3% in 1929 to 25% by 1933.

2. Economic downturn
Recessions and depressions create a massive unwinding in the economy. During times of growth, businesses keep increasing supplies to meet consumer, demands, but at some point there will be too much supply in the economy. When this happens, the economy slows as demand drops. Recessions and depressions allow us to clear out the excesses of the economy, but the process can be painful and many suffer during this time.

3. Fear
Recessions and depressions create high amounts of fear. As the economy slows and unemployment rises, many consumers become fearful that things will not improve anytime soon. This fear causes them to cut back on spending, causing the economy to slow even more. (For related reading, see When Fear And Greed Take Over.)

4. Sinking values
Asset values sink in recessions and depressions because earnings slow along with the economy. This causes stock prices to fall because of the slowing earnings and negative outlooks from companies. In turn, these falling prices cause new investments for expansion to slow and can affect the asset values for many people.

Positives of Recessions and Depressions

There are many positives that take place as a result of recessions and depressions. They include:
1. Getting rid of excess
Economic decline allows the economy to clean out the excesses. During this process, inventories drop to more normal levels, allowing the economy to experience long-term growth as demand for products picks back up.

2. Balancing economic growth
Recessions and depressions help keep economic growth balanced. If the economy grew unchecked at an expansionist rate for many years, this could lead to uncontrolled inflation. By having recessions and depressions, consumers are forced to cut back in response to falling wages. These falling wages force prices to drop, creating a situation in which the economy can grow at normal levels without having prices run away.

3. Creating buying opportunities
Tough economic times can create massive buying opportunities in huge asset classes. As the economy runs its course, the markets will readjust to an expanding economy. This provides investors with an opportunity to make money as these low asset prices move back to normal.

4. Changing consumer attitudes
Economic hardship can create a change in the mindset of consumers. As consumers stop trying to live above their means, they are forced to live within the income they have. This generally causes the national savings rate to rise and allows investments in the economy to increase once again. (For related reading, see Stop Keeping Up With the Joneses - They're Broke.)

Conclusion

Clearly, both recessions and depressions have many effects on the overall economy. To survive and thrive in these environments requires that you understand what causes them and how those causes create positive and negative effects on the overall economy.

Some of the positive effects include taking the excesses out of the economy, balancing economic growth, creating buying opportunities in different asset classes and creating changes in consumer attitudes.

The negative effects include rising unemployment, a severe slowing in the economy, the creation of fear and the destruction of asset values.

It is by carefully understanding what recessions and depressions are that we can learn how to spot them - and protect investments from them.

by Chris Seabury, (Contact Author Biography)

http://www.investopedia.com/articles/economics/09/lessons-recessions-depressions.asp?partner=basics

Millionaire widow becomes cleaner after losing fortune in Madoff's alleged Ponzi scheme

Millionaire widow becomes cleaner after losing fortune in Madoff's alleged Ponzi scheme

A millionaire widow who lost her fortune to Bernard Madoff's alleged $50 billion Ponzi scheme has turned to cleaning and care work to make ends meet.

By Catherine Elsworth in Los Angeles Last Updated: 5:09PM GMT 23 Jan 2009

But after Mr Madoff's alleged confession that the scheme was 'all just one big lie', a revelation that shook the investment world, Mrs Ebel realised she had nothing Photo: GETTY
Maureen Ebel, 60, of West Chester, Pennsylvania, thought she had $7.3 million invested with the New York financier when he was arrested last month and charged with running a massive hedge fun scam, possibly the largest financial fraud in history.
But after Mr Madoff's alleged confession that the scheme was "all just one big lie", a revelation that shook the investment world, Mrs Ebel realised she had nothing.
She went from an annual income from her investments of 400,000 dollars to worrying about how to pay her next bill and picking up coins in the street.
In less than a week following Madoff's arrest, Mrs Ebel found a job caring for a 93-year-old woman, cleaning her home and ironing.
"This is my fate," the retired nurse, whose doctor husband died in 2000 aged 53, told the Philadelphia Inquirer. "I was married, had a fabulous marriage to a man I loved and worshipped, a physician. We travelled. We had a very fine life. And he's dead. He died, and every penny I had in the world has gone."
Mrs Ebel, one of hundreds if not thousands of investors who together lost tens of billions of dollars in the scheme, has raised some cash by selling off jewellery and a painting and returned thousands of dollars worth of items recently bought on credit cards.
She is now desperately trying to offload her two-bedroom holiday home near West Palm Beach, Florida, and Lexus SUV while calculating that to afford her mortgage, she must return to nursing and take in a lodger.
Mrs Ebel's uncle Leonard, 80, introduced her to Madoff's fund after her husband's death.
"At that time, when he got me into Madoff, he had been a Madoff investor for 25 years," she told the Philadelphia Inquirer. "And now he's a Madoff investor and broke after 30 years."
She initially invested 4.5 million dollars and received detailed monthly statements and a cheque four times a year. She has registered with the FBI as a victim of Madoff's scheme.
Now when she visits Florida she says she feels "like an alien".
"Everyone is going riding their horses and playing tennis, playing golf," Mrs Ebel said. "If there's a nickel on the street, I'm picking it up."

http://www.telegraph.co.uk/finance/financetopics/bernard-madoff/4323651/Millionaire-widow-becomes-cleaner-after-losing-fortune-in-Madoffs-alleged-Ponzi-scheme.html

Comment:

This story illustrates the importance of acquiring investment knowledge early in life. These riches to rags stories provide many learning points too.

Introduction to Currencies

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Getting Started In Currencies

Happy Chinese New Year 2009

Buffett-Style Buy And Hold

Investing Strategies
Buffett-Style Buy And Hold



Drew Tignanelli, 01.22.09, 03:52 PM EST


Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.


Warren Buffett is not a buy-and-hold investor, so why are you?


The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.


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Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.


Comment On This Story




It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.




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The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.


Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.



http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts



My comment: Buy, hold and selective selling

Falling Pound Raises Fears of Stagnation

Falling Pound Raises Fears of Stagnation

By JULIA WERDIGIER and NELSON D. SCHWARTZ
Published: January 21, 2009
LONDON — An island nation that bulked up on debt and lived beyond its means. A plunging currency. And a financial system edging toward nationalization.


Multimedia
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A Tumbling Currency
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Related
When Governments Take Over Industries in Trouble (January 22, 2009)
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With the pound at a multidecade low and British banks requiring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as “Reykjavik-on-Thames.”
While that judgment seems exaggerated, there are uncomfortable parallels between Iceland’s recent financial downfall and Britain’s trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.
Washington’s attempts to stabilize financial institutions have failed so far, as well. And now the Obama administration, along with the rest of the world, could watch Britain to see what a bank nationalization might look like, and what it might suggest for American banks.
Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab United Kingdom into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s might return.
The pound, a symbol of British independence from the Continent that is revered nearly as much as the queen, is now down nearly 29 percent against the dollar from a year ago.
There has been a steady drumbeat of gloomy economic news for months, but the mood in Britain has darkened starkly in recent days.
On Monday, Royal Bank of Scotland warned that its 2008 losses could hit £28 billion, or $38 billion, even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.
But in contrast to last autumn, when Mr. Brown’s first bailout plan was highly praised, this package has been greeted with anxiety. While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarms many analysts and economists.
“I fully back what the government is doing, but there is a risk of being Iceland on the Thames,” said Will Hutton, an economic expert who is executive vice chairman of the Work Foundation, a nonprofit research firm. “And the more sterling falls, the greater our liabilities in terms of what we owe.”
The pound fell to $1.3618 on Wednesday, its lowest level against the dollar since September 1985, before recovering to $1.3922.
Even more than their American counterparts, borrowers in Britain turned to local banks to fuel a real estate boom that was as much a national pastime as a rational decision about what to buy. Household debt as a percentage of disposable income hit 177 percent in 2007, compared with 141 percent in the United States.
Now, with both housing prices dropping and institutions like the Royal Bank of Scotland buckling, the British economic outlook looks even bleaker than the landscape in the United States and the euro zone, the countries that use the euro.
The British economy is expected to shrink by 2.9 percent this year, compared with a 2.6 percent drop in the euro zone and a 2.1 percent contraction in the United States, according to Gilles Moëc, senior economist with the Bank of America in London.
To make matters worse, Mr. Moëc said, Britain is facing a wave of deficit spending, as tax receipts fall and the costs of unemployment benefits and other services rise. He predicts the budget deficit will equal 9.4 percent of gross domestic product in 2009, compared with 4.9 percent in the euro zone and 8.4 percent in the United States.
“It’s scary,” he said. “It reminds me of what you could find in southern Europe 15 years ago, during the worst years in Italy or Greece.”
British stocks have followed the pound lower in recent days as well. The benchmark FTSE index has fallen 2.1 percent this week, led by a plunge in the shares of many leading banks.
The government already controls a majority share in Royal Bank of Scotland, but the prospect of a full nationalization of the bank has alarmed investors, and shares of RBS have plunged 64 percent in the last three days. The prospect of nationalization haunts other troubled banks as well — Barclays is down 33 percent and Lloyds Banking Group is off 54 percent.
As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swaths of the economy withered. In recent years, this sector has been responsible for about half of total job growth in Britain even though it accounts for only about 30 percent of the economy, according to Peter Dixon, economist for Britain at Commerzbank in London.
Consumers were also lulled into taking on more and more debt by the unusually steady economic expansion Britain enjoyed until last year, Mr. Dixon said. Growth averaged 2.7 percent annually over the last decade. “The last 10 years were phenomenally stable, with volatility at its lowest point since the 19th century,” he said.
But that prosperity camouflaged a steadily weakening manufacturing base, unlike in Germany, where the industrial sector is a relative counterweight to the outsize problems of financial firms.
For all the debt weighing down British banks, though, Iceland’s situation was far worse before the government was forced to nationalize the banking sector last fall as the krona collapsed.
British bank assets total about 4.5 times the country’s gross domestic product, but in Iceland they were 10 times as large as the G.D.P., Mr. Hutton said.
That does not mean there is not a price to pay for Britons even now. The pound has plunged before and each time is remembered as a humiliating experience that scarred the nation.
In 1976, the government was forced to approach the International Monetary Fund for help after the pound dropped below $2 for the first time. In 1992, the pound dropped out of the European exchange rate mechanism as interest rates hit 15 percent and Britain was in a recession.
A weak pound also weighs on the psyche of the British, most of whom are reducing spending while watching a flood of euro- and dollar-rich tourists hunt for bargains in their shops.
Jeremy Stretch, senior currency strategist at Rabobank in London, said Britons might learn that a weak pound can be helpful.
A weaker pound would make British exporters more competitive, for example, thus reducing Britain’s dependence on the City, as London’s financial district is known, for future growth.
Mr. Stretch also said that Britain’s current economic problems were different from the 1970s and 1990s because it was far from alone this time around.
“The salvation of the pound is that its problem is not a pound-specific problem,” he said. “At the moment, we’re looking the ugliest. But if you sell the pound, what will you buy?”
Julia Werdigier reported from London and Nelson D. Schwartz from Paris.



http://www.nytimes.com/2009/01/22/business/worldbusiness/22pound.html?_r=1&ref=todayspaper

U.K. Pound Serves as Omen for Dollar

JANUARY 22, 2009
U.K. Pound Serves as Omen for Dollar

By JOANNA SLATER

As the British pound continues to sink, its travails are a cautionary tale for the U.S. dollar.
The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy.
Yet their currencies have headed in opposite directions. On Wednesday, the British pound tumbled to a 23-year low against the dollar, briefly buying just $1.362, down from over $2 only six months ago. The pound also hit a new all-time low versus the Japanese yen. It got a minor boost in late afternoon trading, following a report that finance ministers from major industrialized nations will discuss the currency's weakness when they meet next month.

By contrast, the dollar managed to strengthen against a host of currencies as the financial crisis intensified last fall. It has also surged ahead in recent days, particularly versus the pound and the euro.
Unlike the pound, the dollar is being buttressed by its unique status as the world's reserve currency and the vehicle for transactions in U.S. financial markets, including Treasury bonds. That means investors often seek out the dollar as fears rise, sometimes in spite of their concerns about the U.S. economy.
"The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be."
The euro also has flagged in recent weeks, as concerns have risen over the creditworthiness of some of the more indebted countries that use the currency. But it has suffered less than the pound, a sign that investors may be gravitating toward the largest, most highly traded currencies as nearly all economies stumble.
Meanwhile, there's little light ahead for the beleaguered pound, say some currency experts. The economic news is "horrendous," says Neil Mellor, a London-based currency strategist at the Bank of New York Mellon. "There is very good reason for panic at the moment."
In one worrisome sign, investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest.
That's also the scenario that some worry might await the dollar and U.S. bond yields, should appetite from overseas investors wane.
These days, policy makers are inclined to let their currencies weaken "until such a time as other asset markets flag that enough is enough," says Alan Ruskin, chief international strategist at RBS Greenwich Capital. Given that the moves in British government bond yields aren't yet extreme by recent standards, "I don't think we've quite reached that point in the U.K."
In a note on Wednesday, Goldman Sachs analysts pointed out that recent moves in the pound and U.K. bond yields were more typical for emerging markets with weak fundamentals. However, they added, the analogy isn't justified over the long term. Indeed, the firm recommended that investors buy the pound as well as U.K. bonds.
While the dollar continues to benefit from its unique position in financial markets for now, it is far from clear that the resilience will last. "Right now the market is beating up on the pound, but at some point it will look for something else to pick on," says Paul Mackel, a currency strategist at HSBC in London.
The fact that the Federal Reserve stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth "could hurt the dollar quite badly" later this year, he says.

Write to Joanna Slater at joanna.slater@wsj.com

http://online.wsj.com/article/SB123258222098404279.html?mod=loomia&loomia_si=t0:a16:g2:r4:c0.0916979:b0

What does "bank nationalization" mean?

Turmoil at Bank of America and others may spur government takeovers.

JANUARY 22, 2009
What if Uncle Sam Takes Over Your Bank?

By JANE J. KIM and HEIDI MOORE

Could your bank turn into the Bank of the U.S.A.?

The latest wave of banking problems has investors worried that the government will nationalize deeply wounded institutions, such as Bank of America Corp. and Citigroup Inc.
Such a dramatic step could make it easier for some bank customers to get a loan. And customers with deposits will still be protected by federal insurance, just as they are today. Still, consumers could see more branch closings, more standardization across bank products and a deterioration in customer service. Common and preferred shareholders, meanwhile, will likely get wiped out in a bank nationalization.
With all of the problems that banks are now facing, here is a primer on bank collapses and the impact of possible bank nationalization.

What does "bank nationalization" mean?

A nationalized bank is owned and run by the government. The shocks of the credit crisis last fall spurred lawmakers to seminationalize the banking sector; nearly 314 institutions have already signed over some of their shares and other securities to the Treasury in return for $350 billion in government TARP funds. The government could now go a step further by taking complete ownership of certain troubled banks.

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Why nationalize banks?

It makes sense only if banks are in danger of failing. In Western countries, nationalization is largely used as an emergency method to prop up banks during tough times. It is typically used to lend to small and medium-sized businesses and restructure burdensome loans to consumers.

Has nationalization ever worked before?

It has a mixed record. Sweden took over its banks, restored them to health and privatized them again. France nationalized its banking sector, privatized it again by selling it into private hands and now may be in the process of another wave of nationalization. In the U.S., the government took over hundreds of institutions during the savings-and-loan crisis a couple of decades ago. It aggressively sold off bad assets, and the experiment is now regarded as a success.

What will happen to my account if my bank is nationalized?

There should be very little change to consumers' bank accounts and insurance-protection levels if their bank is nationalized. The Federal Deposit Insurance Corp., which insures deposits for up to $250,000, will continue to cover all FDIC-insured institutions, regardless of who the owner is.
And even though an increasing number of banks are failing, the FDIC -- which is backed by the full faith and credit of the U.S. government -- can't run out of money because of its ability to borrow from the Treasury.

Under New Management

What a government takeover of banks could mean for consumers:

• FDIC insurance would still cover any accounts currently covered.
• Banks would likely make more loans and halt foreclosures, but also offer fewer new products.
• Banks would likely reduce the number of branches and cut back customer service.

Will I be able to get a loan?
Nationalized banks are more likely to loosen the lending spigots. Banks would start making loans that they wouldn't otherwise make today, such as to borrowers with less-than-stellar credit.

There would be more pressure to make loans to achieve social objectives.
Homeowners at nationalized banks should also benefit since the government is likely to halt any foreclosure proceedings, says Greg McBride, senior financial analyst at Bankrate.com. "Uncle Sam is not going to want to put anybody out of their house," he says.
Government-owned banks could offer basic credit cards with low rates that would appeal to less-creditworthy customers who regularly use cards to borrow. But such cards are less likely to come with costly rewards programs, such as those that earn frequent-flier miles, says Dave Kaytes, managing director at Novantas.

How will private-banking and brokerage-account customers be affected?
That depends on whether the government takes a short- or long-term view. If it intends to be a long-term owner, then it will probably sell off the brokerage, investment-banking and other auxiliary operations as nonessential to the core banking business. If, however, the government sees its step as a short-term fix to shore up the system temporarily, then it may hang on to such operations.

What other products and services might be affected?
If the government takes over a bank, management will be under even more pressure to cut costs. Expect more branch closings and poorer customer service. "Think of the bank as the DMV of the future, run by government employees who have little upward mobility," says Mr. Kaytes.
"I think we can expect that over time, the nationalized banks will be less open to innovation and new product development, more conservative in their approaches, and more constrained in their actions and subject to tighter scrutiny," says Jim Eckenrode, banking and payments research executive at TowerGroup.

What are the disadvantages of bank nationalization?
In the U.S., the biggest problem for the government would be the sheer impracticality and expense of taking over all 8,000 banks -- or even the 314 institutions that described themselves as "banks" in order to receive government aid.

The U.S. government would have, at most, the ability to take over only a handful of the most important institutions. As a result, nationalization would not solve the pressing problem of potential bank failures, particularly among small banks. Consumers who have deposits in such banks would still be dependent on the FDIC to return their money during a failure, and such a process could be lengthy and involve a lot of red tape.

Write to Jane J. Kim at jane.kim@wsj.com and Heidi Moore at heidi.moore@wsj.com

http://online.wsj.com/article/SB123258304319904345.html

Roubini warns US banking system effectively insolvent

Roubini warns US banking system effectively insolvent

Losses in the US financial system may reach $3.6 trillion (£2.6 trillion) before the credit crisis is over, suggesting the country's banks are "effectively insolvent", according to the man who predicted the current economic meltdown.

By James Quinn, Wall Street CorrespondentLast Updated: 6:26PM GMT 20 Jan 2009

Roubini warns US banking system effectively insolvent

Professor Nouriel Roubini said half of the estimated losses would come from banks and broker-dealers, placing further pressures on an already heavily-laden system.
"It means the US banking system is effectively insolvent because it starts with a capital of $1,400bn. This is a systemic banking crisis," he said.
To date, global losses and write-downs as a result of the crisis, which was triggered by the collapse of the US sub-prime mortgage sector, total about $1 trillion.
The New York University professor's comments were in part responsible for pushing banking shares lower on Tuesday. Citigroup fell 11pc and Bank of America lost 15pc.
Banks were also impacted by news of heavy losses at institutional money manager State Street's commercial paper and investment arm, sending its' shares down as much as 50pc, its worst one-day slump in 24 years.
Speaking in Dubai, Professor Roubini said: "The problems of Citi, Bank of America and others suggest the system is bankrupt. In Europe, it's the same thing."
His warning comes just a day after the UK's second phase in its own banking bail-out, and after Bank of America, Merrill Lynch and Citi last week reported almost $26bn of fourth-quarter losses.
"We have got a crippled financial sector, not only in the US but across the globe," said Keith Wirtz, chief investment officer of Fifth Third Asset Management.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4299466/Roubini-warns-US-banking-system-effectively-insolvent.html

Pound falls to lowest level against the dollar since 1985

Pound falls to lowest level against the dollar since 1985
The pound fell to its lowest level against the dollar since 1985 last night amid growing fears that the Government will have to nationalise high-street banks.


By Robert Winnett
Last Updated: 8:08PM GMT 21 Jan 2009
Pound falls to lowest level against the dollar since 1985
One pound now buys less than $1.37 - compared to more than $2 last summer - after international currency speculators moved in to profit from concerns over the British economy.

One pound now buys less than $1.37 - compared to more than $2 last summer - after international currency speculators moved in to profit from concerns over the British economy.

Experts predict it is likely to fall to $1.30 or below in the next few days.

Sterling also fell sharply against the Euro and reached a record low against the Japanese yen.

The falls have come following sharp reductions in the share values of major high-street banks such as Barclays, Lloyds and Royal Bank of Scotland (RBS).

This has led to fears that several banks may have to be nationalised which could have devastating effects on the public finances. The assets of RBS and Lloyds Banking Group are in excess of the total value of the British economy and experts believe that billions of pounds of their debts may never be repaid.

Mervyn King, the Governor of the Bank of England, has also indicated that more money may effectively have to be printed in the next few months to kick-start the British economy. Analysts at Barclays predicted yesterday that interest rates will soon be cut to zero percent.

Jim Rogers, a former partner of George Soros, the speculator who made $1 billion from the collapse of sterling on black Wednesday in September 1992, yesterday stepped up his attack on the British economy.

He said that the City of London was now "finished" and that the UK had nothing to offer once North Sea oil reserves ran out. "It's simple, the UK has nothing to sell," he said.

Another currency speculator added that "the UK is imploding" last night.

Government ministers have repeatedly refused to comment on the reduction in the value of the pound. However, the French finance minister yesterday called on the Bank of England to intervene.

Christine Lagarde, the French finance minister, said: "The Bank of England does what it can, but its monetary policy, its rate management isn't very efficient in providing more support for the British currency. I believe it's in its interests to support it a little more."

However, one of the world's biggest investment banks said that the fall in the value of the pound had been "overplayed". Goldman Sachs said it was "bullish" on the pound and said it believed the "picture in the UK is not as poor as many people try to portray."

:: How the exchange rate affects shoppers:

An 8GB Ipod Nano priced $149, set a British shopper back £76.18 one year ago, but now costs them £108.22.

A pair of men’s Abercrombie & Fitch jeans priced $79.50, set a British shopper back £40.65 one year ago, but now costs them £57.74.

A double room at the Waldorf Astoria Hotel in New York priced $259, set a British holidaymaker back £132.43 one year ago, but now costs them £188.12.

A one-day adult ski pass in Aspen priced $96, set a British holidaymaker back £49.08 one year ago, but now costs them £69.73.

A one-day admission ticket to Universal Studios Hollywood priced $67, set a British tourist back £34.26 one year ago, but now costs them £48.66.

Note: Calculated using exchange rates for 21/01/08: £1 = $1.9558; 21/01/09: £1 = $1.3768

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4308665/Pound-falls-to-lowest-level-against-the-dollar-since-1985.html

UK banking system so close to collapse

For short and sharp, read long and slow when talking of the R-word

Mervyn King, Governor of the Bank of England, certainly wasn’t pulling his punches in Leeds last night. In a blunt speech Mr King uttered the “R-word”, warning that “it now seems likely that the UK economy is entering a recession”.

By Richard FletcherLast Updated: 8:40AM BST 22 Oct 2008

If that wasn’t bad enough, the Governor provided a rare insight into the worst-case scenarios that the BoE has grappled with in recent weeks. “Not since the beginning of the First World War has our banking system been so close to collapse,” he said.
The speech topped a day of gloomy economic news that included a dire industrial trends survey from the CBI which showed that even if the financial markets are returning to normal, the downturn in the real economy has a lot further to run. Meanwhile, Capital Economics predicted house prices could drop by 35pc, which, if correct, would be the biggest fall ever recorded.
It seems our only hope is that this is a short, sharp recession.
Unfortunately, I even have bad news on that front: the Governor ruled out a “quickie” recession last night, warning that it would be “long, slow haul” before the economy returns to normal.

Arcadia’s debt beats Debenhams’ £1bn
The Bank of England Governor may be gloomy but Sir Philip Green laid on a Champagne breakfast for 125 loyal lieutenants yesterday at the Arcadia headquarters just off Oxford Street. As his senior team tucked into eggs Benedict and bacon (or yoghurt and orange juice for the more health-conscious) Sir Philip unveiled Arcadia’s full-year results and presented a jeroboam of Champagne to the heads of the fashion group’s brands.
Given the carnage on the high street, the billionaire retailer can be rightly proud of the results announced by Arcadia yesterday: a 0.6pc fall in sales and 6.1pc fall in operating profit.
A sterling performance by Topshop finally laid to rest the suggestion that it was former brand director Jane Shepherdson who drove its phenomenal success. Meanwhile, Yasmin Yusuf’s success in reviving Miss Selfridge may leave beleaguered M&S shareholders asking why they didn’t hold on to their former creative director of womenswear.
A short stroll down Oxford Street at Debenhams’ headquarters, Rob Templeman, the department store chain’s chief executive, was taking the red pen to its dividend – which he slashed from 6.3p a share to 3p a share.
Both Debenhams and Arcadia are stealing market share from a battered M&S. Like Arcadia, Debenhams’ 0.9pc fall in like-for-like sales is a (relatively) good performance in the current market.
But no matter how impressive Templeman’s performance, the market has become obsessed by the level of debt in the Debenhams business. With almost identical sales, Sir Philip is servicing £695m of debt at Arcadia, while at Debenhams Templeman is having to juggle just shy of £1bn (a hangover from the leveraged buy-out of the retailer by a private equity group in late 2003).
Yesterday, Templeman laid out his plans to reduce the burden: cutting costs, reining back capital expenditure and asking shareholders to take what is left of the dividend in shares rather than cash.
Templeman has a record of delivering: but slashing the group’s debt will take years, not months. And all the time Sir Philip is busy plotting – eyeing up retail brands including those owned by troubled Icelandic investor Baugur. Not only do his two businesses – Arcadia and Bhs – have relatively conservative borrowings, we can safely assume that Sir Philip still has a large chunk of the £1.2bn dividend he paid himself in 2005.
Its may only be a short stroll down Oxford Street from Arcadia to Debenhams but the two retailers are worlds apart in an environment where cash is king.

Evolution bags a banking bargain

Sir Philip is not the only entrepreneur who has been rummaging around the wreckage that is now Iceland.
Alex Snow, chief executive of Evolution, appears to have bagged a bargain by buying Singer & Friedlander Investment Management from the administrator to failed Icelandic bank Kaupthing.
Evolution has paid just a “few million pounds” for the business, which manages £1.5bn on behalf of 4,000 private clients. In better times, the fund management arm would have sold for closer to £30m (valued on the basis of 3pc of funds under management).
If Evolution’s investment management business – Williams de Broë – can retain the Singer & Friedlander clients, the funds under management will grow by 50pc on the back of the deal.
Until the onset of the credit crunch, Snow had been under pressure from activist shareholders to return the pile of cash the group was sitting on – pressure he largely resisted. Having done so, he is now putting his £150m war chest to good use.
richard.fletcher@telegraph.co.uk

http://www.telegraph.co.uk/finance/comment/richardfletcher/3237854/For-short-and-sharp-read-long-and-slow-when-talking-of-the-R-word.html

Comment:
There are opportunities in this dire economic times.

What's really wrong with Sterling?

What's really wrong with Sterling?
The pound is suffering its worst ever fall in value. Why is it happening and what are the implications? Edmund Conway, Economics Editor, has the answers

Last Updated: 10:13PM GMT 22 Jan 2009

Taking a pounding: UK currency is in crisis
How bad is this fall in the pound? In a word: hideous.

Measured against a basket of other currencies – the best way in this globalised era to test a currency's strength – the pound has fallen in the past year by around a quarter.
This is more than any previous devaluation in the past century – greater even than in 1931, when, under Ramsay MacDonald, the UK was forced to abandon the gold standard and saw the pound plummet by more than 24 per cent against the dollar. Greater than after Black Wednesday and the abandonment of the Exchange Rate Mechanism; worse than in 1967, when Harold Wilson was forced to make an extraordinary televised statement to the nation claiming that the "pound in your pocket" would not be worth any less after his devaluation.
As anyone who has been overseas recently will know, it has fallen from over $2 against the dollar to under $1.40. This week it touched the lowest level since the Plaza Accord of 1985 – in which year the pound very nearly went to parity against the US currency. Against the euro, the pound has slid from €1.35 to just above €1 in the past year.
In practice this means that anyone travelling to the Continent will find it tough to get anything more than a euro for every pound they want exchanged, after the bureau de change has taken its cut and commission.
For Gordon Brown, who mocked the Conservatives in 1992, it is acutely embarrassing. Back then, he said: "A weak currency arises from a weak economy which in turn is the result of a weak Government." This time he is staying conspicuously quiet about the whole thing.

But why is sterling sliding?

In large part because it reflects Britain's economic prospects. The UK is facing a nasty recession – one that is likely to be as bad as any experienced by the Western world. House prices are falling at the fastest ratesince the 1930s, unemployment is on the rise and will soon climb beyond two million, consumer spending is sliding.
In such circumstances, investors are naturally likely to withdraw their money from the UK. On the one hand, they will sell sterling shares and investments since they are likely to fall in value as a result of the recession. On the other, those who invest their cash in the UK will pull it out of the country, since the Bank of England is cutting interest rates as a response to the slump. Any money in sterling in a UK bank account is earning very little interest, so overseas investors calculate they might as well take it elsewhere.

How worried ought we to be?

If the above was all that was happening, not unduly. In a world of floating exchange rates, the falling pound is not merely a symptom of the disease (the recession) but its cure. All else being equal, a weak pound should boost the exports of British companies, since it makes their products cheaper than those of their overseas rivals.
Machinery produced in the north of England is fast becoming cheaper than that produced in eastern Europe. And this goes not just for visible trade – actual physical goods – but for invisible trades such as legal or financial services.
So, although Britain's manufacturing sector has shrunk significantly since the 1980s and 1990s, the comparative value of UK products should nevertheless help boost the economy. The same goes for tourism, which has already picked up significantly as foreigners come to the UK to pick up bargains. London's days as Europe's most expensive city are well behind it.
The problem, however, is that all else is not equal at the moment: the appetite abroad for exports of any type has dried up in a way never before experienced. From Europe to the Americas to Asia, trade has almost entirely seized up as the recession has turned global. And let's not mention financial and legal services – the appetite for which has evaporated.
In the 1990s and the 2000s, successive governments decided to focus the UK's economy on financial services. A decision was taken to put almost all our economic eggs in one basket. Unfortunately, that basket has come crashing to the ground.

So is this now a full-blown sterling crisis?

Until recently, it wasn't a crisis. There are, broadly speaking, two types of devaluation – one benign, the other far less so. The good one is much as described above – a competitive devaluation in the pound which, over time, provides a cure. After the pound fell in 1992, it ushered in years of recovery and then prosperity for the economy.
The bad version is a full-scale crisis – a run on the pound. It is a vote of no-confidence in a country's economic policies, and occurs when investors start pulling their cash out of the UK not because of a temporary period of recession but because they are worried about the direction the economy is taking (over years and decades rather than months).
In the months up until this week it was possible to argue that this represented a competitive devaluation, and would be a boon for exporters. All of that changed on Monday. Following Gordon Brown and Alistair Darling's announcement of a second bail-out package for struggling banks, the pound suffered what can be described as a minor run. Investors took fright that the UK was drawing closer to insolvency, and as a response sold off their stocks of government debt.
It is difficult to overstate the significance of this. Britain's power and prosperity since the earliest days of the Union have been founded on its reputation for being a good risk.
Whereas other countries, such as Argentina and Russia, have occasionally defaulted on their debts, Britain's government has always been among the best borrowers in the world. For the first time in decades this is being questioned.
The rumour around the market this week was that Standard & Poor's, a ratings agency which tells traders what has and does not have the stamp of approval, was set to downgrade Britain's government sovereign debt. The agency has since denied this, but the UK fulfils many of the criteria for such a humiliating decision.

Does it really matter if Britain's creditworthiness comes under question?

Yes – immensely. Britain has a large current account deficit – of about £7.7 billion. This means we, as a nation, spend more money than we generate each year. This is no problem while we can borrow the difference, but that £7.7 billion chunk has to come from overseas investors. Should they stop lending to the UK, Britons would face a sudden, painful jolt and their living standards would fall even faster and more painfully than they are at the moment.
The Government would have to seek assistance from the International Monetary Fund which would, most likely, dole out a baleful dose of economic medicine – higher interest rates, lower government spending and immediate austerity.
Although, in the long run, Britain does need to borrow less and save more, such an adjustment should ideally take place over years, not weeks.

Isn't this all really the fault of the bankers as well as the Government?

Indeed it is. Now that the majority of the banking system is effectively nationalised (and the Government has promised to insure the nastiest debts of the remaining private banks) the taxpayer is effectively standing behind another massive liability. The banking system has about $4.4 trillion of foreign debts, and most analysts predict that around £200 billion of these could default.
What scared investors this week was the sudden realisation that the Government, rather than the banks, will have to pay the bill. The UK, unlike Iceland, does not have the luxury of being able to default on those foreign debts (remember the fracas when Britons faced losing their savings in Icelandic banks?)
Were the UK to do the same as Iceland, the size of Britain's liabilities are such that it would trigger an international panic and financial meltdown worse than when Lehman Brothers collapsed last year.

This all sounds unremittingly gloomy. Is there any solution?

Mainly to hope that the economic medicine served up by the Bank of England and its fellow central banks does the trick. As long as house prices are falling and unemployment is rising, the liabilities of the Government will swell and the pound will remain weak. But when, eventually, the economic backdrop improves, so should the financial outlook, and, eventually, the pound.
However, there is little hope of returning to the heady days of a near-80p euro and a $2 pound. The pound was significantly stronger than it ought to have been over the previous decade. It is probably undervalued now, and if all goes well it should bounce back in the coming years.
However, everything now depends on trust: that trust will return to the beleaguered financial system; that investors will start to trust the Government again and that Britons trust that there will be life after the recession.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4318572/Whats-really-wrong-with-Sterling.html

World crisis deepens as downturn bites in Asia

World crisis deepens as downturn bites in Asia

Grim economic news from China and Japan showed the global crisis hitting ever harder Thursday, burning Asia's champion exporters while data from the United States signalled more pain to come.
China's powerhouse economy slowed dramatically at the end of 2008, dragging growth of the world's third-largest economy to a seven-year low, official data showed, in a striking sign of the current downturn's strength and reach.
Japan meanwhile warned it was facing a two-year recession and announced new measures to repair battered credit markets after announcing a 35-percent plunge in exports in December.
"Exports tumbled so much that you cannot believe your eyes," said Naoki Murakami, chief economist at Monex Securities in Japan.
After breathtaking economic growth in recent decades, China had been widely tipped to ride out the world economic storm that has driven the world's biggest economies into recession.
But with the Asian giant now gravely suffering too, reporting just 6.8 percent growth in the last quarter of 2008, signs emerged on Thursday of a knock-on effect, with Australia warning of the impact on its own prospects.
"The Chinese boom that supercharged Australia's economy over the past five to seven years is receding rapidly," Australia's Finance Minister Lindsay Tanner told reporters.
South Korea said its economy was in the worst shape since the East Asian financial crisis a decade ago while Singapore announced a 13-billion-dollar (10-billion-euro) stimulus package and said it would tap its vast financial reserves for the first time.
US data released Thursday showed unemployment claims hit a 26-year high and housing construction fell to half-century lows, highlighting the depths of the recession facing the new administration of Barack Obama.
"The underlying trend in (jobless) claims is still upwards and we have no hope that the peak is anywhere near," said Ian Shepherdson, chief US economist at High Frequency Economics.
"The corporate sector is rolling over and we probably have not yet seen many job losses stemming from the sudden collapse in international trade."
On the industrial front, US software giant Microsoft said on Thursday it was cutting up to 5,000 jobs over the next 18 months due to "the further deterioration of global economic conditions."
Italy's national auto champion, Fiat, slashed its 2009 forecasts due to slumping demand and said it would not pay shareholders a 2008 dividend.
And in Helsinki Nokia, the world's leading mobile phone maker, reported a near 70 percent drop in its fourth-quarter net profit.
In Europe, meanwhile there were fresh signs of upheaval in the financial sector, where shares in troubled banks faced more pressure.
Belgian authorities moved to bail out lender KBC, providing up to 3.5 billion euros, and Germany was working on a new rescue package for its banks as last year's 480-billion-euro effort failed to get them lending again.
The financial crisis showed it had further to run as Portugal on Wednesday followed Spain and Greece in having its sovereign debt downgraded by the ratings agency Standard and Poor's.
Some fear such downgrades could increase strains in the 16-nation eurozone where investors are discriminating between weaker and stronger debtors, with powerhouse Germany paying less interest on its bonds than the rest of Europe.
US stocks swung lower Thursday after the jobless and construction figures and amid persistent worries on company earnings. The Dow Jones Industrial Average lost 2.20 percent in early trade.
In Europe, London's FTSE 100 index closed down 0.19 percent. Paris fell 1.24 percent, while Frankfurt lost 0.98 percent.
Asian stocks rose Thursday in a technical bounce despite the miserable economic data.

http://news.my.msn.com/topstories/article.aspx?cp-documentid=2210110

US: More Pain Ahead

APLayoffs spike, housing tumbles; outlook worsens

Thursday January 22, 4:42 pm ET
By Jeannine Aversa, AP Economics Writer

Worse-than-expected reports on jobless claims, housing further dim outlook, challenge Obama

WASHINGTON (AP) -- The number of newly laid-off Americans filing jobless claims and the pace of home construction both posted worse-than-expected results in government data released Thursday, lending urgency to the economic recovery plan President Barack Obama and Congress are scrambling to advance.
The latest batch of economic news cemented fears that the recession, already in its second year, will drag on through much of 2009.
The reports "paint a bleak economic landscape ahead," said Stuart Hoffman, chief economist at PNC Financial Services Group.
And the furious pace of layoffs continued Thursday, with Microsoft Corp. saying it will slash up to 5,000 jobs over the next 18 months. Chemical maker Huntsman Corp. will ax 1,175 jobs this year and will get rid of an additional 490 contractors. Those -- as well as other employers -- have seen customer demand wane and are cutting costs to survive the fallout.
"The corporate sector is rolling over, and we probably have not yet seen many job losses stemming from the sudden collapse in international trade," warned Ian Shepherdson, chief U.S. economist at High Frequency Economics. "The labor market remains a disaster area."
Wall Street ended a volatile trading day sharply lower following the worse-than-expected economic data, concerns about the nation's banks and disappointing results from Microsoft. The Dow Jones industrial average lost more than 105 points.
On Capitol Hill, House Democrats rolled up their sleeves to nail down pieces of Obama's $825 billion stimulus package -- a blend of tax cuts and increased government spending that includes boosting unemployment benefits-- with the goal of a floor vote next week.
And the Senate Finance Committee cleared Obama's nomination of Timothy Geithner to be Treasury secretary -- despite what the nominee called "careless" and "avoidable" tax mistakes. The full Senate still must clear Geithner, president of the Federal Reserve Bank of New York, before he can take office.
Already Geithner is helping shape the Obama administration's new plan to bust through the debilitating credit and financial crises that are aggravating the recession. The package -- likely to be unveiled in a few weeks-- may include a program to mop up bad mortgages and other toxic assets so banks would be in a better position to lend money more freely.
On the layoffs front, first-time applications for unemployment benefits jumped last week by 62,000 to 589,000, the Labor Department reported. That was much more than the 540,000 tally economists expected. It left claims matching a 26-year high reached four weeks ago, although the work force has grown by about half since then.
Part of the rise was blamed on a backlog of claims that piled up in recent weeks as several states experienced computer crashes from a crush of filings, a government analyst said.
The number of unemployed people continuing to draw jobless benefits soared by 97,000 to 4.6 million. That figure, too, was above analysts' expectations, and was up considerably from a year ago, when 2.7 million people were receiving such aid. The pickup shows that those out of work are having trouble finding a new job.
Some economists believe the number of people continuing to draw unemployment benefits could rise to 5.5 million -- possibly more -- this year even if a new stimulus package is enacted.
On top of the 4.6 million covered by the regular unemployment insurance program, another 2 million Americans requested benefits under an emergency extension authorized by Congress last year. But the 2 million figure is not seasonally adjusted and is volatile.
Obama's stimulus package -- which is running into Republican resistance -- includes plans to extend and boost unemployment benefits, give states $87 billion to deal with Medicaid shortfalls and help unemployed people retain health care. Tax credits for workers, tax cuts for businesses and money for public works projects, such as road and bridge construction, also are being put forward.
Meanwhile, the miserable state of the U.S. housing market was in full view Thursday, and the outlook remains dim.
The Commerce Department reported that new-home construction plunged 15.5 percent in December to an annual rate of 550,000 units, an all-time low, capping the worst year for builders on records dating back to 1959. Last month's performance was weaker than economists expected, and shattered the previous record low set in November.
"The extent of the decline was breathtaking," said Joel Naroff, president of Naroff Economics Advisors. "Home builders were simply sitting around watching the grass grow, and conditions are not likely to change soon."
For all of last year, the number of housing units that builders broke ground on totaled just over 904,000, also a record low. That marked a huge 33.3 percent drop from the 1.355 million housing units started in 2007. The previous low was set in 1991.
The report also showed that applications for building permits -- considered a reliable sign of future activity -- sank to a rate of 549,000 in December, a 10.7 percent drop from the previous month.
Rising defaults, tighter lending standards and fear about the housing market's future have sidelined buyers, an absence felt acutely by homebuilders such as D.R. Horton Inc., Pulte Homes Inc. and Centex Corp.
The collapse of the once high-flying housing market has been devastating to the United States' economic health.
Its spreading fallout has contributed to big pullbacks by consumers and businesses alike, plunging the economy into a painful recession now in its second year.
The Obama administration wants to ramp up efforts to stem skyrocketing home foreclosures, which have dumped even more properties on an already crippled market.
The Federal Reserve has taken a number of extraordinary steps with the hope of providing some relief. It is buying certain types of mortgage securities and has slashed a key interest rate to a record low of between zero and 0.25 percent. To help brace the economy, the Fed is expected to hold rates at that level at its meeting next week and probably for the rest of this year.
In other housing-related news, rates on 30-year mortgages climbed above 5 percent this week, ending a five-week streak at record low levels. Average rates on 30-year fixed mortgages rose to 5.12 percent this week, from 4.96 percent last week, which was the lowest since Freddie Mac started its survey in April 1971, the mortgage giant reported.
Builders and economists are skeptical about the prospects of a housing turnaround. Unemployment last month hit a 16-year high of 7.2 percent and is expected to march upward this year -- a situation that can put stresses on existing home owners and make it less likely new buyers will stream into the market.
Against this backdrop, Patrick Newport, economist at IHS Global Insight, summed up the outlook: "More pain ahead."

http://biz.yahoo.com/ap/090122/economy.html

Firing John Thain Should Be Ken Lewis's Last Act At Bank Of America (BAC)

Firing John Thain Should Be Ken Lewis's Last Act At Bank Of America (BAC)

Posted Jan 22, 2009 02:07pm EST by Henry Blodget in Newsmakers, Banking
Related: BAC, MER, ^DJI

From Clusterstock, Jan. 22, 2009:

Ken Lewis has now successfully focused some of the outrage about the destruction of Bank of America (BAC) on John Thain.
Thain was the one responsible for that $15 billion loss. Thain was the one who approved $15 billion of bailout-funded bonuses. Thain was the one who spent $1.2 million decorating his office. And now, a month after the bonus and loss outrages, Ken Lewis has finally fired John Thain.
As he should have. Someone has to take direct responsibility for that loss, the taxpayer-funded bonuses, and the humiliation of Ken Lewis. And John Thain's that man.
But don't let this distract you from who is ultimately responsible.
No one forced Ken Lewis to buy Merrill Lynch--the decision that, more than any other, destroyed Bank of America shareholders. No one forced Bank of America to approve the $15 billion in bailout-funded bonuses Merrill just paid to its workforce.
John Thain isn't responsible for those decisions. Ken Lewis is. If Bank of America's board doesn't finally acknowledge this and throw him out, the board should be thrown out, too.
For more news, go to Clusterstock.

http://finance.yahoo.com/tech-ticker/article/162333/Firing-John-Thain-Should-Be-Ken-Lewis

Broken Financials: Are Bank Stocks Going to Zero?

Broken Financials: Are Bank Stocks Going to Zero?

Posted Jan 22, 2009 03:39pm EST by Aaron Task in Investing, Banking, Housing
Related: XLF, BAC, JPM, FITB, NTRS, C, ^DJI


After hitting a 14-year low Tuesday, the financial sector enjoyed a reprieve Wednesday on news of some big purchases by insiders, namely JPMorgan CEO Jamie Dimon and Bank of America's Ken Lewis.
But the sector was back in the dregs Thursday on news of John Thain's ouster from Bank of America (and ridiculous spending spree), change at the very top of Citigroup and a big loss at Fifth Third Bancorp.
But with the financial sector now less than 10% of the S&P 500's market-cap (down from 22% at its peak) and so much bad news "priced in," there have to be bargains in the banks, right?
Wrong! says John Roque, technical analyst at Natixis Bleichroeder.
While he can find at least one bank stock worth investigating, Roque believes investors would be wise to avoid banks, homebuilders and other housing-related stocks for the foreseeable future.
"Those sectors have been broken and are not going to come back for a long time," he said, predicting it will be a very long time before these stocks return to their peaks, if ever.
Disclosure: Roque has no positions in any of the stocks mentioned in the accompanying video.



http://finance.yahoo.com/tech-ticker/article/162574/Broken-Financials-Are-Bank-Stocks-Going-to-Zero?tickers=XLF,BAC,JPM,FITB,NTRS,C,%5EDJI

Social risk

Social risk

Social risk is difficult to quantify. It reflects the potentially adverse impact changing public attitudes can have on a firm’s ability to sell its product.

It is really a form of business risk that impacts a specific firm or industry.
· No one likes ugly smoke-stacks, for instance. Local opposition to apparent pollution might lead to a boycott of company products.
· Past examples of social risk issues include nuclear power, the spotted owl, furs, cigarette advertisements, concern with cholesterol, and the gasoline consumption of SUVs.

According to the Social Investment Forum, there is more than $2 trillion invested in socially screened portfolios in the United States. This is a 47% increase since 1999.

While there are various social screening criteria, avoiding tobacco investments is the most common.

Other criteria appearing in more than half of the institutional screens are related to
· the environment,
· human rights,
· employment/equality,
· gambling,
· alcohol, and
· weapons.

Less common criteria involve
· labour relations,
· animal testing/rights,
· community investing,
· community relations,
· executive compensation,
· abortion/birth control, and
· international labour standards.

Social investing does not necessarily avoid things; sometimes it seeks things out, and not always with good outcomes.
· In 1990 the state of Connecticut Employee Pension Plan, under political pressure, invested $25 million in the stock of Colt Firearms in order to keep 925 local jobs from being lost. Colt filed for bankruptcy 2 years later. This government attempt to help one group of citizens wound up hurting another, as the entire investment was lost.


Also read: Understanding Risk
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk