The George W. Bush administration handed 125 billion dollars to nine of Wall Street's richest banks, but this will do little to help the economy that is crumbling around ordinary U.S. citizens, independent experts and activists say.
"There is no way a modern economy can function without good roads, telecommunication, rail transport and an educated labour force," Allan Mendelowitz, a member and former chairman of the Federal Housing Finance Board, told IPS.
Bush's new Office of Financial Stability, led by Neel Kashkari, sealed a deal Tuesday to provide the billions, plus 125 billion dollars more for small banks, to encourage them to start lending to each other and the world's biggest businesses again.
A freeze in lending, related to the banks' risky trading ventures, has slowed the global economy, rocked stock markets around the world, and tightened lending throughout the U.S. economy.
"We're not proud of all the mistakes that were made by many different people, different parties, failures of our regulatory system, failures of market discipline that got us here," said Treasury Secretary Henry Paulson Thursday in an interview on Fox Business Network.
High anxiety on Wall Street won't subside this week as the deepening credit crunch pushes the global economy into recession, and corporate profits increasingly become an afterthought as investors scramble to raise enough cash to weather the credit crisis.
On the heels of a panic-riddled sell-off that caused the Dow industrials and the S&P 500 to plummet for eight days in a row, finance ministers and central bankers from the Group of Seven met on Friday -- followed by meetings of the Group of 20, International Monetary Fund, World Bank officials and European leaders over the weekend -- to discuss jammed credit markets and the staggering global economy.
While corporate earnings season gets into full swing this week, results will likely be on the back burner as investors struggle to see through the fog of fear that has engulfed the market.
Wall Street joined in a worldwide cascade of despair Monday over the financial crisis, driving the Dow Jones industrials to their biggest loss ever during a trading day. Even a big afternoon rally failed to keep the Dow from its first close below 10,000 since 2004.
The sell-off came despite the $700 billion U.S. government bailout package, which was signed into law Friday after two weeks in which traders had appeared to count on the rescue as their only hope to avoid a market meltdown.
At its worst point, the Dow was down more than 800 points, an intraday record. The stock market rallied during the final 90 minutes of the trading day, and the Dow finished down about 370 points at 9,955.50.
The AP is reporting that consumer confidence fell in January.
Consumer confidence fell sharply in January on worries over deteriorating business conditions and a weakening job market, a business research group said Tuesday.
The New York-based Conference Board said that its Consumer Confidence Index dropped to 87.9 in January from a revised 90.6 in December. That put it back to about where it was in November, when it registered 87.8.
The January reading was just a tad below the 88 expected by Wall Street analysts, according to Thomson/IFR.
The index, which measures how consumers feel now about the economy, has been weakening since July, suggesting that wary consumers could retrench financially. Any cut back on consumer spending could weaken the economy further.
Wall Street didn't take kindly to the economic stimulus plan announced earlier today.
Wall Street resumed its downward trek Friday as skittish investors, unable to hold on to much optimism about the economy, drew little comfort from President Bush's stimulus plan.
Investors had already pulled back from a big early gain, with the major indexes trading mixed as Bush began to speak. By the time the president finished announcing a plan for about $145 billion worth of tax relief, the indexes were well into negative territory.
"It's disappointed in the size of the economic growth package. Wall Street's showing its displeasure," said Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh. "Honestly, I think the institutional investors understand the limits to the government's ability to enact economic change."
The Dow Jones industrial average, up more than 180 points in morning trading, was down 85.11, or 0.70 percent, at 12,074.10. The Dow plunged 306 points Thursday amid deepening pessimism about the economy.
The broader Standard & Poor's 500 index fell 15.40, or 1.16 percent, to 1,317.85, while the technology-focused Nasdaq composite index fell 10.38, or 0.44 percent, to 2,336.52.
The unemployment rate surged to 5 percent in December as the economy added a meager 18,000 jobs, the smallest monthly increase in four years, the Labor Department reported on Friday.
Economists viewed the report as the most powerful indication to date that the United States could well be falling into a recessionary downturn. Evidence of widening unemployment heightened anticipation that the Federal Reserve would further cut interest rates this month, perhaps by an unusually large half a percentage point, in a bid to prevent the economy from sliding into the muck.
“This is unambiguously negative,” said Mark Zandi, chief economist at Moody’s Economy.com. “The economy is on the edge of recession, if we’re not already engulfed in one.”
A recession is typically defined as an extended period of at least several months during which economic activity shrinks and unemployment rises.
The swift deterioration in the job market resonated as a warning sign that troubles once confined to real estate and construction are spilling into the broader economy, threatening the ability of American consumers to keep spending with customary abandon.
On Wall Street, the report led to a big sell-off that sent the Dow Jones industrial average plunging nearly 2 percent.
It appears that Wall Street is nervous about the upcoming year.
As 2007 comes to a close, Wall Street is almost as jittery as it was over the summer, when worries about the housing slump and banks' losing bets on mortgages first came to a head.
Investors know more now about how much exposure financial institutions have to bad loans — quite a lot — but they remain uncertain about how the credit crisis of 2007 will hurt the economy in 2008. Market participants will be paying close attention to this week's economic data, particularly the monthly report on employment, seen as the most important factor in preventing housing woes from crippling consumers.
Last week, the Dow Jones industrial average ended 0.63 percent lower, the Standard & Poor's 500 index finished down 0.40 percent, and the Nasdaq composite index fell 0.65 percent.
The three major indexes will finish the year with gains, barring any extraordinary drops Monday, but problems with credit, housing and the financial sector are likely to keep Wall Street nervous at least early on in 2008.
It's been a dismal fourth quarter for the stock market, and the "Santa Claus rally" Wall Street often launches at the end of every year failed to gain steam. The Dow has fallen 3.8 percent since the end of September, when many investors were driving the blue-chip index toward record heights and betting that the worst of the credit crunch was over.
This might have been one of Wall Street's most dismal years in a decade, but that hasn't stopped bonus checks from rising an average of 14 percent.
Four of the biggest U.S. investment banks — Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. — will pay out about $49.6 billion in compensation this year. Of that, bonuses are traditionally estimated to represent 60 percent, or almost $30 billion.
But that might not sit well with investors who held on to investment bank stocks this year — and watched them plunge by up to 45 percent. Investment houses have been slammed by the credit crisis, and top executives this past week said they've yet to see a bottom.
Further, some of those executives have even agreed to forgo their bonuses this year to reflect the poor performance. Morgan Stanley CEO John Mack and Bear Stearns CEO Jimmy Cayne won't be collecting their payouts.
Mack received no cash bonus a year ago but received stock and options worth an estimated $40.2 million, well above his $800,000 base pay. Cayne received a bonus of $33.6 million in 2006 and base pay of $250,000.
Goldman Sachs CEO Lloyd Blankfein reportedly is in line for a bonus of up to $70 million this year, as the nation's largest investment bank has largely navigated past any mortgage-related losses. Lehman Brothers' CEO Richard Fuld was granted a $35 million stock bonus for 2007, up 4 percent from last year.
There had been some predictions the increase in bonuses would have been significantly higher. However, layoffs and top managers giving up their bonuses have curtailed that.
Meanwhile we peons are told to pull ourselves up by the bootstraps and learn how to live within our means. Bonuses? Please! Maybe a McDonald's gift certificate book if we are lucky.
Even as Bush touts the 'strong' economy today, others have quite a different view.
U.S. corporate profits are in a recession, and the entire economy might not be far behind.
Slower sales and higher costs for energy and labor are forcing companies like Bear Stearns and Pitney Bowes to reduce spending and hiring. Their efforts to keep earnings from eroding even further raise the risk that the U.S. economy, already weakened by the steepest housing slide since 1991, could shrink sometime next year.
"The earnings recession has already arrived," said David Rosenberg, North America economist in New York for Merrill Lynch. "We are going to see an economic recession in '08."
Corporate profits, as measured by the Commerce Department, fell at an annual rate of $19.3 billion in the third quarter from the second, as domestic earnings dropped by $41.2 billion.
The fourth quarter may be an even bigger bust.
"In the third quarter, the tide shifted, and for the worse," said Joseph Quinlan, chief market strategist for Bank of America. "The domestic profits squeeze is in its early stages and will be severe enough to overwhelm strong foreign earnings."
Wall Street is cheering the latest hint of a new interest rate cut by Fed chief Ben Bernanke. Stocks are up! If you are like me, Wall Street gains hardly impact my day-to-day existence as I don't have a million bucks tucked away in stocks. The downside, of course, to a new rate cut is that the dollar will continue to tumble.
The dollar slid against the European single currency on Friday after US Federal Reserve chief Ben Bernanke stoked expectations of another reduction in US borrowing costs, analysts said.
In early European trading, the euro rose to 1.4752 dollars from 1.4742 late on Thursday in New York. At the end of last week, the euro had hit a record 1.4967 dollars.
There has been a flurry of stories about the faltering economy and the reckless way in which many in the financial sector have operated for quite some time. I can personally attest to the bad economy as my own financial situation has declined so much in recent years that I don't even want to think about the 'good old days' anymore. I came across this great article by Rodrigue Trembley, a Canadian economists, who presents a good picture of what is going on today.
"If these items [promised benefits in Social Security, Medicare, Veterans Administration and other entitlement programs] are factored in, the total [debt] burden in present value dollars is estimated to be about $53 trillion. Stated differently, the estimated current total burden for every American is nearly $175,000; and every day that burden becomes larger."
David Walker, comptroller general of the United States
"The economic forces driving the global saving-investment balance have been unfolding over the course of the past decade, so the steepness of the recent decline in long-term dollar yields and the associated distant forward rates suggests that something more may have been at work."
Alan Greenspan, former Fed Chairman, July 20, 2005
“The subprime black hole is appearing deeper, darker and scarier than they [the banks] thought. They’ve worked through ... about 40 percent of the backlog of the leveraged loan side, and there’s definitely some signs of thaw there.”
Tony James, president and CEO of Blackstone Group LP
The global dollar-based financial system is in crisis and is threatening the prosperity and stability of many economies. Financial excesses of all kinds have undermined its legitimacy and its efficiency. The U.S. dollar is losing its preeminence as the main international reserve currency while many banks are caught in the turmoil of the subprime credit crisis.
The overall background is the unprecedented real estate bubble that took place worldwide, from 1995 to 2005. In the United States, for example, owner-occupied home prices increased annually by an average of about 9 percent. The market value of the stock of owner-occupied homes in the U.S. rose from slightly less than $8 trillion in 1995 to slightly more than $18 trillion in 2005. It has been contracting ever since, confirming the working of the 18-year Kuznets real estate cycle, which has gone from the top of 1987 to the 2005 top.
What makes this period especially dangerous is the fact that the average 54-year long inflation-disinflation-deflation Kondratieff cycle is also at play, having begun in 1949 after prices were unfrozen. World inflation then rose for twenty years, until 1980, which was followed by a period of disinflation under the Volcker Fed. The entry of China into the World Trade Organization (WTO) on December 11, 2001, with its abundant labor and low wages, unleashed strong deflationary forces worldwide. This in turn led to lower inflation expectations paving the way for the Greenspan Fed to keep interest rates abnormally low.
Persistent low interest rates and low inflation expectations led to a binge in borrowing and to a vast increase in market valuation, not only in real estate but also in stocks and bonds. Banks and other mortgage lending institutions took advantage of the opportunity to introduce some financial innovations in order to finance the exploding mortgage market. These innovations resulted in the severing of the traditional direct link between borrower and lender and the reduction in the lending risk normally associated with mortgage loans.
Thus, with the connivance of the rating agencies and of the Federal Reserve System, large banks invented new financial products under various names such as "Collateralized Bond Obligations" (CBOs), "Collateralized Debt Obligations" (CDOs), also called "Structured Investment Vehicles" (SIVs), which had the characteristics of unfunded short term commercial paper. In the residential mortgage market, for example, mortgage brokers and retail lenders would sell their mortgage loans to banks, which in turn would package them together and slice them into different classes of mortgage-backed securities (RMBS), carrying different levels of risk and return, before selling them to investors.
Indeed, these new financial instruments were the end result of a process of "asset securitization" and were slices of bundles of loans, not only of mortgage loans but also of credit cards debts, car loans, student loans and other receivables. Each slice carried a different risk load and a different yield. With the blessing of rating agencies, banks went even one step further, and they began pooling the more risky financial slices into more risky bundles and divided them again to be sold to investors in search of high yields.
By selling these new debt instruments to investors in search of high yields and higher yields, including hedged funds and pension funds, banks were doubly rewarded. First, they collected handsome managing fees for their efforts. But second, and more importantly, they unloaded the risk of lending to the unsuspected buyer of such securities, because in case of default on the original loans, the banks would be scot-free. They had already been paid and had been released from the risk of default and foreclosure on the original loans.
The banks' residual role was to collect and distribute interest, as long as borrowers made their interest payments. But if payments stopped, the capital losses incurred because of the decline in the value of unperforming loans would instead be carried by the investors in CBOs and CDOs. The banks themselves would suffer no losses and would be free to use their capital bases to engage in additional profitable lending. In fact, the end of the line investors became the real mortgage lenders (without reaping all the rewards of such risky loans) and the banks could reuse their capital to pyramid upward their loan operations. These were the best of times for banks and they gorged themselves without restraint. Some of them paid their employees tens of billions of dollars in year-end bonuses.
Indeed, and it is here that the Fed and other regulatory agencies failed, first line mortgage lenders became more and more aggressive in their lending, with the full knowledge that they could profitably unload the risk downstream. This explains the expansion of the "subprime" mortgage market where borrowing was done with no down payment, no interest payments for a while and no questions asked as to the income and creditworthiness of the borrower. These were not normal lending practices. Such Ponzi schemes could not last forever. And when housing prices started to decline, foreclosures also increased, thus shaking the new financial house of cards to its foundations. Banks became the reluctant owners of some of the foreclosed properties at very discounted values.
Why then are so many banks in financial difficulties, if the lending risk was transferred to unsuspecting investors? Essentially, because when the housing boom burst, the banks' inventory of unsold "asset-backed securities" was unusually high. When the piper stopped playing and investors stopped buying the newly created risky investments, their value plummeted overnight and banks were left with huge losses still not fully reflected in their financial balance sheets. Indeed, banks that did not unload their stocks of packaged mortgages were forced to accept ownership of foreclose properties at very discounted values. With little or no collateral behind the loans, bad-debt losses became unavoidable.
Since nobody knows for sure the value of something which is not traded, it will take months before banks come to terms with the total losses they have suffered in their stocks of unsold pre-packaged "asset-based securities". It is more than a normal "liquidity crisis" or "credit crunch" (which results when banks borrow short term and invest in illiquid long term assets); it is more like a "solvency crisis" if the banks' capital base is overtaken by the disclosure of huge financial losses incurred when the banks are forced to sell mortgaged assets in a depressed real estate market.
This is this financial and banking mess which is unfolding under our very eyes and which is threatening the American and international financial system. There are four classes of losers. First, the home buyers who bought properties at inflated prices with little or no down payment and who now face foreclosure. Second, the investors who bought illiquid mortgage-backed commercial paper and who stand to lose part or all of their investments. Third, the holders of bank stocks who profited when the system worked smoothly but who now face declining stock values. And, finally, anybody who stands to fall victim, directly or indirectly, to the coming economic slowdown.
Rodrigue Tremblay is a Canadian economist who lives in Montreal; he can be reached at rodrigue.tremblay@yahoo.com
At a hearing today, ex EPA chief Christie Whitman was on the hot seat regarding the EPA's handling of the immediate aftermath and cleanup of Ground Zero. Decisions that were made by that agency and others in the Federal Government have since directly affected the health and safety of rescue workers and residents there following the September 11, 2001 attacks.
As you may remember, the EPA certified on September 12th that the air quality in and around Ground Zero posed no health risks and that the cleanup operations should proceed as quickly as possible. They also assured area residents that it posed no health risks for them to return to their homes. This at a time when reliable information on air quality was not available and asbestos levels were known to be three times higher than national standards.
We now know that these statements were false and the health risks were, sadly, all too real. A study conducted by the Mount Sinai Medical Center in Manhattan has revealed that almost 70% of the rescue workers at Ground Zero suffer from various respiratory ailments . There has also been the rise in cases of sarcoidosis (a lung scarring disease) that shows up in firefighters at five times the normal rate. As Thomas Cahill, a professor of physics and atmospheric sciences, who was one of those called in to analyze the air around Ground Zero proclaimed, "You had the workers working on top of a huge incinerator in the rush to get Wall Street going again, it was really dumb."
To get an idea of just how bad things are, take a look at this excerpt from Ground Zero rescue worker Sgt. Matthew Tartaglia in an interview about the health hazards he and others experienced:
"Most everybody has chronic sinusitis. They have ringing in the ears. Some people’s teeth and gums are bothering them. In the last year, I’ve lost seven teeth. They have just broken while I was eating. I have three or four more teeth that are just dying. And my dentist says, “I’ve never seen anything like this in someone who’s healthy. There is something wrong with you but I cannot find what it is. And I can’t stop it either.”
Back to Capitol Hill. Ms Whitman testified that the EPA and others in the federal government took all precautions and acted in an appropriate fashion. She lambasted critics and stated that they engaged in a campaign of "misinformation, innuendo and downright falsehoods.'' Ms Whitman insists that her statements that the "air is safe'" were aimed at those living and working near ground zero, not those who actually toiled on the toxic pile that included asbestos. "Was it wrong to try get the city back on its feet as quickly as possible in the safest way possible? Absolutely not,'' she said.
Does anyone stop to wonder why the government could not at least have given people just a simple warning to take precautions until further information could be obtained? Why was it so important to ignore the reality and proceed as if there were no problems with air quality? The decisions made then have affected thousands of people and their daily suffering attest to this fact. Someone must be held accountable!
