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Found 27 results

  1. (Courtesy of The Financial Post) It is pretty easy you sign up with your credit card or debit and few days later you get your gold delivered to your front door I read somewhere else you can buy up to $6000 CDN worth of Gold per day so almost 6 ounces. Scotia Mocatta
  2. Harper disagrees with pessimistic report on Canadian housing market Wed Sep 24, 1:46 PM Conservative Leader Stephen Harper says he disagrees with a report by brokerage firm Merrill Lynch that warns Canada could be headed for a housing and mortgage meltdown similar to the one that has devastated the United States economy. The report, issued Wednesday by Merrill Lynch Canada economists David Wolf and Carolyn Kwan, said many Canadian households are more financially overextended than their counterparts in the U.S. or Britain. They said it's only a matter of time before the "tipping point" is reached and the housing and credit markets crack in Canada. "I don't accept that conclusion, not at all," Harper told reporters on tour in British Columbia. "We have seen the housing market and the construction market much stronger in Canada than in the U.S.," he said. Harper said Canadian financial institutions have also taken a different approach to lending than their American counterparts. "We don't have the same situation here with the mortgages as was the case in the U.S. with the subprime mortgages there," he said. "So, therefore, I think that our market is in a much stronger position." The report acknowledges that the analysis is more pessimistic than the prevailing view. Many economists have been saying that Canada's housing and banking sectors are much more stable than their American counterparts, and will likely slow down but not crash. But Merrill Lynch Canada - whose U.S. parent is one of the biggest victims of a crisis in financial markets arising from the American housing and mortgage meltdown - said Canadians should be wary. Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007, which is more than households in the U.K. and not far off the peak reached by U.S. households in 2005. The report also said housing prices are now falling and inventories of unsold homes are rising sharply in Canada, suggesting that this market turnaround will not be a transitory phenomenon. However, the prevailing view is that Canada's lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis. In addition, a recent study showed that Canadian residential properties are not overvalued in most cities. With files from the Canadian Press lien
  3. Cities Collapsing throughout the USA The Coming Depression April 7, 2009“With enough abandoned lots to fill the city of San Francisco, Motown is 138 square miles divided between expanses of decay and emptiness and tracts of still-functioning communities and commercial areas. Close to six barren acres of an estimated 17,000 have already been turned into 500 “mini- farms,” demonstrating the lengths to which planners will go to make land productive. The city, like the automakers, has to shrink to match what’s left, said June Thomas, a professor of urban and regional planning at the University of Michigan in Ann Arbor. “The issue is how,” she said. “There’s no vision.” “People are moving out of the city, trying to find work,” said David Martin of Wayne State University’s Urban Safety Program. Those who stay “can’t afford to move out.” “Property abandonment is getting so bad in Flint that some in government are talking about an extreme measure that was once unthinkable — shutting down portions of the city, officially abandoning them and cutting off police and fire service. … [Mayor] Brown said that as more people abandon homes, eating away at the city’s tax base and creating more blight, the city might need to examine “shutting down quadrants of the city where we (wouldn’t) provide services.” He did not define what that could mean — bulldozing abandoned areas, simply leaving the vacant homes to rot or some other idea entirely.” “Cul-de-sac neighborhoods once filled with the sound of backyard barbecues and playing children are falling silent. Communities like Elk Grove, Calif., and Windy Ridge, N.C., are slowly turning into ghost towns with overgrown lawns, vacant strip malls and squatters camping in empty homes.” “In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). … But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.”
  4. The banking system in eastern Europe is increasingly vulnerable to a severe economic downturn, Moody’s has warned, saying western European banks with local subsidiaries are at risk of ratings downgrades. “The relative vulnerabilties in east European banking systems will be exposed by an increasingly tougher operating environment in eastern Europe as a result of a steep and long economic downturn coupled with macroeconomic vulnerabilities,” Moody’s said in a report. The ratings agency said it expected “continuous downward pressure on east European bank ratings” because of deteriorating asset quality, falling local currencies, exposure to a regional slump in real-estate and the units’ reliance on scarce short-term funding. Eurozone banks have the largest exposure to central and eastern Europe, with liabilities of $1,500bn – about 90 per cent of total foreign bank exposure to the region. Shares of the handful of banks with substantial investments in eastern Europe – led by Austria’s Raiffeisen and Erste Bank, Société Générale of France, Italy’s UniCredit (which owns Bank Austria) and Belgian group KBC – tumbled after the ratings agency said it was concerned about the impact of a slowdown and the ability of the parent banks to support their support units in the region. The Austrian banking system is the most vulnerable, with eastern Europe accounting for nearly half of its foreign loans, while Italian banks are exposed to Poland and Croatia and Scandinavian institutions to the Baltic states. Central and eastern European currencies have come under intense pressure in recent weeks. The credit crisis has raised fears over the region’s ability to finance its current account deficits and slowing global growth has heightened concerns over the health of its export-dependent economies. The Polish zloty plunged to a five-year low against the euro on Tuesday, while the Czech koruna hit a three-year trough against the single currency and the Hungarian forint falling to a record low. The Prague and Warsaw stock indices meanwhile fell to their lowest levels in five years, while the smaller markets of Budapest, Zagreb and Bucharest skirted close to multi-year lows. The euro dropped to a two-month low against the dollar on Tuesday on heightened concerns over eurozone banks’ exposure to the worsening conditions in eastern Europe. Amid the growing sense of crisis in eastern European economies, Hungary on Tuesday outlined plans to save Ft210bn (€680m, $860m) this year to prevent an increase in the budget deficit. Hungary’s economy is expected to contract by up to 3 per cent this year, much more than earlier expectations. Antje Praefcke at Commerzbank said eastern European currencies were in a “self-feeding depreciation spiral.” “The creditworthiness of local banks, companies and private households, who hold mainly foreign currency denominated debt, is deteriorating with each depreciation in eastern European currencies, thus further undermining confidence in the currencies,” she said. Ms Praefcke said further depreciation of eastern European currencies was thus a distinct possibility, which was likely to undermine the euro. “The collapse of these currencies is likely to constitute a risk for the euro,” she said. “So far markets have largely ignored this fact, but are unlikely to be able to maintain this approach if the weakness of the eastern European currencies continues.” Western European banks have piled into the former Communist countries in recent years as economic growth in the region outpaced domestic gains. The accession of 10 new members to the European Union in 2004, and of Romania and Bulgaria in 2007, added to optimism about the region. In 2007, Raiffeisen and Erste Bank earned the vast majority of their pre-tax profits in eastern European countries including Russia and Ukraine. Since the onset of the global financial crisis, Hungary, Latvia and Ukraine have all received emergency loans from the International Monetary Fund, with other countries in the region expected to follow.
  5. Financial crisis bringing global economy to standstill: IMF By Veronica Smith WASHINGTON (AFP) – The International Monetary Fund slashed its economic growth forecasts Wednesday, predicting the severe financial crisis would brake global growth to the slowest pace in six decades. "World growth is projected to fall to 0.5 percent in 2009, its lowest rate since World War II," the IMF said in a sharp 1.75-point downward revision of November forecasts. "The world economy is facing a deep recession" under continued financial stress, it warned. The advanced economies were expected to contract by 2.0 percent, their first annual contraction in the post-war period and far more than the negative 0.3 percent the IMF estimated less than three months ago. "Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy," the 185-nation institution said, warning its projections were made in a "highly uncertain outlook."
  6. Twenty-five people at the heart of the meltdown ... * Julia Finch, with additional reporting by Andrew Clark and David Teather The Guardian, Monday 26 January 2009 The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part. In the second part of a week-long series looking behind the slump, Guardian City editor Julia Finch picks out the individuals who have led us into the current crisis Greenspan Testifies At Senate Hearing On Oil Dependence Former Federal Reserve chairman Alan Greenspan, who backed sub-prime lending. Alan Greenspan, chairman of US Federal Reserve 1987- 2006 Only a couple of years ago the long-serving chairman of the Fed, a committed free marketeer who had steered the US economy through crises ranging from the 1987 stockmarket collapse through to the aftermath of the 9/11 attacks, was lauded with star status, named the "oracle" and "the maestro". Now he is viewed as one of those most culpable for the crisis. He is blamed for allowing the housing bubble to develop as a result of his low interest rates and lack of regulation in mortgage lending. He backed sub-prime lending and urged homebuyers to swap fixed-rate mortgages for variable rate deals, which left borrowers unable to pay when interest rates rose. For many years, Greenspan also defended the booming derivatives business, which barely existed when he took over the Fed, but which mushroomed from $100tn in 2002 to more than $500tn five years later. Billionaires George Soros and Warren Buffett might have been extremely worried about these complex products - Soros avoided them because he didn't "really understand how they work" and Buffett famously described them as "financial weapons of mass destruction" - but Greenspan did all he could to protect the market from what he believed was unnecessary regulation. In 2003 he told the Senate banking committee: "Derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so". In recent months, however, he has admitted at least some of his long-held beliefs have turned out to be incorrect - not least that free markets would handle the risks involved, that too much regulation would damage Wall Street and that, ultimately, banks would always put the protection of their shareholders first. He has described the current financial crisis as "the type ... that comes along only once in a century" and last autumn said the fact that the banks had played fast and loose with shareholders' equity had left him "in a state of shocked disbelief". Mervyn King, governor of the Bank of England Mervyn King When Mervyn King settled his feet under the desk in his Threadneedle Street office, the UK economy was motoring along just nicely: GDP was growing at 3% and inflation was just 1.3%. Chairing his first meeting of the Bank's monetary policy committee (MPC), interest rates were cut to a post-war low of 3.5%. His ambition was that monetary policy decision-making should become "boring". How we would all like it to become boring now. When the crunch first took hold, the Aston Villa-supporting governor insisted it was not about to become an international crisis. In the first weeks of the crunch he refused to pump cash into the financial system and insisted that "moral hazard" meant that some banks should not be bailed out. The Treasury select committee has said King should have been "more pro-active". King's MPC should have realised there was a housing bubble developing and taken action to damp it down and, more recently, the committee should have seen the recession coming and cut interest rates far faster than it did. Politicians Bill Clinton, former US president Clinton shares at least some of the blame for the current financial chaos. He beefed up the 1977 Community Reinvestment Act to force mortgage lenders to relax their rules to allow more socially disadvantaged borrowers to qualify for home loans. In 1999 Clinton repealed the Glass-Steagall Act, which ensured a complete separation between commercial banks, which accept deposits, and investment banks, which invest and take risks. The move prompted the era of the superbank and primed the sub-prime pump. The year before the repeal sub-prime loans were just 5% of all mortgage lending. By the time the credit crunch blew up it was approaching 30%. Gordon Brown, prime minister The British prime minister seems to have been completely dazzled by the movers and shakers in the Square Mile, putting the City's interests ahead of other parts of the economy, such as manufacturers. He backed "light touch" regulation and a low-tax regime for the thousands of non-domiciled foreign bankers working in London and for the private equity business. George W Bush, former US president Clinton might have started the sub-prime ball rolling, but the Bush administration certainly did little to put the brakes on the vast amount of mortgage cash being lent to "Ninja" (No income, no job applicants) borrowers who could not afford them. Neither did he rein back Wall Street with regulation (although the government did pass the Sarbanes-Oxley Act in the wake of the Enron scandal). Senator Phil Gramm Former US senator from Texas, free market advocate with a PhD in economics who fought long and hard for financial deregulation. His work, encouraged by Clinton's administration, allowed the explosive growth of derivatives, including credit swaps. In 2001, he told a Senate debate: "Some people look at sub-prime lending and see evil. I look at sub-prime lending and I see the American dream in action." According to the New York Times, federal records show that from 1989 to 2002 he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. At an April 2000 Senate hearing after a visit to New York, he said: "When I am on Wall Street and I realise that that's the very nerve centre of American capitalism and I realise what capitalism has done for the working people of America, to me that's a holy place." He eventually left Capitol Hill to work for UBS as an investment banker. Wall Street/Bankers Abby Cohen, Goldman Sachs chief US strategist The "perpetual bull". Once rated one of the most powerful women in the US. But so wrong, so often. She failed to see previous share price crashes and was famous for her upwards forecasts. Replaced last March. Kathleen Corbet, former CEO, Standard & Poor's The credit-rating agencies were widely attacked for failing to warn of the risks posed by mortgage-backed securities. Kathleen Corbet ran the largest of the big three agencies, Standard & Poor's, and quit in August 2007, amid a hail of criticism. The agencies have been accused of acting as cheerleaders, assigning the top AAA rating to collateralised debt obligations, the often incomprehensible mortgage-backed securities that turned toxic. The industry argues it did its best with the information available. Corbet said her decision to leave the agency had been "long planned" and denied that she had been put under any pressure to quit. She kept a relatively low profile and had been hired to run S&P in 2004 from the investment firm Alliance Capital Management. Investigations by the Securities and Exchange Commission and the New York attorney general among others have focused on whether the agencies are compromised by earning fees from the banks that issue the debt they rate. The reputation of the industry was savaged by a blistering report by the SEC that contained dozens of internal emails that suggested they had betrayed investors' trust. "Let's hope we are all wealthy and retired by the time this house of cards falters," one unnamed S&P analyst wrote. In another, an S&P employee wrote: "It could be structured by cows and we would rate it." "Hank" Greenberg, AIG insurance group Now aged 83, Hank - AKA Maurice - was the boss of AIG. He built the business into the world's biggest insurer. AIG had a vast business in credit default swaps and therefore a huge exposure to a residential mortgage crisis. When AIG's own credit-rating was cut, it faced a liquidity crisis and needed an $85bn (£47bn then) bail out from the US government to avoid collapse and avert the crisis its collapse would have caused. It later needed many more billions from the US treasury and the Fed, but that did not stop senior AIG executives taking themselves off for a few lavish trips, including a $444,000 golf and spa retreat in California and an $86,000 hunting expedition to England. "Have you heard of anything more outrageous?" said Elijah Cummings, a Democratic congressman from Maryland. "They were getting their manicures, their facials, pedicures, massages while the American people were footing the bill." Andy Hornby, former HBOS boss So highly respected, so admired and so clever - top of his 800-strong class at Harvard - but it was his strategy, adopted from the Bank of Scotland when it merged with Halifax, that got HBOS in the trouble it is now. Who would have thought that the mighty Halifax could be brought to its knees and teeter on the verge of nationalisation? Sir Fred Goodwin, former RBS boss Once one of Gordon Brown's favourite businessmen, now the prime minister says he is "angry" with the man dubbed "Fred the Shred" for his strategy at Royal Bank of Scotland, which has left the bank staring at a £28bn loss and 70% owned by the government. The losses will reflect vast lending to businesses that cannot repay and write-downs on acquisitions masterminded by Goodwin stretching back years. Steve Crawshaw, former B&B boss Once upon a time Bradford & Bingley was a rather boring building society, which used two men in bowler hats to signify their sensible and trustworthy approach. In 2004 the affable Crawshaw took over. He closed down B&B businesses, cut staff numbers by half and turned the B&B into a specialist in buy-to-let loans and self-certified mortgages - also called "liar loans" because applicants did not have to prove a regular income. The business broke down when the wholesale money market collapsed and B&B's borrowers fell quickly into debt. Crawshaw denied a rights issue was on its way weeks before he asked shareholders for £300m. Eventually, B&B had to be nationalised. Crawshaw, however, had left the bridge a few weeks earlier as a result of heart problems. He has a £1.8m pension pot. Adam Applegarth, former Northern Rock boss Applegarth had such big ambitions. But the business model just collapsed when the credit crunch hit. Luckily for Applegarth, he walked away with a wheelbarrow of cash to ease the pain of his failure, and spent the summer playing cricket. Dick Fuld, Lehman Brothers chief executive The credit crunch had been rumbling on for more than a year but Lehman Brothers' collapse in September was to have a catastrophic impact on confidence. Richard Fuld, chief executive, later told Congress he was bewildered the US government had not saved the bank when it had helped secure Bear Stearns and the insurer AIG. He also blamed short-sellers. Bitter workers at Lehman pointed the finger at Fuld. A former bond trader known as "the Gorilla", Fuld had been with Lehman for decades and steered it through tough times. But just before the bank went bust he had failed to secure a deal to sell a large stake to the Korea Development Bank and most likely prevent its collapse. Fuld encouraged risk-taking and Lehman was still investing heavily in property at the top of the market. Facing a grilling on Capitol Hill, he was asked whether it was fair that he earned $500m over eight years. He demurred; the figure, he said, was closer to $300m. Ralph Cioffi and Matthew Tannin Cioffi (pictured) and Tannin were Bear Stearns bankers recently indicted for fraud over the collapse of two hedge funds last year, which was one of the triggers of the credit crunch. They are accused of lying to investors about the amount of money they were putting into sub-prime, and of quietly withdrawing their own funds when times got tough. Lewis Ranieri The "godfather" of mortgage finance, who pioneered mortgage-backed bonds in the 1980s and immortalised in Liar's Poker. Famous for saying that "mortgages are math", Ranieri created collateralised pools of mortgages. In 2004 Business Week ranked him alongside names such as Bill Gates and Steve Jobs as one of the greatest innovators of the past 75 years. Ranieri did warn in 2006 of the risks from the breakneck growth of mortgage securitisation. Nevertheless, his Texas-based Franklin Bank Corp went bust in November due to the credit crunch. Joseph Cassano, AIG Financial Products Cassano ran the AIG team that sold credit default swaps in London, and in effect bankrupted the world's biggest insurance company, forcing the US government to stump up billions in aid. Cassano, who lives in a townhouse near Harrods in Knightsbridge, earned 30 cents for every dollar of profit his financial products generated - or about £280m. He was fired after the division lost $11bn, but stayed on as a $1m-a-month consultant. "It seems he single-handedly brought AIG to its knees," said John Sarbanes, a Democratic congressman. Chuck Prince, former Citi boss A lawyer by training, Prince had built Citi into the biggest bank in the world, with a sprawling structure that covered investment banking, high-street banking and wealthy management for the richest clients. When profits went into reverse in 2007, he insisted it was just a hiccup, but he was forced out after multibillion-dollar losses on sub-prime business started to surface. He received about $140m to ease his pain. Angelo Mozilo, Countrywide Financial Known as "the orange one" for his luminous tan, Mozilo was the chairman and chief executive of the biggest American sub-prime mortgage lender, which was saved from bankruptcy by Bank of America. BoA recently paid billions to settle investigations by various attorney generals for Countrywide's mis-selling of risky loans to thousands who could not afford them. The company ran a "VIP programme" that provided loans on favourable terms to influential figures including Christopher Dodd, chairman of the Senate banking committee, the heads of the federal-backed mortgage lenders Fannie Mae and Freddie Mac, and former assistant secretary of state Richard Holbrooke. Stan O'Neal, former boss of Merrill Lynch O'Neal became one of the highest-profile casualties of the credit crunch when he lost the confidence of the bank's board in late 2007. When he was appointed to the top job four years earlier, O'Neal, the first African-American to run a Wall Street firm, had pledged to shed the bank's conservative image. Shortly before he quit, the bank admitted to nearly $8bn of exposure to bad debts, as bets in the property and credit markets turned sour. Merrill was forced into the arms of Bank of America less than a year later. Jimmy Cayne, former Bear Stearns boss The chairman of the Wall Street firm Bear Stearns famously continued to play in a bridge tournament in Detroit even as the firm fell into crisis. Confidence in the bank evaporated after the collapse of two of its hedge funds and massive write-downs from losses related to the home loans industry. It was bought for a knock down price by JP Morgan Chase in March. Cayne sold his stake in the firm after the JP Morgan bid emerged, making $60m. Such was the anger directed towards Cayne that the US media reported that he had been forced to hire a bodyguard. A one-time scrap-iron salesman, Cayne joined Bear Stearns in 1969 and became one of the firm's top brokers, taking over as chief executive in 1993. Others Christopher Dodd, chairman, Senate banking committee (Democrat) Consistently resisted efforts to tighten regulation on the mortgage finance firms Fannie Mae and Freddie Mac. He pushed to broaden their role to dodgier mortgages in an effort to help home ownership for the poor. Received $165,000 in donations from Fannie and Freddie from 1989 to 2008, more than anyone else in Congress. Geir Haarde, Icelandic prime minister He announced on Friday that he would step down and call an early election in May, after violent anti-government protests fuelled by his handling of the financial crisis. Last October Iceland's three biggest commercial banks collapsed under billions of dollars of debts. The country was forced to borrow $2.1bn from the International Monetary Fund and take loans from several European countries. Announcing his resignation, Haarde said he had throat cancer. The American public There's no escaping the fact: politicians might have teed up the financial system and failed to police it properly and Wall Street's greedy bankers might have got carried away with the riches they could generate, but if millions of Americans had just realised they were borrowing more than they could repay then we would not be in this mess. The British public got just as carried away. We are the credit junkies of Europe and many of our problems could easily have been avoided if we had been more sensible and just said no. John Tiner, FSA chief executive, 2003-07 No one can fault 51-year-old Tiner's timing: the financial services expert took over as the City's chief regulator in 2003, just as the bear market which followed the dotcom crash came to an end, and stepped down from the Financial Services Authority in July 2007 - just a few weeks before the credit crunch took hold. He presided over the FSA when the so-called "light touch" regulation was put in place. It was Tiner who agreed that banks could make up their own minds about how much capital they needed to hoard to cover their risks. And it was on his watch that Northern Rock got so carried away with the wholesale money markets and 130% mortgages. When the FSA finally got around to investigating its own part in the Rock's downfall, it was a catalogue of errors and omissions. In short, the FSA had been asleep at the wheel while Northern Rock racked up ever bigger risks. An accountant by training, with a penchant for Porsches and proud owner of the personalised number plate T1NER, the former FSA boss has since been recruited by the financial entrepreneur Clive Cowdery to run a newly floated business that aims to buy up financial businesses laid low by the credit crunch. Tiner will be chief executive but, unusually, will not be on the board, so his pay and bonuses will not be made public. ... and six more who saw it coming Andrew Lahde A hedge fund boss who quit the industry in October thanking "stupid" traders and "idiots" for making him rich. He made millions by betting against sub-prime. John Paulson, hedge fund boss He has been described as the "world's biggest winner" from the credit crunch, earning $3.7bn (£1.9bn) in 2007 by "shorting" the US mortgage market - betting that the housing bubble was about to burst. In an apparent response to criticism that he was profiting from misery, Paulson gave $15m to a charity aiding people fighting foreclosure. Professor Nouriel Roubini Described by the New York Times as Dr Doom, the economist from New York University was warning that financial crisis was on the way in 2006, when he told economists at the IMF that the US would face a once-in-a-lifetime housing bust, oil shock and a deep recession. He remains a pessimist. He predicted last week that losses in the US financial system could hit $3.6tn before the credit crunch ends - which, he said, means the entire US banking system is in effect bankrupt. After last year's bail-outs and nationalisations, he famously described George Bush, Henry Paulson and Ben Bernanke as "a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America". Warren Buffett, billionaire investor Dubbed the Sage of Omaha, Buffett had long warned about the dangers of dodgy derivatives that no one understood and said often that Wall Street's finest were grossly overpaid. In his annual letter to shareholders in 2003, he compared complex derivative contracts to hell: "Easy to enter and almost impossible to exit." On an optimistic note, Buffett wrote in October that he had begun buying shares on the US stockmarket again, suggesting the worst of the credit crunch might be over. Now is a great time to "buy a slice of America's future at a marked-down price", he said. George Soros, speculator The billionaire financier, philanthropist and backer of the Democrats told an audience in Singapore in January 2006 that stockmarkets were at their peak, and that the US and global economies should brace themselves for a recession and a possible "hard landing". He also warned of "a gigantic real estate bubble" inflated by reckless lenders, encouraging homeowners to remortgage and offering interest-only deals. Earlier this year Soros described a 25-year "super bubble" that is bursting, blaming unfathomable financial instruments, deregulation and globalisation. He has since characterised the financial crisis as the worst since the Great Depression. Stephen Eismann, hedge fund manager An analyst and fund manager who tracked the sub-prime market from the early 1990s. "You have to understand," he says, "I did sub-prime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold." Meredith Whitney, Oppenheimer Securities On 31 October 2007 the analyst forecast that Citigroup had to slash its dividend or face bankruptcy. A day later $370bn had been wiped off financial stocks on Wall Street. Within days the boss of Citigroup was out and the dividend had been slashed.
  7. Wall Street, R.I.P.: The End of an Era, Even at Goldman Article Tools Sponsored By By JULIE CRESWELL and BEN WHITE Published: September 27, 2008 WALL STREET. Two simple words that — like Hollywood and Washington — conjure a world. Goldman Sachs’s headquarters in New York. The company, a golden child of the financial sector, faces a very different future and mission amid seismic changes wrought by the credit crisis. Lloyd C. Blankfein led Goldman’s securities division before becoming chief executive in 2006. A world of big egos. A world where people love to roll the dice with borrowed money. A world of tightwire trading, propelled by computers. In search of ever-higher returns — and larger yachts, faster cars and pricier art collections for their top executives — Wall Street firms bulked up their trading desks and hired pointy-headed quantum physicists to develop foolproof programs. Hedge funds placed markers on red (the Danish krone goes up) or black (the G.D.P. of Thailand falls). And private equity firms amassed giant funds and went on a shopping spree, snapping up companies as if they were second wives buying Jimmy Choo shoes on sale. That world is largely coming to an end. The huge bailout package being debated in Congress may succeed in stabilizing the financial markets. But it is too late to help firms like Bear Stearns and Lehman Brothers, which have already disappeared. Merrill Lynch, whose trademark bull symbolized Wall Street to many Americans, is being folded into Bank of America, located hundreds of miles from New York, in Charlotte, N.C. For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersized bonuses are behind them. The credit boom that drove Wall Street’s explosive growth has dried up. Regulators who sat on the sidelines for too long are now eager to rein in Wall Street’s bad boys and the practices that proliferated in recent years. “The swashbuckling days of Wall Street firms’ trading, essentially turning themselves into giant hedge funds, are over. Turns out they weren’t that good,” said Andrew Kessler, a former hedge fund manager. “You’re no longer going to see middle-level folks pulling in seven- and multiple-seven-dollar figures that no one can figure out exactly what they did for that.” The beginning of the end is felt even in the halls of the white-shoe firm Goldman Sachs, which, among its Wall Street peers, epitomized and defined a high-risk, high-return culture. Goldman is the firm that other Wall Street firms love to hate. It houses some of the world’s biggest private equity and hedge funds. Its investment bankers are the smartest. Its traders, the best. They make the most money on Wall Street, earning the firm the nickname Goldmine Sachs. (Its 30,522 employees earned an average of $600,000 last year — an average that considers secretaries as well as traders.) Although executives at other firms secretly hoped that Goldman would once — just once — make a big mistake, at the same time, they tried their darnedest to emulate it. While Goldman remains top-notch in providing merger advice and underwriting public offerings, what it does better than any other firm on Wall Street is proprietary trading. That involves using its own funds, as well as a heap of borrowed money, to make big, smart global bets. Other firms tried to follow its lead, heaping risk on top of risk, all trying to capture just a touch of Goldman’s magic dust and its stellar quarter-after-quarter returns. Not one ever came close. While the credit crisis swamped Wall Street over the last year, causing Merrill, Citigroup and Lehman Brothers to sustain heavy losses on big bets in mortgage-related securities, Goldman sailed through with relatively minor bumps. In 2007, the same year that Citigroup and Merrill cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million — the most ever for a Wall Street C.E.O. Even Wall Street’s golden child, Goldman, however, could not withstand the turmoil that rocked the financial system in recent weeks. After Lehman and the American International Group were upended, and Merrill jumped into its hastily arranged engagement with Bank of America two weeks ago, Goldman’s stock hit a wall. The A.I.G. debacle was particularly troubling. Goldman was A.I.G.’s largest trading partner, according to several people close to A.I.G. who requested anonymity because of confidentiality agreements. Goldman assured investors that its exposure to A.I.G. was immaterial, but jittery investors and clients pulled out of the firm, nervous that stand-alone investment banks — even one as esteemed as Goldman — might not survive. “What happened confirmed my feeling that Goldman Sachs, no matter how good it was, was not impervious to the fortunes of fate,” said John H. Gutfreund, the former chief executive of Salomon Brothers. So, last weekend, with few choices left, Goldman Sachs swallowed a bitter pill and turned itself into, of all things, something rather plain and pedestrian: a deposit-taking bank. The move doesn’t mean that Goldman is going to give away free toasters for opening a checking account at a branch in Wichita anytime soon. But the shift is an assault on Goldman’s culture and the core of its astounding returns of recent years. Not everyone thinks that the Goldman money machine is going to be entirely constrained. Last week, the Oracle of Omaha, Warren E. Buffett, made a $5 billion investment in the firm, and Goldman raised another $5 billion in a separate stock offering. Still, many people say, with such sweeping changes before it, Goldman Sachs could well be losing what made it so special. But, then again, few things on Wall Street will be the same. GOLDMAN’S latest golden era can be traced to the rise of Mr. Blankfein, the Brooklyn-born trading genius who took the helm in June 2006, when Henry M. Paulson Jr., a veteran investment banker and adviser to many of the world’s biggest companies, left the bank to become the nation’s Treasury secretary. Mr. Blankfein’s ascent was a significant changing of the guard at Goldman, with the vaunted investment banking division giving way to traders who had become increasingly responsible for driving a run of eye-popping profits. Before taking over as chief executive, Mr. Blankfein led Goldman’s securities division, pushing a strategy that increasingly put the bank’s own capital on the line to make big trading bets and investments in businesses as varied as power plants and Japanese banks. The shift in Goldman’s revenue shows the transformation of the bank. From 1996 to 1998, investment banking generated up to 40 percent of the money Goldman brought in the door. In 2007, Goldman’s best year, that figure was less than 16 percent, while revenue from trading and principal investing was 68 percent. Goldman’s ability to sidestep the worst of the credit crisis came mainly because of its roots as a private partnership in which senior executives stood to lose their shirts if the bank faltered. Founded in 1869, Goldman officially went public in 1999 but never lost the flat structure that kept lines of communication open among different divisions. In late 2006, when losses began showing in one of Goldman’s mortgage trading accounts, the bank held a top-level meeting where executives including David Viniar, the chief financial officer, concluded that the housing market was headed for a significant downturn. Hedging strategies were put in place that essentially amounted to a bet that housing prices would fall. When they did, Goldman limited its losses while rivals posted ever-bigger write-downs on mortgages and complex securities tied to them. In 2007, Goldman generated $11.6 billion in profit, the most money an investment bank has ever made in a year, and avoided most of the big mortgage-related losses that began slamming other banks late in that year. Goldman’s share price soared to a record of $247.92 on Oct. 31. Goldman continued to outpace its rivals into this year, though profits declined significantly as the credit crisis worsened and trading conditions became treacherous. Still, even as Bear Stearns collapsed in March over bad mortgage bets and Lehman was battered, few thought that the untouchable Goldman could ever falter. Mr. Blankfein, an inveterate worrier, beefed up his books in part by stashing more than $100 billion in cash and short-term, highly liquid securities in an account at the Bank of New York. The Bony Box, as Mr. Blankfein calls it, was created to make sure that Goldman could keep doing business even in the face of market eruptions. That strong balance sheet, and Goldman’s ability to avoid losses during the crisis, appeared to leave the bank in a strong position to move through the industry upheaval with its trading-heavy business model intact, if temporarily dormant. Even as some analysts suggested that Goldman should consider buying a commercial bank to diversify, executives including Mr. Blankfein remained cool to the notion. Becoming a deposit-taking bank would just invite more regulation and lessen its ability to shift capital quickly in volatile markets, the thinking went. All of that changed two weeks ago when shares of Goldman and its chief rival, Morgan Stanley, went into free fall. A national panic over the mortgage crisis deepened and investors became increasingly convinced that no stand-alone investment bank would survive, even with the government’s plan to buy up toxic assets. Nervous hedge funds, some burned by losing big money when Lehman went bust, began moving some of their balances away from Goldman to bigger banks, like JPMorgan Chase and Deutsche Bank. By the weekend, it was clear that Goldman’s options were to either merge with another company or transform itself into a deposit-taking bank holding company. So Goldman did what it has always done in the face of rapidly changing events: it turned on a dime. “They change to fit their environment. When it was good to go public, they went public,” said Michael Mayo, banking analyst at Deutsche Bank. “When it was good to get big in fixed income, they got big in fixed income. When it was good to get into emerging markets, they got into emerging markets. Now that it’s good to be a bank, they became a bank.” The moment it changed its status, Goldman became the fourth-largest bank holding company in the United States, with $20 billion in customer deposits spread between a bank subsidiary it already owned in Utah and its European bank. Goldman said it would quickly move more assets, including its existing loan business, to give the bank $150 billion in deposits. Even as Goldman was preparing to radically alter its structure, it was also negotiating with Mr. Buffett, a longtime client, on the terms of his $5 billion cash infusion. Mr. Buffett, as he always does, drove a relentless bargain, securing a guaranteed annual dividend of $500 million and the right to buy $5 billion more in Goldman shares at a below-market price. While the price tag for his blessing was steep, the impact was priceless. “Buffett got a very good deal, which means the guy on the other side did not get as good a deal,” said Jonathan Vyorst, a portfolio manager at the Paradigm Value Fund. “But from Goldman’s perspective, it is reputational capital that is unparalleled.” EVEN if the bailout stabilizes the markets, Wall Street won’t go back to its freewheeling, profit-spinning ways of old. After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish. For Goldman and Morgan Stanley, which are converting themselves into bank holding companies, that means their primary regulators become the Federal Reserve and the Office of the Comptroller of the Currency, which oversee banking institutions. Rather than periodic audits by the Securities and Exchange Commission, Goldman will have regulators on site and looking over their shoulders all the time. The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller’s agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. (That’s not to say stronger regulators would prevent losses. Citigroup, which on paper is highly regulated, suffered huge write-downs on risky mortgage securities bets.) As a bank, Goldman will also face tougher requirements about the size of the financial cushion it maintains. While Goldman and Morgan Stanley both meet current guidelines, many analysts argue that regulators, as part of the fallout from the credit crisis, may increase the amount of capital banks must have on hand. More important, a stiffer regulatory regime across Wall Street is likely to reduce the use and abuse of its favorite addictive drug: leverage. The low-interest-rate environment of the last decade offered buckets of cheap credit. Just as consumers maxed out their credit cards to live beyond their means, Wall Street firms bolstered their returns by pumping that cheap credit into their own trading operations and lending money to hedge funds and private equity firms so they could do the same. By using leverage, or borrowed funds, firms like Goldman Sachs easily increased the size of the bets they were making in their own trading portfolios. If they were right — and Goldman typically was — the returns were huge. When things went wrong, however, all of that debt turned into a nightmare. When Bear Stearns was on the verge of collapse, it had borrowed $33 for every $1 of equity it held. When trading partners that had lent Bear the money began demanding it back, the firm’s coffers ran dangerously low. Earlier this year, Goldman had borrowed about $28 for every $1 in equity. In the ensuing credit crisis, Wall Street firms have reined in their borrowing significantly and have lent less money to hedge funds and private equity firms. Today, Goldman’s borrowings stand at about $20 to $1, but even that is likely to come down. Banks like JPMorgan and Citigroup typically borrow about $10 to $1, analysts say. As leverage dries up across Wall Street, so will the outsize returns at many private equity firms and hedge funds. Returns at many hedge funds are expected to be awful this year because of a combination of bad bets and an inability to borrow. One result could be a landslide of hedge funds’ closing shop. At Goldman, the reduced use of borrowed money for its own trading operations means that its earnings will also decrease, analysts warn. Brad Hintz, an analyst at Sanford C. Bernstein & Company, predicts that Goldman’s return on equity, a common measure of how efficiently capital is invested, will fall to 13 percent this year, from 33 percent in 2007, and hover around 14 percent or 15 percent for the next few years. Goldman says its returns are primarily driven by economic growth, its market share and pricing power, not by leverage. It adds that it does not expect changes in its business strategies and expects a 20 percent return on equity in the future. IF Mr. Hintz is right, and Goldman’s legendary returns decline, so will its paychecks. Without those multimillion-dollar paydays, those top-notch investment bankers, elite traders and private-equity superstars may well stroll out the door and try their luck at starting small, boutique investment-banking firms or hedge funds — if they can. “Over time, the smart people will migrate out of the firm because commercial banks don’t pay out 50 percent of their revenues as compensation,” said Christopher Whalen, a managing partner at Institutional Risk Analytics. “Banks simply aren’t that profitable.” As the game of musical chairs continues on Wall Street, with banks like JPMorgan scooping up troubled competitors like Washington Mutual, some analysts are wondering what Goldman’s next move will be. Goldman is unlikely to join with a commercial bank with a broad retail network, because a plain-vanilla consumer business is costly to operate and is the polar opposite of Goldman’s rarefied culture. “If they go too far afield or get too large in terms of personnel, then they become Citigroup, with the corporate bureaucracy and slowness and the inability to make consensus-type decisions that come with that,” Mr. Hintz said. A better fit for Goldman would be a bank that caters to corporations and other institutions, like Northern Trust or State Street Bank, he said. “I don’t think they’re going to move too fast, no matter what the environment on Wall Street is,” Mr. Hintz said. “They’re going to take some time and consider what exactly the new Goldman Sachs is going to be.”
  8. Ottawa boosts mortgage buyout by $50B Eoin Callan, Canwest News Service Published: Wednesday, November 12 TORONTO - After a sustained lobbying campaign by Bay Street executives that culminated in a breakfast meeting with senior government officials in Toronto Wednesday, Ottawa agreed to the most pressing demands of Canadian banks squeezed by the credit crisis. "We had asked for four things and we got all four," Don Drummond, a senior vice-president at TD Bank Financial Group, said after Ottawa unveiled co-ordinated measures to buy up to $75-billion worth of mortgages, facilitate access to capital markets, provide extra liquidity and loosen reserve requirements. Jim Flaherty, the Finance Minister, said the moves meant Canada was making good on a pledge he made during talks with his international counterparts to collectively bolster the banking system ahead of a summit on the financial crisis this weekend in Washington. The actions were a sign of the "commitment" of Ottawa to ensure the country's financial system remained strong, said Gerry McCaughey, chief executive of Canadian Imperial Bank of Commerce, which, along with TD, is thought to be among the main beneficiaries of new looser rules on minimum capital requirements. But executives who participated in the process cautioned state interventions to ease the credit crisis had proven to be more art than science, as the United States Wednesday ditched an earlier plan to buy up toxic assets at the same time Ottawa was expanding its own scheme to buy mortgage-backed securities by $50 billion. Executives said it remains to be seen if the interventions finalized at Wednesday morning's meeting would succeed in lowering the premium banks pay for medium-term financing, which is about five times higher than before the credit crisis. In a bid to ease funding pressures, executives persuaded the Conservatives to reduce to 1.1 per cent from 1.6 per cent the fee to be charged if banks invoke a special new government guarantee when they borrow money in international capital markets. Banks argued the previous higher rate had actually encouraged lenders to nudge up the premium they were charging banks at a time when other countries were offering more generous terms. The Finance Minister said he would resist new global initiatives that might put Canadian institutions at a competitive disadvantage during the weekend summit in Washington. But he said Ottawa's ability to influence the outcome was being undermined by the absence of a federal securities regulator in Canada, which is alone among major industrialized nations in not having national oversight of financial markets. "It is difficult for us to go abroad and say governments should get their house in order when there is a glaring omission at home," he said. Flaherty said a key objective of the moves announced Wednesday was addressing "concerns about the availability of credit" for business borrowers, adding that "the government stands ready to take whatever further actions are necessary to keep Canada's financial system strong among external risks." The Bank of Canada also said it would boost the availability of affordable credit in the banking system by $8 billion, using new rules that mean institutions can bid for cash using almost any form of collateral. Banks also welcomed a move late Tuesday by the Office of the Superintendent of Financial Institutions to allow them to top up their capital reserves with securities that are a hybrid of debt and equity. The regulator clarified Wednesday that a related measure on treatment of money lent by banks to other financial institutions under the government guarantee of interbank lending "would have the effect" of "increasing their regulatory capital ratios, all else being equal", but would "not count as regulatory capital." Bank analysts said the interventions were positive for Canadian banks, but warned they would be squeezed further in the coming months as the global economic slowdown hit home and losses on bad loans mount. Ian de Verteuil, an analyst at BMO Capital Markets, cited as an example how falling demand for coal could by next year jeopardize more than $10 billion in bank loans made to finance the acquisition by Teck Cominco of Fording Canadian Coal Trust. Royal Bank of Canada, Bank of Montreal and CIBC each have about $1 billion in exposures, while TD and Scotiabank each have $400 million of exposures to the deal, which the companies expect will be viable. But bank executives remained bullish Wednesday, with TD chief executive Ed Clark saying he was still on the hunt for U.S. acquisitions.
  9. Méga article très intéressant du magazine The Economist Lien The world economy A glimmer of hope? Apr 23rd 2009 From The Economist print edition The worst thing for the world economy would be to assume the worst is over THE rays are diffuse, but the specks of light are unmistakable. Share prices are up sharply. Even after slipping early this week, two-thirds of the 42 stockmarkets that The Economist tracks have risen in the past six weeks by more than 20%. Different economic indicators from different parts of the world have brightened. China’s economy is picking up. The slump in global manufacturing seems to be easing. Property markets in America and Britain are showing signs of life, as mortgage rates fall and homes become more affordable. Confidence is growing. A widely tracked index of investor sentiment in Germany has turned positive for the first time in almost two years. All this is welcome—not least because the slump has been made so much worse by panic and despair. When the financial system was on the brink of collapse in September, investors shunned all but the safest assets, consumers stopped spending and firms shut down. That plunge into the depths could be succeeded by a virtuous cycle, where the wheels of finance turn again, cheerier consumers open their wallets and ambitious firms turn from hoarding cash to pursuing profits. But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths. Luminous indicators Begin with those glimmers. It is easy to read too much into the gain in share prices. Stockmarkets usually rally before economies improve, because investors spy the promise of fatter profits before the statisticians document a turnaround. But plenty of rallies fizzle into nothing. Between 1929 and 1932, the Dow Jones Industrial Average soared by more than 20% four times, only to fall back below its previous lows. Today’s crisis has seen five separate rallies in which share prices rose more than 10% only to subside again. The economic statistics are hard to interpret, too. The past six months have seen several slumps, each with a different trajectory. The plunge in manufacturing is in part the result of a huge global inventory adjustment. With unsold goods piling up and finance hard to come by, firms around the world have slashed production even faster than demand has fallen. Once firms have run down their stocks they will start making things again and the manufacturing recession will be past its worst. Even if that moment is at hand, two other slumps are likely to poison the economy for much longer. The most important is the banking crisis and the purge of debt in the bubble economies, especially America and Britain. Demand has plummeted as tighter credit and sinking asset prices have exposed consumers’ excessive borrowing and scared them into saving more. History suggests that such balance-sheet recessions are long and that the recoveries which eventually follow them are feeble. The second slump is in the emerging world, where many economies have been hit by the sudden fall in private cross-border capital flows. Emerging economies, which imported capital worth 5% of their GDP in 2007, now face a world where cautious investors keep their money at home. According to the IMF, banks, firms and governments in the emerging world have some $1.8 trillion-worth of borrowing to roll over this year, much of that in central and eastern Europe. Even if emerging markets escape a full-blown debt crisis, investors’ confidence is unlikely to recover for years. These crises sent the world economy into a decline that, on several measures, has been steeper than the onset of the Depression. The IMF’s latest World Economic Outlook expects global output to shrink by 1.3% this year, its first fall in 60 years. But the collapse has been countered by the most ambitious policy response in history. Central banks have pumped out trillions of dollars of liquidity and, in rising numbers, have resorted to an increasingly exotic arsenal of “unconventional” firepower to ease credit markets and loosen monetary conditions even as policy rates approach zero. Governments have battled to prop up their banks, committing trillions of dollars in the process. The IMF has new money. Every big rich country has bolstered demand with fiscal stimulus (and so have many emerging ones). The rich world’s budget deficits will, on average, reach almost 9% of GDP, six times higher than before the crisis hit. The Depression showed how damaging it can be if governments don’t step in when the rest of the economy seizes up. Yet action on the current scale has never been tried before and nobody knows when it will have an effect—let alone how much difference it will make. Whatever the impact, it would be a mistake to confuse the twitches of an economy on life-support with a lasting recovery. A real recovery depends on government demand being supplanted by sustainable sources of private spending. And here the news is almost uniformly grim. Searching for new demand Take the country many are pinning their hopes on: America. The adjustment in the housing market began earlier there than anywhere else. Prices peaked almost three years ago, and are now down by 30%. Manufacturing production has been falling at an annualised rate of more than 20% for the past three months. And the government’s offsetting policy offensive has been the rich world’s boldest. As the inventory adjustment ends and the stimuli kick in, America’s slump is sure to ease. Cushioned by the government, the economy may even begin to grow again before too long. But it is hard to see the ingredients for a recovery that is robust enough to stop unemployment rising. Weakness abroad will crimp exports. America’s banks are propped up with public capital, but their balance-sheets are clogged with toxic assets. Consumer spending and firms’ investment will be dragged lower by the need to pay back debt and restore savings. This will be a long slog. Private-sector leverage, which rose by 70% of GDP between 2000 and 2008, has barely begun to unwind. At 4%, the household savings rate has jumped sharply from its low of near zero, but it is still far below its post-war average of 7%. Higher unemployment and rising bankruptcies could easily cause a vicious new downward lurch. In Britain, given the size of its finance industry, housing boom and consumer debt, the balance-sheet adjustment will, if anything, be greater. The weaker pound will buoy exports, but fragile public finances suggest that Britain has much less scope to use government spending to cushion the private sector than America does—as this week’s flawed budget made painfully clear (see article). The outlook should in theory be brighter for Germany and Japan. Both have seen output slump faster than in other rich countries because of the collapse in trade and manufacturing, but neither has the huge private borrowing of the sort that haunts the Anglo-Saxon world. Once inventories have adjusted, recovery should come quickly. In practice, though, that seems unlikely, especially in Germany. As the output slump sends Germany’s jobless rate towards double-digits, it is hard to see consumers going on a spending spree. Nor has the government shown much appetite for boosting demand. Germany’s fiscal stimulus, although large by European standards, falls well short of what it could afford. Worse, the country’s banks are still in trouble. Germans did not behave recklessly, but their banks did—along with many others in continental Europe. New figures from the IMF suggest that European banks face some $1.1 trillion in losses, hardly any of which have yet been recognised (see article). This week’s German plan to set up several bad banks was no more than a down payment on the restructuring ahead. Japan has acted more boldly. Its latest package of tax cuts and government spending, unveiled in early April, will provide the biggest fiscal boost, relative to GDP, of any rich country this year. Its economy is likely to perk up, temporarily at least. But its public-debt stock is approaching 200% of GDP, so Japan has scant room for more fiscal stimulus. With export markets weak, demand will soon need to be privately generated at home. But the past two decades offer little evidence that Japan can make that shift. For the time being, the brightest light glows in China, where a huge inventory adjustment has exaggerated the impact of falling foreign demand, and where the government has the cash and determination to prop up domestic spending. China’s stimulus is already bearing fruit. Loans are soaring and infrastructure investment is growing smartly. The IMF’s latest forecast, that China’s economy will grow by 6.5% this year, may prove conservative. Yet even China has its difficulties. Perhaps three-quarters of the growth will come from government demand, particularly infrastructure spending. Not much to glow about Add all this up and the case for optimism fades quickly. The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments. Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit. Start preparing for the next decade Welcome to an era of diminished expectations and continuing dangers; a world where policymakers must steer between the imminent threat of deflation while countering investors’ (reasonable) fears that swelling public debts and massive monetary easing could eventually lead to high inflation; an uncharted world where government borrowing reaches a scale not seen since the second world war, when capital controls ensured that savings stayed at home. How to cope with these dangers? Certainly not by clutching at scraps of better news. That risks leading to less action right now. Warding off deflation, for instance, will demand more unconventional steps from more central banks for longer than many now seem to foresee. Laggards, such as the European Central Bank, do themselves and the world no favours by holding back. Nor should governments immediately seek to take back the fiscal stimulus. Prolonged economic weakness does far greater damage to public finances than temporary fiscal activism. Remember how Japan snuffed out its recovery in the 1990s by rushing to raise taxes. Japan also put off bank reform. Countries facing big balance-sheet adjustments should heed that lesson and nudge reform along, in particular by doing more to clean up and restructure the banks. Countries with surpluses must encourage private spending at home more vigorously. China’s leaders are still doing too little to boost private citizens’ income and their spending by fostering reforms, from widening health-care coverage to forcing state-owned firms to pay higher dividends. At the same time policymakers must give themselves room to change course in the future. Central banks need to lay out the rules that will govern their exit from exotic forms of policy easing (see article). That may require new tools: the Federal Reserve would gain from being able to issue bonds that could mop up liquidity. All governments, especially those with the ropiest public finances, should think boldly about how to lower their debt ratios in the medium term—in ways that do not choke off nascent private demand. Rather than pushing up tax rates, they should think about raising retirement ages, reining in health costs and broadening the tax base. This weekend many of the world’s finance ministers and central bankers will meet in Washington, DC, for the spring meetings of the IMF and World Bank. Amid rising confidence, they will be tempted to pat themselves on the back. There is no time for that. The worst global slump since the Depression is far from finished. There is work to do.
  10. Economic meltdown : The Big Fix Article Tools Sponsored By By DAVID LEONHARDT Published: January 27, 2009 NYC Times I. WHITHER GROWTH? The economy will recover. It won’t recover anytime soon. It is likely to get significantly worse over the course of 2009, no matter what President Obama and Congress do. And resolving the financial crisis will require both aggressiveness and creativity. In fact, the main lesson from other crises of the past century is that governments tend to err on the side of too much caution — of taking the punch bowl away before the party has truly started up again. “The mistake the United States made during the Depression and the Japanese made during the ’90s was too much start-stop in their policies,” said Timothy Geithner, Obama’s choice for Treasury secretary, when I went to visit him in his transition office a few weeks ago. Japan announced stimulus measures even as it was cutting other government spending. Franklin Roosevelt flirted with fiscal discipline midway through the New Deal, and the country slipped back into decline. Geithner arguably made a similar miscalculation himself last year as a top Federal Reserve official who was part of a team that allowed Lehman Brothers to fail. But he insisted that the Obama administration had learned history’s lesson. “We’re just not going to make that mistake,” Geithner said. “We’re not going to do that. We’ll keep at it until it’s done, whatever it takes.” Once governments finally decide to use the enormous resources at their disposal, they have typically been able to shock an economy back to life. They can put to work the people, money and equipment sitting idle, until the private sector is willing to begin using them again. The prescription developed almost a century ago by John Maynard Keynes does appear to work. But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention — and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow? That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country’s growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country’s growth rate “dwarf all other economic-policy concerns.” Growth is the only way for a government to pay off its debts in a relatively quick and painless fashion, allowing tax revenues to increase without tax rates having to rise. That is essentially what happened in the years after World War II. When the war ended, the federal government’s debt equaled 120 percent of the gross domestic product (more than twice as high as its likely level by the end of next year). The rapid economic growth of the 1950s and ’60s — more than 4 percent a year, compared with 2.5 percent in this decade — quickly whittled that debt away. Over the coming 25 years, if growth could be lifted by just one-tenth of a percentage point a year, the extra tax revenue would completely pay for an $800 billion stimulus package. Yet there are real concerns that the United States’ economy won’t grow enough to pay off its debts easily and ensure rising living standards, as happened in the postwar decades. The fraternity of growth experts in the economics profession predicts that the economy, on its current path, will grow more slowly in the next couple of decades than over the past couple. They are concerned in part because two of the economy’s most powerful recent engines have been exposed as a mirage: the explosion in consumer debt and spending, which lifted short-term growth at the expense of future growth, and the great Wall Street boom, which depended partly on activities that had very little real value. Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union’s growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme. Where will new, real sources of growth come from? Wall Street is not likely to cure the nation’s economic problems. Neither, obviously, is Detroit. Nor is Silicon Valley, at least not by itself. Well before the housing bubble burst, the big productivity gains brought about by the 1990s technology boom seemed to be petering out, which suggests that the Internet may not be able to fuel decades of economic growth in the way that the industrial inventions of the early 20th century did. Annual economic growth in the current decade, even excluding the dismal contributions that 2008 and 2009 will make to the average, has been the slowest of any decade since the 1930s. So for the first time in more than 70 years, the epicenter of the American economy can be placed outside of California or New York or the industrial Midwest. It can be placed in Washington. Washington won’t merely be given the task of pulling the economy out of the immediate crisis. It will also have to figure out how to put the American economy on a more sustainable path — to help it achieve fast, broadly shared growth and do so without the benefit of a bubble. Obama said as much in his inauguration speech when he pledged to overhaul Washington’s approach to education, health care, science and infrastructure, all in an effort to “lay a new foundation for growth.” For centuries, people have worried that economic growth had limits — that the only way for one group to prosper was at the expense of another. The pessimists, from Malthus and the Luddites and on, have been proved wrong again and again. Growth is not finite. But it is also not inevitable. It requires a strategy. II. THE UPSIDE OF A DOWNTURN TWO WEEKS AFTER THE ELECTION, Rahm Emanuel, Obama’s chief of staff, appeared before an audience of business executives and laid out an idea that Lawrence H. Summers, Obama’s top economic adviser, later described to me as Rahm’s Doctrine. “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.” In part, the idea is standard political maneuvering. Obama had an ambitious agenda — on health care, energy and taxes — before the economy took a turn for the worse in the fall, and he has an interest in connecting the financial crisis to his pre-existing plans. “Things we had postponed for too long, that were long term, are now immediate and must be dealt with,” Emanuel said in November. Of course, the existence of the crisis doesn’t force the Obama administration to deal with education or health care. But the fact that the economy appears to be mired in its worst recession in a generation may well allow the administration to confront problems that have festered for years. That’s the crux of the doctrine. The counterargument is hardly trivial — namely, that the financial crisis is so serious that the administration shouldn’t distract itself with other matters. That is a risk, as is the additional piling on of debt for investments that might not bear fruit for a long while. But Obama may not have the luxury of trying to deal with the problems separately. This crisis may be his one chance to begin transforming the economy and avoid future crises. In the early 1980s, an economist named Mancur Olson developed a theory that could fairly be called the academic version of Rahm’s Doctrine. Olson, a University of Maryland professor who died in 1998, is one of those academics little known to the public but famous among his peers. His seminal work, “The Rise and Decline of Nations,” published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis. In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods. Olson’s book was short but sprawling, touching on everything from the Great Depression to the caste system in India. His primary case study was Great Britain in the decades after World War II. As an economic and military giant for more than two centuries, it had accumulated one of history’s great collections of interest groups — miners, financial traders and farmers, among others. These interest groups had so shackled Great Britain’s economy by the 1970s that its high unemployment and slow growth came to be known as “British disease.” Germany and Japan, on the other hand, were forced to rebuild their economies and political systems after the war. Their interest groups were wiped away by the defeat. “In a crisis, there is an opportunity to rearrange things, because the status quo is blown up,” Frank Levy, an M.I.T. economist and an Olson admirer, told me recently. If a country slowly glides down toward irrelevance, he said, the constituency for reform won’t take shape. Olson’s insight was that the defeated countries of World War II didn’t rise in spite of crisis. They rose because of it. The parallels to the modern-day United States, though not exact, are plain enough. This country’s long period of economic pre-eminence has produced a set of interest groups that, in Olson’s words, “reduce efficiency and aggregate income.” Home builders and real estate agents pushed for housing subsidies, which made many of them rich but made the real estate bubble possible. Doctors, drug makers and other medical companies persuaded the federal government to pay for expensive treatments that have scant evidence of being effective. Those treatments are the primary reason this country spends so much more than any other on medicine. In these cases, and in others, interest groups successfully lobbied for actions that benefited them and hurt the larger economy. Surely no interest group fits Olson’s thesis as well as Wall Street. It used an enormous amount of leverage — debt — to grow to unprecedented size. At times Wall Street seemed ubiquitous. Eight Major League ballparks are named for financial-services companies, as are the theater for the Alvin Ailey dance company, a top children’s hospital in New York and even a planned entrance of the St. Louis Zoo. At Princeton, the financial-engineering program, meant to educate future titans of finance, enrolled more undergraduates than any of the traditional engineering programs. Before the stock market crashed last year, finance companies earned 27 percent of the nation’s corporate profits, up from about 15 percent in the 1970s and ’80s. These profits bought political influence. Congress taxed the income of hedge-fund managers at a lower rate than most everyone else’s. Regulators didn’t ask too many hard questions and then often moved on to a Wall Street job of their own. In good times — or good-enough times — the political will to beat back such policies simply doesn’t exist. Their costs are too diffuse, and their benefits too concentrated. A crisis changes the dynamic. It’s an opportunity to do things you could not do before. England’s crisis was the Winter of Discontent, in 1978-79, when strikes paralyzed the country and many public services shut down. The resulting furor helped elect Margaret Thatcher as prime minister and allowed her to sweep away some of the old economic order. Her laissez-faire reforms were flawed in some important ways — taken to an extreme, they helped create the current financial crisis — and they weren’t the only reason for England’s turnaround. But they made a difference. In the 30 years since her election, England has grown faster than Germany or Japan. III. THE INVESTMENT GAP ONE GOOD WAY TO UNDERSTAND the current growth slowdown is to think of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We’re suffering from investment-deficit disorder. You can find examples of this disorder in just about any realm of American life. Walk into a doctor’s office and you will be asked to fill out a long form with the most basic kinds of information that you have provided dozens of times before. Walk into a doctor’s office in many other rich countries and that information — as well as your medical history — will be stored in computers. These electronic records not only reduce hassle; they also reduce medical errors. Americans cannot avail themselves of this innovation despite the fact that the United States spends far more on health care, per person, than any other country. We are spending our money to consume medical treatments, many of which have only marginal health benefits, rather than to invest it in ways that would eventually have far broader benefits. Along similar lines, Americans are indefatigable buyers of consumer electronics, yet a smaller share of households in the United States has broadband Internet service than in Canada, Japan, Britain, South Korea and about a dozen other countries. Then there’s education: this country once led the world in educational attainment by a wide margin. It no longer does. And transportation: a trip from Boston to Washington, on the fastest train in this country, takes six-and-a-half hours. A trip from Paris to Marseilles, roughly the same distance, takes three hours — a result of the French government’s commitment to infrastructure. These are only a few examples. Tucked away in the many statistical tables at the Commerce Department are numbers on how much the government and the private sector spend on investment and research — on highways, software, medical research and other things likely to yield future benefits. Spending by the private sector hasn’t changed much over time. It was equal to 17 percent of G.D.P. 50 years ago, and it is about 17 percent now. But spending by the government — federal, state and local — has changed. It has dropped from about 7 percent of G.D.P. in the 1950s to about 4 percent now. Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won’t undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal. Historically, the government has stepped into the void. It helped create new industries with its investments. Economic growth has many causes, including demographics and some forces that economists admit they don’t understand. But government investment seems to have one of the best track records of lifting growth. In the 1950s and ’60s, the G.I. Bill created a generation of college graduates, while the Interstate System of highways made the entire economy more productive. Later, the Defense Department developed the Internet, which spawned AOL, Google and the rest. The late ’90s Internet boom was the only sustained period in the last 35 years when the economy grew at 4 percent a year. It was also the only time in the past 35 years when the incomes of the poor and the middle class rose at a healthy pace. Growth doesn’t ensure rising living standards for everyone, but it sure helps. Even so, the idea that the government would be playing a much larger role in promoting economic growth would have sounded radical, even among Democrats, until just a few months ago. After all, the European countries that have tried guiding huge swaths of their economies — that have kept their arms around the “commanding heights,” in Lenin’s enduring phrase — have grown even more slowly than this country in recent years. But the credit crunch and the deepening recession have changed the discussion here. The federal government seems as if it was doing too little to take advantage of the American economy’s enormous assets: its size, its openness and its mobile, risk-taking work force. The government is also one of the few large entities today able to borrow at a low interest rate. It alone can raise the capital that could transform the economy in the kind of fundamental ways that Olson described. “This recession is a critical economic problem — it is a crisis,” Summers told me recently. “But a moment when there are millions of people who are unemployed, when the federal government can borrow money over the long term at under 3 percent and when we face long-run fiscal problems is also a moment of great opportunity to make investments in the future of the country that have lagged for a long time.” He then told a story that John F. Kennedy liked to tell, about an early-20th-century French marshal named Hubert Lyautey. “The guy says to his gardener, ‘Could you plant a tree?’ ” Summers said. “The gardener says, ‘Come on, it’s going to take 50 years before you see anything out of that tree.’ The guy says, ‘It’s going to take 50 years? Really? Then plant it this morning.’ ” IV. STIMULUS VS. TRANSFORMATION THE OBAMA ADMINISTRATION’S FIRST CHANCE to build a new economy — an investment economy — is the stimulus package that has been dominating policy discussions in Washington. Obama has repeatedly said he wants it to be a down payment on solving bigger problems. The twin goals, he said recently, are to “immediately jump-start job creation and long-term growth.” But it is not easy to balance those goals. For the bill to provide effective stimulus, it simply has to spend money — quickly. Employing people to dig ditches and fill them up again would qualify. So would any of the “shovel ready” projects that have made it onto the list of stimulus possibilities. Even the construction of a mob museum in Las Vegas, a project that was crossed off the list after Republicans mocked it, would work to stimulate the economy, so long as ground was broken soon. Pork and stimulus aren’t mutually exclusive. But pork won’t transform an economy. Neither will the tax cuts that are likely to be in the plan. Sometimes a project can give an economy a lift and also lead to transformation, but sometimes the goals are at odds, at least in the short term. Nothing demonstrates this quandary quite so well as green jobs, which are often cited as the single best hope for driving the post-bubble economy. Obama himself makes this case. Consumer spending has been the economic engine of the past two decades, he has said. Alternative energy will supposedly be the engine of the future — a way to save the planet, reduce the amount of money flowing to hostile oil-producing countries and revive the American economy, all at once. Put in these terms, green jobs sounds like a free lunch. Green jobs can certainly provide stimulus. Obama’s proposal includes subsidies for companies that make wind turbines, solar power and other alternative energy sources, and these subsidies will create some jobs. But the subsidies will not be nearly enough to eliminate the gap between the cost of dirty, carbon-based energy and clean energy. Dirty-energy sources — oil, gas and coal — are cheap. That’s why we have become so dependent on them. The only way to create huge numbers of clean-energy jobs would be to raise the cost of dirty-energy sources, as Obama’s proposed cap-and-trade carbon-reduction program would do, to make them more expensive than clean energy. This is where the green-jobs dream gets complicated. For starters, of the $700 billion we spend each year on energy, more than half stays inside this country. It goes to coal companies or utilities here, not to Iran or Russia. If we begin to use less electricity, those utilities will cut jobs. Just as important, the current, relatively low price of energy allows other companies — manufacturers, retailers, even white-collar enterprises — to sell all sorts of things at a profit. Raising that cost would raise the cost of almost everything that businesses do. Some projects that would have been profitable to Boeing, Kroger or Microsoft in the current economy no longer will be. Jobs that would otherwise have been created won’t be. As Rob Stavins, a leading environmental economist, says, “Green jobs will, to some degree, displace other jobs.” Just think about what happened when gas prices began soaring last spring: sales of some hybrids increased, but vehicle sales fell overall. None of this means that Obama’s climate policy is a mistake. Raising the price of carbon makes urgent sense, for the well-being of the planet and of the human race. And the economic costs of a serious climate policy are unlikely to be nearly as big as the alarmists — lobbyists and members of Congress trying to protect old-line energy industries — suggest. Various analyses of Obama’s cap-and-trade plan, including one by Stavins, suggest that after it is fully implemented, it would cost less than 1 percent of gross domestic product a year, or about $100 billion in today’s terms. That cost is entirely manageable. But it’s still a cost. Or perhaps we should think of it as an investment. Like so much in the economy, our energy policy has been geared toward the short term. Inexpensive energy made daily life easier and less expensive for all of us. Building a green economy, on the other hand, will require some sacrifice. In the end, that sacrifice should pay a handsome return in the form of icecaps that don’t melt and droughts that don’t happen — events with costs of their own. Over time, the direct economic costs of a new energy policy may also fall. A cap-and-trade program will create incentives for the private sector to invest in alternative energy, which will lead to innovations and lower prices. Some of the new clean-energy spending, meanwhile, really will replace money now flowing overseas and create jobs here. But all those benefits will come later. The costs will come sooner, which is a big reason we do not already have a green economy — or an investment economy. V. CURING INEFFICIENCIES WASHINGTON’S CHALLENGE on energy policy is to rewrite the rules so that the private sector can start building one of tomorrow’s big industries. On health care, the challenge is keeping one of tomorrow’s industries from growing too large. For almost two decades, spending on health care grew rapidly, no matter what the rest of the economy was doing. Some of this is only natural. As a society gets richer and the basic comforts of life become commonplace, people will choose to spend more of their money on health and longevity instead of a third car or a fourth television. Much of the increases in health care spending, however, are a result of government rules that have made the sector a fabulously — some say uniquely — inefficient sector. These inefficiencies have left the United States spending far more than other countries on medicine and, by many measures, getting worse results. The costs of health care are now so large that it has become one problem that cannot be solved by growth alone. It’s qualitatively different from the other budget problems facing the government, like the Wall Street bailout, the stimulus, the war in Iraq or Social Security. You can see that by looking at various costs as a share of one year of economic output — that is, gross domestic product. Surprisingly, the debt that the federal government has already accumulated doesn’t present much of a problem. It is equal to about $6 trillion, or 40 percent of G.D.P., a level that is slightly lower than the average of the past six decades. The bailout, the stimulus and the rest of the deficits over the next two years will probably add about 15 percent of G.D.P. to the debt. That will take debt to almost 60 percent, which is above its long-term average but well below the levels of the 1950s. But the unfinanced parts of Medicare, the spending that the government has promised over and above the taxes it will collect in the coming decades requires another decimal place. They are equal to more than 200 percent of current G.D.P. During the campaign, Obama talked about the need to control medical costs and mentioned a few ideas for doing so, but he rarely lingered on the topic. He spent more time talking about expanding health-insurance coverage, which would raise the government’s bill. After the election, however, when time came to name a budget director, Obama sent a different message. He appointed Peter Orszag, who over the last two years has become one of the country’s leading experts on the looming budget mess that is health care. Orszag is a tall, 40-year-old Massachusetts native, made taller by his preference for cowboy boots, who has risen through the Democratic policy ranks over the last 15 years. He received a Ph.D. from the London School of Economics, later joined the Clinton White House and, from 2007, was the director of the Congressional Budget Office. While there, he devoted himself to studying health care, believing that it was far more important to the future of the budget than any other issue in front of Congress. He nearly doubled the number of health care analysts in the office, to 50. Obama highlighted this work when he announced Orszag’s appointment in November. In Orszag’s final months on Capitol Hill, he specifically argued that health care reform should not wait until the financial system has been fixed. “One of the blessings in the current environment is that we have significant capacity to expand and sell Treasury debt,” he told me recently. “If we didn’t have that, and if the financial markets didn’t have confidence that we would repay that debt, we would be in even more dire straits than we are.” Absent a health care overhaul, the federal government’s lenders around the world may eventually grow nervous about its ability to repay its debts. That, in turn, will cause them to demand higher interest rates to cover their risk when lending to the United States. Facing higher interest rates, the government won’t be able to afford the kind of loans needed to respond to a future crisis, be it financial or military. The higher rates will also depress economic growth, aggravating every other problem. So what should be done? Orszag was technically prohibited from advocating policies in his old job. But it wasn’t very hard to read between the lines. In a series of speeches around the country, in testimony to Congress and in a blog that he started (“Director’s Blog”), he laid out a fairly clear agenda. Orszag would begin his talks by explaining that the problem is not one of demographics but one of medicine. “It’s not primarily that we’re going to have more 85-year-olds,” he said during a September speech in California. “It’s primarily that each 85-year-old in the future will cost us a lot more than they cost us today.” The medical system will keep coming up with expensive new treatments, and Medicare will keep reimbursing them, even if they bring little benefit. After this introduction, Orszag would typically pause and advise his audience not to get too depressed. He would put a map of the United States on the screen behind him, showing Medicare spending by region. The higher-spending regions were shaded darker than the lower-spending regions. Orszag would then explain that the variation cannot be explained by the health of the local population or the quality of care it receives. Darker areas didn’t necessarily have sicker residents than lighter areas, nor did those residents necessarily receive better care. So, Orszag suggested, the goal of reform doesn’t need to be remaking the American health care system in the image of, say, the Dutch system. The goal seems more attainable than that. It is remaking the system of a high-spending place, like southern New Jersey or Texas, in the image of a low-spending place, like Minnesota, New Mexico or Virginia. To that end, Orszag has become intrigued by the work of Mitchell Seltzer, a hospital consultant in central New Jersey. Seltzer has collected large amounts of data from his clients on how various doctors treat patients, and his numbers present a very similar picture to the regional data. Seltzer told me that big-spending doctors typically explain their treatment by insisting they have sicker patients than their colleagues. In response he has made charts breaking down the costs of care into thin diagnostic categories, like “respiratory-system diagnosis with ventilator support, severity: 4,” in order to compare doctors who were treating the same ailment. The charts make the point clearly. Doctors who spent more — on extra tests or high-tech treatments, for instance — didn’t get better results than their more conservative colleagues. In many cases, patients of the aggressive doctors stay sicker longer and die sooner because of the risks that come with invasive care. The first step toward turning “less efficient” doctors, in Seltzer’s euphemism, into “efficient” doctors would be relatively uncontroversial. The government would have to create a national version of his database and, to do so, would need doctors and hospitals to have electronic medical records. The Obama administration plans to use the stimulus bill to help pay for the installation of such systems. It is then likely to mandate that, within five years, any doctor or hospital receiving Medicare payment must be using electronic records. The next steps will be harder. Based on what the data show, Medicare will have to stop reimbursing some expensive treatments that don’t do much good. Private insurers would likely follow Medicare’s lead, as they have on other issues in the past. Doctors, many of whom make good money from extra treatments, are sure to object, just as Mancur Olson would have predicted. They will claim that, whatever the data show, the treatments are benefiting their patients. In a few cases — though, by definition, not most — they may be right. Even when they are not, their patients, desperate for hope, may fight for the treatment. The most pessimistic point that Orszag routinely made during his time on Capitol Hill was that the political system didn’t deal well with simmering, long-term problems. It often waited until those problems became a crisis, he would say. That may be a kind of corollary to Rahm’s Doctrine, but it does highlight the task before the Obama administration. It will need to figure out how it can use one crisis as an excuse to prevent several more. VI. GRADUATES EQUAL GROWTH A GREAT APPEAL of green jobs — or, for that matter, of a growing and efficient health care sector — is that they make it possible to imagine what tomorrow’s economy might look like. They are concrete. When somebody wonders, What will replace Wall Street? What will replace housing? they can be given an answer. As answers go, green jobs and health care are fine. But they probably aren’t the best answers. The best one is less concrete. It also has a lot more historical evidence on its side. Last year, two labor economists, Claudia Goldin and Lawrence Katz, published a book called “The Race Between Education and Technology.” It is as much a work of history — the history of education — as it is a work of economics. Goldin and Katz set out to answer the question of how much an education really matters. They are themselves products of public schools, she of New York and he of Los Angeles, and they have been a couple for two decades. They are liberals (Katz served as the chief economist under Robert Reich in Bill Clinton’s Labor Department), but their book has been praised by both the right and the left. “I read the Katz and Goldin book,” Matthew Slaughter, an associate dean of Dartmouth’s business school who was an economic adviser to George W. Bush, recently told me, “and there’s part of me that can’t fathom that half the presidential debates weren’t about a couple of facts in that book.” Summers wrote a blurb for the book, calling it “the definitive treatment” of income inequality. The book’s central fact is that the United States has lost its once-wide lead in educational attainment. South Korea and Denmark graduate a larger share of their population from college — and Australia, Japan and the United Kingdom are close on our heels. Goldin and Katz explain that the original purpose of American education was political, to educate the citizens of a democracy. By the start of the 20th century, though, the purpose had become blatantly economic. As parents saw that high-school graduates were getting most of the good jobs, they started a grass-roots movement, known as the high-school movement, to demand free, public high schools in their communities. “Middletown,” the classic 1929 sociological study of life in Indiana, reported that education “evokes the fervor of a religion, a means of salvation, among a large section of the population.” At the time, some European intellectuals dismissed the new American high schools as wasteful. Instead of offering narrowly tailored apprentice programs, the United States was accused of overeducating its masses (or at least its white masses). But Goldin and Katz, digging into old population surveys, show that the American system paid huge dividends. High-school graduates filled the ranks of companies like General Electric and John Deere and used their broad base of skills to help their employers become global powers. And these new white-collar workers weren’t the only ones to benefit. A high-school education also paid off for blue-collar workers. Those with a diploma were far more likely to enter newer, better-paying, more technologically advanced industries. They became plumbers, jewelers, electricians, auto mechanics and railroad engineers. Not only did mass education increase the size of the nation’s economic pie; it also evened out the distribution. The spread of high schools — by 1940, half of teenagers were getting a diploma — meant that graduates were no longer an elite group. In economic terms, their supply had increased, which meant that the wage premium that came with a diploma was now spread among a larger group of workers. Sure enough, inequality fell rapidly in the middle decades of the 20th century. But then the great education boom petered out, starting in the late 1960s. The country’s worst high schools never got their graduation rates close to 100 percent, while many of the fast-growing community colleges and public colleges, which were educating middle-class and poorer students, had low graduation rates. Between the early 1950s and early ’80s, the share of young adults receiving a bachelor’s degree jumped to 24 percent, from 7 percent. In the 30 years since, the share has only risen to 32 percent. Nearly all of the recent gains have come among women. For the first time on record, young men in the last couple of decades haven’t been much more educated than their fathers were. Goldin and Katz are careful to say that economic growth is not simply a matter of investing in education. And we can all name exceptions to the general rule. Bill Gates dropped out of college (though, as Malcolm Gladwell explains in his recent book, “Outliers,” Gates received a fabulously intense computer-programming education while in high school). Some college graduates struggle to make a good living, and many will lose their jobs in this recession. But these are exceptions. Goldin’s and Katz’s thesis is that the 20th century was the American century in large part because this country led the world in education. The last 30 years, when educational gains slowed markedly, have been years of slower growth and rising inequality. Their argument happens to be supported by a rich body of economic literature that didn’t even make it into the book. More-educated people are healthier, live longer and, of course, make more money. Countries that educate more of their citizens tend to grow faster than similar countries that do not. The same is true of states and regions within this country. Crucially, the income gains tend to come after the education gains. What distinguishes thriving Boston from the other struggling cities of New England? Part of the answer is the relative share of children who graduate from college. The two most affluent immigrant groups in modern America — Asian-Americans and Jews — are also the most educated. In recent decades, as the educational attainment of men has stagnated, so have their wages. The median male worker is roughly as educated as he was 30 years ago and makes roughly the same in hourly pay. The median female worker is far more educated than she was 30 years ago and makes 30 percent more than she did then. There really is no mystery about why education would be the lifeblood of economic growth. On the most basic level, education helps people figure out how to make objects and accomplish tasks more efficiently. It allows companies to make complex products that the rest of the world wants to buy and thus creates high-wage jobs. Education may not be as tangible as green jobs. But it helps a society leverage every other investment it makes, be it in medicine, transportation or alternative energy. Education — educating more people and educating them better — appears to be the best single bet that a society can make. Fortunately, we know much more than we did even a decade ago about how education works and doesn’t work. In his book, “Whatever It Takes,” (and in this magazine, where he is an editor), Paul Tough has described some of the most successful schools for poor and minority students. These schools tend to set rigorous standards, keep the students in school longer and create a disciplined, can-do culture. Many of the schools, like several middle schools run by an organization called KIPP, have had terrific results. Students enter with test scores below the national average. They leave on a path to college. The lessons of KIPP — some of the lessons, at least — also apply to schools that are not so poor. Last year, the Gates Foundation hired an economist named Thomas Kane to oversee a big new push to prepare students for college. Kane is one of the researchers whose work shows that teachers may matter more than anything else. Good teachers tend to receive high marks from parents, colleagues and principals, and they tend to teach their students much more than average teachers. Bad teachers tend to do poorly on all these metrics. The differences are usually apparent after just a couple of years on the job. Yet in a typical school system, both groups receive tenure. The Obama administration has suggested that education reform is an important goal. The education secretary is Arne Duncan, the former school superintendent in Chicago, who pushed for education changes there based on empirical data. Obama advisers say that the administration plans to use the education money in the stimulus package as leverage. States that reward good teaching and use uniform testing standards — rather than the choose-your-own-yardstick approach of the No Child Left Behind law — may get more money. But it is still unclear just how much of a push the administration will make. With the financial crisis looming so large, something as sprawling and perennially plagued as education can seem like a sideshow. Given everything else on its agenda, the Obama administration could end up financing a few promising pilot programs without actually changing much. States, for their part, will be cutting education spending to balance their budgets. A few weeks ago, I drove to Shepherd University in West Virginia to get a glimpse of both the good and bad news for education. Shepherd is the kind of public college that will need to be at the center of any effort to improve higher education. Located in a small town in the Shenandoah Valley, it attracts mostly middle-class students — from the actual middle class, not the upper middle class — and it has a graduation rate of about 35 percent. Several years ago, the state of West Virginia started a scholarship program, called Promise, in part to lift the graduation rate at places like Shepherd. The program is modeled after those in several Southern states, in which any high-school student with a certain minimum grade-point average (often 3.0) and certain SAT scores gets a hefty scholarship to any state school. When West Virginia officials were designing their program, though, they noticed a flaw with the other programs. The students weren’t required to take a course load that was big enough to let them graduate in four years. In some cases they were required to keep a minimum grade-point average, which encouraged them, perversely, to take fewer courses. Many students drifted along for a few years and then dropped out. So West Virginia changed the rules. It offered a bigger carrot — free tuition at any public college — but also a stick. Students had to take enough courses each semester so that they could graduate in four years. Judith Scott-Clayton, a young economist who analyzed the program, concluded that it had raised the on-time graduation rate by almost 7 percentage points in a state where many colleges have a graduation rate below 50 percent. Given those results, the Promise scholarship might seem like an ideal public policy in a deep recession. It pays for school at a time when many families are struggling. It keeps students busy when jobs are hard to come by. It also has the potential to do some long-term good. But nearly everyone I interviewed in West Virginia — the students, the president of Shepherd and other education officials — worried that financing would be reduced soon. The program is expensive, and state revenue is declining. Something has to give. VII. A MATTER OF NORMS WHAT STRUCK ME ABOUT the Shepherd students I met was that they didn’t seem to spend much time thinking about the credit requirement. It had become part of their reality. Many college students today assume they will not graduate in four years. Some even refer to themselves as second- or third-years, instead of sophomores or juniors. “It’s just normal all around not to be done in four years,” Chelsea Carter, a Shepherd student, told me. “People don’t push you.” Carter, in fact, introduced herself to me as a third-year. But she is also a Promise scholar, and she said she expected to graduate in four years. Her younger sister, now in her first year in the program at Shepherd, also plans to graduate in four years. For many Promise scholars, graduating on time has become the norm. Economists don’t talk much about cultural norms. They prefer to emphasize prices, taxes and other incentives. And the transformation of the American economy will depend very much on such incentives: financial aid, Medicare reimbursements, energy prices and marginal tax rates. But it will also depend on forces that aren’t quite so easy to quantify. Orszag, on his barnstorming tour to talk about the health care system, argued that his fellow economists were making a mistake by paying so little attention to norms. After all, doctors in Minnesota don’t work under a different Medicare system than doctors in New Jersey. But they do act differently. The norms of the last two decades or so — consume before invest; worry about the short term, not the long term — have been more than just a reflection of the economy. They have also affected the economy. Chief executives have fought for paychecks that their predecessors would have considered obscenely large. Technocrats inside Washington’s regulatory agencies, after listening to their bosses talk endlessly about the dangers of overregulation, made quite sure that they weren’t regulating too much. Financial engineering became a more appealing career track than actual engineering or science. In one of the small gems in their book, Goldin and Katz write that towns and cities with a large elderly population once devoted a higher-than-average share of their taxes to schools. Apparently, age made them see the benefits of education. In recent decades, though, the relationship switched. Older towns spent less than average on schools. You can imagine voters in these places asking themselves, “What’s in it for me?” By any standard, the Obama administration faces an imposing economic to-do list. It will try to end the financial crisis and recession as quickly as possible, even as it starts work on an agenda that will inspire opposition from a murderers’ row of interest groups: Wall Street, Big Oil, Big Coal, the American Medical Association and teachers’ unions. Some items on the agenda will fail. But the same was true of the New Deal and the decades after World War II, the period that is obviously the model for the Obama years. Roosevelt and Truman both failed to pass universal health insurance or even a program like Medicare. Yet the successes of those years — Social Security, the highway system, the G.I. Bill, the National Science Foundation, the National Labor Relations Board — had a huge effect on the culture. The American economy didn’t simply grow rapidly in the late 1940s, 1950s and 1960s. It grew rapidly and gave an increasing share of its bounty to the vast middle class. Middle-class incomes soared during those years, while income growth at the very top of the ladder, which had been so great in the 1920s, slowed down. The effects were too great to be explained by a neat package of policies, just as the last few decades can’t be explained only by education, investment and the like. When Washington sets out to rewrite the rules for the economy, it can pass new laws and shift money from one program to another. But the effects of those changes are not likely to be merely the obvious ones. The changes can also send signals. They can influence millions of individual decisions — about the schools people attend, the jobs they choose, the medical care they request — and, in the process, reshape the economy.
  11. (Courtesy of The Montreal Gazette) Hopefully they don't lose $40 billion again, but at least they almost regained everything they lost.
  12. VISIT the euro zone and you will be invigorated by gusts of reform. The “Save Italy” plan has done enough for Mario Monti, the prime minister, to declare, however prematurely, that the euro crisis is nearly over. In Spain Mariano Rajoy’s government has tackled the job market and is about to unveil a tight budget (see article). For all their troubles, Greeks know that the free-spending and tax-dodging are over. But one country has yet to face up to its changed circumstances. France is entering the final three weeks of its presidential campaign. The ranking of the first round, on April 22nd, remains highly uncertain, but the polls back François Hollande, the Socialist challenger, to win a second-round victory. Indeed, in elections since the euro crisis broke, almost all governments in the euro zone have been tossed out by voters. But Nicolas Sarkozy, the Gaullist president, has been clawing back ground. The recent terrorist atrocity in Toulouse has put new emphasis on security and Islamism, issues that tend to favour the right—or, in the shape of Marine Le Pen, the far right. Yet what is most striking about the French election is how little anybody is saying about the country’s dire economic straits (see article). The candidates dish out at least as many promises to spend more as to spend less. Nobody has a serious agenda for reducing France’s eye-watering taxes. Mr Sarkozy, who in 2007 promised reform with talk of a rupture, now offers voters protectionism, attacks on French tax exiles, threats to quit Europe’s passport-free Schengen zone and (at least before Toulouse) talk of the evils of immigration and halal meat. Mr Hollande promises to expand the state, creating 60,000 teaching posts, partially roll back Mr Sarkozy’s rise in the pension age from 60 to 62, and squeeze the rich (whom he once cheerfully said he did not like), with a 75% top income-tax rate. A plethora of problems France’s defenders point out that the country is hardly one of the euro zone’s Mediterranean basket cases. Unlike those economies, it should avoid recession this year. Although one ratings agency has stripped France of its AAA status, its borrowing costs remain far below Italy’s and Spain’s (though the spread above Germany’s has risen). France has enviable economic strengths: an educated and productive workforce, more big firms in the global Fortune 500 than any other European country, and strength in services and high-end manufacturing. However, the fundamentals are much grimmer. France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country—more even than in Sweden. The banks are undercapitalised. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities. Exports are stagnating while they roar ahead in Germany. France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not any more. Indeed, a sluggish and unreformed France might even find itself at the centre of the next euro crisis. Browse our slideshow guide to the leading candidates for the French presidency It is not unusual for politicians to avoid some ugly truths during elections; but it is unusual, in recent times in Europe, to ignore them as completely as French politicians are doing. In Britain, Ireland, Portugal and Spain voters have plumped for parties that promised painful realism. Part of the problem is that French voters are notorious for their belief in the state’s benevolence and the market’s heartless cruelty. Almost uniquely among developed countries, French voters tend to see globalisation as a blind threat rather than a source of prosperity. With the far left and the far right preaching protectionism, any candidate will feel he must shore up his base. Many business leaders cling to the hope that a certain worldly realism will emerge. The debate will tack back to the centre when Mr Sarkozy and Mr Hollande square off in the second round; and once elected, the new president will ditch his extravagant promises and pursue a sensible agenda of reform, like other European governments. But is that really possible? It would be hard for Mr Sarkozy suddenly to propose deep public-spending cuts, given all the things he has said. It would be harder still for Mr Hollande to drop his 75% tax rate. 1981 and all that Besides, there is a more worrying possibility than insincerity. The candidates may actually mean what they say. And with Mr Hollande, who after all is still the most likely victor, that could have dramatic consequences. The last time an untried Socialist candidate became president was in 1981. As a protégé of François Mitterrand, Mr Hollande will remember how things turned out for his mentor. Having nationalised swathes of industry and subjected the country to two devaluations and months of punishment by the markets, Mitterrand was forced into reverse. Mr Hollande’s defenders say he is a pragmatist with a more moderate programme than Mitterrand’s. His pension-age rollback applies only to a small set of workers; his 75% tax rate affects a tiny minority. Yet such policies indicate hostility to entrepreneurship and wealth creation and reflect the French Socialist Party’s failure to recognise that the world has changed since 1981, when capital controls were in place, the European single market was incomplete, young workers were less mobile and there was no single currency. Nor were France’s European rivals pursuing big reforms with today’s vigour. If Mr Hollande wins in May (and his party wins again at legislative elections in June), he may find he has weeks, not years, before investors start to flee France’s bond market. The numbers of well-off and young French people who hop across to Britain (and its 45% top income tax) could quickly increase. Even if Mr Sarkozy is re-elected, the risks will not disappear. He may not propose anything as daft as a 75% tax, but neither is he offering the radical reforms or the structural downsizing of spending that France needs. France’s picnickers are about to be swamped by harsh reality, no matter who is president. http://www.economist.com/node/21551478
  13. ``What happens in the next leg down? We obviously have a huge crisis in financial institutions, but the crisis in the economy is just beginning to be felt,'' Bonderman told a private equity conference in Hong Kong today. ``The global recession is likely to be a deep one and a prolonged one, not a V-shape, not a U-shape, more an L-shape one.'' The credit contagion that began with a surge in subprime mortgage delinquencies is driving the U.S., European and Japanese economies toward recession, and prompted China to unveil a $586 billion stimulus package. The International Monetary Fund last week predicted economic contractions next year in the U.S., Japan and the euro region, the first simultaneous recession since the end of World War II. David Rubenstein, the 59-year-old co-founder of Washington- based Carlyle Group, echoed Bonderman's pessimism. Rubenstein said at the Hong Kong conference that the recession will last for at least a year, and that U.S. unemployment may rise as high as 10 percent. U.S. housing prices may have ``a significant way'' to fall because they're still high by historical standards and sliding rents are reducing the allure of home ownership, said Bonderman, whose firm's funds oversee more than $50 billion. Prices `Way High' TPG's fourth buyout fund, launched in 2003, has delivered average annual returns of 31 percent, according to the California Public Employees' Retirement System, an investor in a number of TPG's funds. Home prices in 20 U.S. metropolitan areas slid 17 percent in August as foreclosures rose, according to the S&P/Case-Shiller price index. ``Housing prices are still way high by historical standards,'' Bonderman said.
  14. Big Apple starting to crumble Janet Whitman, Financial Post Published: Thursday, November 06, 2008 NEW YORK -- The Big Apple is losing its shine. After years of benefiting from consumer bingeing on everything from luxury lofts to US$99 hamburgers, New York is seeing a dramatic turn in its fortunes as Wall Street stumbles. Investment banks and other financial-services firms here have cut tens of thousands of high-wage jobs and many more pink slips still could be on the way as they grapple with the deepening credit crisis. This year's Wall Street bonus pool, which makes up the bulk of the pay for high-flying financial executives, is forecast to be chopped in half to US$16-billion. Businesses are already feeling the pinch. Revenue at some high-end Manhattan restaurants are down an estimated 20% this year and the once sizzling real-estate market is cooling fast. New York City Mayor Michael Bloomberg said this week that the big drop in tax revenue collected from financial firms is forcing him to renege on planned US$400 property tax rebates for homeowners and to mull a 15% income tax hike. Economists said yesterday that the downturn could resemble New York's financial crisis in the early 1970s, when the city nearly went bankrupt and crime rates skyrocketed. "Compensation is going to be way down and that's going to weigh on restaurants and retailers and the housing market as well," said Mark Vitner, senior economist at Charlotte, N.C.-based bank Wachovia Corp. "We're going to have a very difficult climb back out of this. The recovery might begin in the middle of next year, but that just means things will stop getting worse." Mr. Vitner said it could take at least three years before New York starts to see strong growth and five years before the city gets back to normal. After the dot-com bust in 1999 and the Sept. 11 terrorist attacks, New York soon roared back, fueled by Wall Street's recovery. But the city can't depend on Wall Street this time around. "The flavour is different," said James Brown, a New York state Department of Labor regional analyst who focuses on New York City. "It's not clear how much growth we can expect from our financial sector in the next upturn. We don't know to what degree they may not be as profitable and able to lavish the same high salaries in the next boom as they have in the past booms." With the U.S. government looking to avoid sowing the seeds for a future financial crisis by cracking down on executive bonuses and limiting how much financial firms can wager, Wall Street's recovery could be slow. That's bad news for New York State, which depends on the financial sector for 20% of its revenue. The state already is facing its biggest budget gap in history, at US$47-billion over the next four years. The crisis last week prompted New York State Gov. David Paterson to ask U.S. Congress for billions of dollars in federal assistance. New York City has been particularly hard hit. For every Wall Street job another three or four will be lost in the city. Despite the doom and gloom, Mr. Bloomberg assured New Yorkers at a press briefing this week that the city wouldn't return "to the dark days of the 1970s when service cuts all but destroyed our quality of life." The mayor, who is seeking a third term to guide the city through the crisis, said New York is in much better fiscal shape than it was then and won't make the same mistakes. Still, he warned, it could be as many as five years before financial companies have to start paying city or state taxes again because of the half a trillion dollars in write-downs they have taken, which will offset future profits.
  15. Europe Works to Contain Crisis Article Tools Sponsored By NYC Times By CARTER DOUGHERTY, NELSON SCHWARTZ and FLOYD NORRIS Published: October 6, 2008 European nations scrambled further Monday to prevent a growing credit crisis from bringing down major banks and alarming savers as Sweden followed Germany, Austria and Denmark in offering new protections for bank deposits. As troubles in financial markets spread around the world, some governments are eager to act to avoid the mistakes of the 1930s when authorities sat on their hands during the Wall Street crash and its aftermath, Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management in London, said. Sweden became the latest European country to offer protection for bank deposits, after the German government offered blanket guarantees Sunday to all private savings accounts. Austria and Denmark also did the same. Britain’s government on Monday scrambled to find ways to help the country’s ailing banking sector and even considered a partial nationalization of the industry. The chancellor of the Exchequer, Alistair Darling, continued to consult with advisers on Monday on ways to stabilize the banking sector, which may include a recapitalization financed by taxpayers, said a person at the Treasury who declined to be identified because the discussions were private. Stocks fell sharply on Monday in London, Paris and Frankfurt. New bailouts were arranged late Sunday for two European companies, Hypo Real Estate, a large German mortgage lender, and Fortis, a large banking and insurance company based in Belgium but active across much of the Continent. Under the agreement, BNP Paribas will acquire the Belgium and Luxembourg banking operations of Fortis for about $20 billion. The spreading worries came days after the United States Congress approved a $700 billion bailout package that officials had hoped would calm financial markets globally. The crisis in Europe appears to be the most serious one to face the Continent since a common currency, the euro, was created in 1999. Jean Pisani-Ferry, director of the Bruegel research group in Brussels, said Europe confronted “our first real financial crisis, and it’s not just any crisis. It’s a big one.” Britain is coming under increasing pressure to act. Some investors criticized the government for failing to set up an American-style rescue fund and for its piecemeal approach to deal with each problem. “The government needs to get on their front foot and get control of their own destiny,” Mr. Chillingworth said. “We could well be in a period where we see a quasi-nationalization in the banking sector, where taxpayers are taking equity stakes.” Britain partly nationalized Bradford & Bingley last week after the mortgage lender struggled to get financing and brokered a takeover of HBOS by Lloyds TSB after its shares lost most of its value. From Tuesday, the government will also increase the amount of retail deposits it guarantees to £50,000, or $88,600, from £35,000. Some analysts said guaranteeing deposits might reinstate client confidence but would fall short of bringing back the trust among banks that is desperately needed to encourage them to lend to each other. British banks remain burdened by their exposure to worthless mortgage assets, but the larger problem remains their unwillingness to lend to one another — even after an injection of £40 billion by the Bank of England. “Liquidity is drying up,” said Richard Portes, a professor of economics at the London Business School. “The authorities have to deal with this paralysis in the money markets.” The European Central Bank has aggressively lent money to banks as the crisis has grown. It had resisted lowering interest rates, but signaled on Thursday that it might cut rates soon. The extra money, aimed at ensuring that banks have adequate access to cash, has not reassured savers or investors, and European stock markets have performed even worse than the American markets. In Iceland, government officials and banking chiefs were discussing a possible rescue plan for the country’s commercial banks. In Berlin, Chancellor Angela Merkel and her finance minister, Peer Steinbrück, appeared on television Sunday to promise that all bank deposits would be protected, although it was not clear whether legislation would be needed to make that promise good. Mindful of the rising public anger at the use of public money to buttress the business of high-earning bankers, Ms. Merkel promised a day of reckoning for them as well. “We are also saying that those who engaged in irresponsible behavior will be held responsible,” she said. The events in Berlin and Brussels underscored the failure of Europe’s case-by-case approach to restoring confidence in the Continent’s increasingly jittery banking sector. A meeting of European heads of state in Paris on Saturday did little to calm worries, though officials there pledged to work together to ensure market stability. President Nicolas Sarkozy of France and his counterparts from Germany, Britain and Italy vowed to prevent a Lehman Brothers-like bankruptcy in Europe but they did not offer a sweeping American-style bailout package. The growing crisis has underlined the difficulty of taking concerted action in Europe because its economies are far more integrated than its governing structures. “We are not a political federation,” Jean-Claude Trichet, the president of the European Central Bank, said after the meeting. “We do not have a federal budget.” Last week, Ireland moved to guarantee both deposits and other liabilities at six major banks. There was grumbling in London and Berlin about the move giving those banks an unfair advantage. But Germany proposed its deposit guarantee Sunday after Britain raised its guarantee. The German officials emphasized that the guarantee applied only to private depositors, not to the banks themselves. But on Monday, Mr. Steinbrück said the government was considering an “umbrella” to protect the banking sector. Unlike in the United States, where deposits are now fully guaranteed up to a limit of $250,000 — a figure that was raised from $100,000 last week — deposits in most European countries have been only partly guaranteed, sometimes by groups of banks rather than governments. In Germany, the first 90 percent of deposits up to 20,000 euros, or about $27,000, was guaranteed. Even before the Paris meeting began it was becoming clear that two bailouts announced the week before had not succeeded and that UniCredit, a major Italian bank, might be in trouble. UniCredit announced plans on Sunday to raise as much as 6.6 billion euros. Fortis, which only a week ago received 11.2 billion euros from the governments of the Netherlands, Belgium and Luxembourg, was unable to continue its operations. On Friday, the Dutch government seized its operations in that country, and late Sunday night the Belgian government helped to arrange for BNP Paribas, the French bank, to take control of the company for 14.5 billion euros, or about $20 billion. In Berlin, the government arranged a week ago for major banks to lend 35 billion euros to Hypo Real Estate, but that fell apart when the banks concluded that far more money would be needed. Late Sunday night the government said a package of 50 billion euros had been arranged, with both the government and other banks taking part. The credit crisis began in the United States, a fact that has led European politicians to assert superiority for their countries’ financial systems, in contrast to what Silvio Berlusconi, the prime minister of Italy, called the “speculative capitalism” of the United States. On Saturday, Gordon Brown, the British prime minister, said the crisis “has come from America,” and Mr. Berlusconi bemoaned the lack of business ethics that had been exposed by the crisis. Many of the European banks’ problems have stemmed from bad loans in Europe, and Fortis got into trouble in part by borrowing money to make a major acquisition. But activities in the United States have played a role. Bankers said Sunday that the need for additional money at Hypo came from newly discovered guarantees it had issued to back American municipal bonds that it had sold to investors. The credit market worries came on top of heightening concerns about economic growth in Europe and the United States. “Unless there is a material easing of credit conditions,” said Bob Elliott of Bridgewater Associates, an American money management firm, after retail sales figures were announced, “it is unlikely that demand will turn around soon.” Henry M. Paulson Jr., the United States Treasury secretary, hoped that approval of the American bailout, which involved buying securities from banks at more than their current market value, would free up credit by making cash available for banks to lend and by reassuring participants in the credit markets. But that did not happen last week. Instead, credit grew more expensive and harder to get as investors became more skittish about buying commercial paper, essentially short-term loans to companies. Rates on such loans rose so fast that some feared the market could essentially close, leaving it to already-stressed banks to provide short-term corporate loans. Europe’s need to scramble is in part the legacy of a decision to establish the euro, which 15 countries now use, but not follow up with a parallel system of cross-border regulation and oversight of private banks. “First we had economic integration, then we had monetary integration,” said Sylvester Eijffinger, a member of the monetary expert panel advising the European Parliament. “But we never developed the parallel political and regulatory integration that would allow us to face a crisis like the one we are facing today.” In Brussels, Daniel Gros, director of the Center for European Policy Studies, agreed. “Maybe they will be shocked into thinking more strategically instead of running behind events,” he said. “The later you come, the higher the bill.” While the European Central Bank has power over interest rates and broader monetary policy, it was never granted parallel oversight of private banks, leaving that task to dozens of regulators across the Continent. This patchwork system includes national central banks in each of the euro zone’s 15 members and they still retain broad powers within their own borders, further complicating any regional approach to problem-solving. “The European banking landscape was transformed fairly recently,” Mr. Pisani-Ferry said. “When the euro was first introduced, the question of cross-border regulation didn’t really arise.” Optimists say one potential long-term benefit from the current turmoil is that it often takes a crisis to propel European integration forward. “Progress in Europe is usually the result of a crisis,” Mr. Eijffinger said. “This could be one of those rare moments in E.U. history.”
  16. Time for Quebecers to be more open: report Shake off angst. Get used to living in globalized society, Bouchard-Taylor report urges JEFF HEINRICH The Gazette Saturday, May 17, 2008 Learn more English, be nicer to Muslims, get better informed. Those are just some of the ways the unhappy French-Canadian majority in Quebec can shake off its angst about minorities and help build a truly open society in a globalized world, say the authors of a much-anticipated report for the Liberal government on the "reasonable accommodation" of minorities. In several chapters of the final draft obtained by The Gazette, Gérard Bouchard and Charles Taylor argue the "discontent of a large part of the population" over demands by Muslims, Jews and other religious minorities "seems to us the result of partial information and false perceptions." The chairpersons of the $5-million commission address a number of what they call "unfounded objections" to the role of religion in Quebec society, mostly voiced by old-stock francophones during three months of highly publicized hearings last fall. Rebutting those objections, Bouchard, a prominent Chicoutimi sociologist and historian, and Taylor, a world-renowned Montreal philosopher, lay out their vision of a new Quebec coming to terms with kirpans, hijabs, kosher food and other expressions of non-Christian cultures. In Quebec, they say, everyone should feel welcome and the majority should no longer feel under threat by newcomers. "We think it is possible to re-concile Quebecers - franco-phones and others - with practices of harmonization, once it has been shown that: a) these practices respect our society's fundamental values, notably the equality of men and women. b) they don't aim to create privileges but, rather, equality that is well understood and that respects everyone's rights. c) they encourage integration and not marginalization. d) they're framed by guidelines and protected against spiralling out of control. e) they're founded on the principle of reciprocity. f) they don't play the game of fundamentalism. g) they don't compromise the gains of the Quiet Revolution." The final draft is dated March 19, two weeks before the commission announced on its website that the writing of the report was finished and that, after adding a series of recommendations, proofreading the document and translating it into English, it would be sent to the printers. The official report is now in the hands of Premier Jean Charest, who is to present it to cabinet on Wednesday. After a budget-style "lock-up" behind closed doors for journalists Friday morning, the commissioners will hold a news conference to discuss their findings. Broken down into half-a-dozen parts, the voluminous report has more than a dozen chapters and almost as many annexes consisting of a series of research reports, independently produced under special order by the commission. Their subjects relate to the accommodation debate, including media coverage, ethnic ghettos and French-language training for immigrants. In their report, Bouchard and Taylor - but mainly Bouchard, who did the bulk of the writing, insiders say- argue that the responsibility for open-mindedness and desire for change lie mainly with one people: the French Canadians themselves. "It's principally from this milieu that the crisis arose," the commissioners write, adding that many French Canadians "have a strong feeling of insecurity for the survival of their culture." They fear losing their "values, language, tradition and customs" and of eventually "disappearing" entirely as a French-speaking minority in North America. Self-doubt and "the fear of the Other" - are "the two great hindrances from the French-Canadian past," the commissioners write. "In the past, the threat came mainly from the anglophone. Before that, it was the lifestyle brought on by industrialization. Today, for many, it's the immigrant." What Quebec now faces is not the traditional "deux solitudes" of French and English, but rather "deux inquiètudes" - the twin anxieties of the majority and the new minorities, the commissioners say. The "members of a strong ethnocultural majority fear being submerged by minorities who themselves are fragile and worried about the future, especially immigrants trying to find their feet in their adoptive society," write the scholars, who in footnotes liberally quote from oral testimony as well as written briefs presented at the hearings last fall. Bouchard and Taylor also compare Quebec's immigration situation with that of other provinces, noting that Quebec has far fewer immigrants (11.5 per cent per capita, compared with 28 per cent in Ontario and British Columbia, and 16 per cent in Alberta) and far fewer ethnocultural minorities generally (21 per cent in metropolitan Montreal vs. 46 per cent in Toronto and 40 per cent in Vancouver). Quebec's accommodation crisis dates to March 2006, when the Supreme Court of Canada ruled in favour of a Montreal Sikh teenager who wanted to keep wearing his kirpan, the traditional ceremonial dagger of baptized orthodox Sikh men, to school. A series of media-fuelled controversies over demands for accommodation by religious minorities followed. For example: The Association of Maritime Employers agreed to re-examine its workplace rules after orthodox Sikh truck drivers objected to wearing safety helmets instead of their turbans at the Port of Montreal. A Montreal YMCA frosted the windows of an exercise room so that ultraorthodox Jewish neighbours wouldn't have to watch women exercising. And Montreal policewomen were advised in a training brochure to let their male colleagues take charge when visiting Hasidic neighborhoods. The "scandals" came to a head in January 2007 with the publication of a "code of life" by the village council of Hérouxville in the Mauricie region, in which foreigners were advised that public stonings and female circumcision were not allowed in the community. Faced with the polemic over that declaration and fearing unrest over immigrants and religious minorities on the eve of a provincial election campaign, Charest quickly announced the formation of a special commission to look into accommodations and defuse the crisis: the Bouchard-Taylor commission. In their report, the commissioners say that in hindsight the accommodation crisis was largely a media phenomenon - but, they add, it was no invention. "The media didn't create the crisis over accommodations, but their message fell on fertile ground." Elsewhere, they call on the media to show more "self-discipline" and rigour in reporting on ethnic communities and their representatives, some of whom - like deported Tunisian imam Saïd Jaziri - got wide coverage despite having little or no credibility. Although "what has happened in Quebec sometimes gives the impression of being a showdown between two groups of minorities (French Canadians and the ethnic minorities), each of whom wants the other to accommodate it," there are many ways to avoid a fatal confrontation, the commissioners say. People should get used to the idea that "Quebec is made up of diverse ethnic groups, each of which, as is its right and in its own way, cultivates its own memory" - in other words, none is more valuable than the other. The two commissioners - who each collected a salary of $380,000 for their work - also: Declare themselves in favour of more funding for community groups that try to bring cultures together. Argue against race-based projects that segregate people from mainstream society (such as a proposed all-black school). Lament the "wasted careers" of foreign professionals who can't find work here because their credentials aren't recognized. Deplore that only three per cent of Quebec public-service jobs are held by immigrants, "one of the worst situations in North America." Blame the Quebec media for being generally "very 'old-stock,' very 'white' (and) by consequence, they broadcast an often biased image of a (multicultural) reality that a lot of people don't know well enough." But Bouchard and Taylor also - surprisingly - come to the defence of Hérouxville, which made headlines around the world. "In a very awkward and excessive way, the Hérouxville text expressed a tension, an ambivalence many French-Canadian Quebecers have," the commissioners write. Finally, they make a plea for better understanding of Quebec's Muslims, "who only make up two per cent of the Quebec population, about 130,000 people," who are "massively francophone and highly educated," who are "among the least devoutly religious of all immigrants," and who are "the least ghettoized" geographically in Montreal. "The way to overcome Islamophobia is to get closer to Muslims, not to run away from them," the commissioners state. "Mistrust breeds mistrust. Just like fear, it winds up feeding on itself." [email protected] thegazette.canwest.com SOUNDOFF! How has reasonable accommodation affected your life? What do you think of the Bouchard-Taylor findings? Do they go far enough in addressing concerns about the state of minorities in Quebec? What other issues do you think should have been addressed? Share your views and catch up on stories and testimonials from the hearings at montrealgazette.com © The Gazette (Montreal) 2008
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  18. Will California become America's first failed state? Los Angeles, 2009: California may be the eighth largest economy in the world, but its state staff are being paid in IOUs, unemployment is at its highest in 70 years, and teachers are on hunger strike. So what has gone so catastrophically wrong? Patients without medical insurance wait for treatment in the Forum, a music arena inInglewood, Los Angeles. The 1,500 free places were filled by 4am. Photograph: John Moore/Getty Images California has a special place in the American psyche. It is the Golden State: a playground of the rich and famous with perfect weather. It symbolises a lifestyle of sunshine, swimming pools and the Hollywood dream factory. But the state that was once held up as the epitome of the boundless opportunities of America has collapsed. From its politics to its economy to its environment and way of life, California is like a patient on life support. At the start of summer the state government was so deeply in debt that it began to issue IOUs instead of wages. Its unemployment rate has soared to more than 12%, the highest figure in 70 years. Desperate to pay off a crippling budget deficit, California is slashing spending in education and healthcare, laying off vast numbers of workers and forcing others to take unpaid leave. In a state made up of sprawling suburbs the collapse of the housing bubble has impoverished millions and kicked tens of thousands of families out of their homes. Its political system is locked in paralysis and the two-term rule of former movie star Arnold Schwarzenegger is seen as a disaster – his approval ratings having sunk to levels that would make George W Bush blush. The crisis is so deep that Professor Kevin Starr, who has written an acclaimed history of the state, recently declared: "California is on the verge of becoming the first failed state in America." Outside the Forum in Inglewood, near downtown Los Angeles, California has already failed. The scene is reminiscent of the fallout from Hurricane Katrina, as crowds of impoverished citizens stand or lie aimlessly on the hot tarmac of the centre's car park. It is 10am, and most have already been here for hours. They have come for free healthcare: a travelling medical and dental clinic has set up shop in the Forum (which usually hosts rock concerts) and thousands of the poor, the uninsured and the down-on-their-luck have driven for miles to be here. The queue began forming at 1am. By 4am, the 1,500 spaces were already full and people were being turned away. On the floor of the Forum, root-canal surgeries are taking place. People are ferried in on cushions, hauled out of decrepit cars. Sitting propped up against a lamp post, waiting for her number to be called, is Debbie Tuua, 33. It is her birthday, but she has taken a day off work to bring her elderly parents to the Forum, and they have driven through the night to get here. They wait in a car as the heat of the day begins to rise. "It is awful for them, but what choice do we have?" Tuua says. "I have no other way to get care to them." Yet California is currently cutting healthcare, slashing the "Healthy Families" programme that helped an estimated one million of its poorest children. Los Angeles now has a poverty rate of 20%. Other cities across the state, such as Fresno and Modesto, have jobless rates that rival Detroit's. In order to pass its state budget, California's government has had to agree to a deal that cuts billions of dollars from education and sacks 60,000 state employees. Some teachers have launched a hunger strike in protest. California's education system has become so poor so quickly that it is now effectively failing its future workforce. The percentage of 19-year-olds at college in the state dropped from 43% to 30% between 1996 and 2004, one of the highest falls ever recorded for any developed world economy. California's schools are ranked 47th out of 50 in the nation. Its government-issued bonds have been ranked just above "junk". Some of the state's leading intellectuals believe this collapse is a disaster that will harm Californians for years to come. "It will take a while for this self-destructive behaviour to do its worst damage," says Robert Hass, a professor at Berkeley and a former US poet laureate, whose work has often been suffused with the imagery of the Californian way of life. Now, incredibly, California, which has been a natural target for immigration throughout its history, is losing people. Between 2004 and 2008, half a million residents upped sticks and headed elsewhere. By 2010, California could lose a congressman because its population will have fallen so much – an astonishing prospect for a state that is currently the biggest single political entity in America. Neighbouring Nevada has launched a mocking campaign to entice businesses away, portraying Californian politicians as monkeys, and with a tag-line jingle that runs: "Kiss your assets goodbye!" You know you have a problem when Nevada – famed for nothing more than Las Vegas, casinos and desert – is laughing at you. This matters, too. Much has been made globally of the problems of Ireland and Iceland. Yet California dwarfs both. It is the eighth largest economy in the world, with a population of 37 million. If it was an independent country it would be in the G8. And if it were a company, it would likely be declared bankrupt. That prospect might surprise many, but it does not come as news to Tuua, as she glances nervously into the warming sky, hoping her parents will not have to wait in the car through the heat of the day just to see a doctor. "It is so depressing. They both worked hard all their lives in this state and this is where they have ended up. It should not have to be this way," she says. It is impossible not to be impressed by the physical presence of Arnold Schwarzenegger when he walks into a room. He may appear slightly smaller than you imagine, but he's just as powerful. This is, after all, the man who, before he was California's governor, was the Terminator and Conan the Barbarian. But even Schwarzenegger is humbled by the scale of the crisis. At a press conference in Sacramento to announce the final passing of a state budget, which would include billions of dollars of cuts, the governor speaks in uncharacteristically pensive terms. "It is clear that we do not know yet what the future holds. We are still in troubled waters," he says quietly. He looks subdued, despite his sharp grey suit and bright pink tie. Later, during a grilling by reporters, Schwarzenegger is asked an unusual question. As a gaggle of journalists begins to shout, one man's voice quickly silences the others. "Do you ever feel like you're watching the end of the California dream?" asks the reporter. It is clearly a personal matter for Schwarzenegger. After all, his life story has embodied it. He arrived virtually penniless from Austria, barely speaking English. He ended up a movie star, rich beyond his dreams, and finally governor, hanging Conan's prop sword in his office. Schwarzenegger answers thoughtfully and at length. He hails his own experience and ends with a passionate rallying call in his still thickly accented voice. "There is people that sometimes suggest that the American dream, or the Californian dream, is evaporating. I think it's absolutely wrong. I think the Californian dream is as strong as ever," he says, mangling the grammar but not the sentiment. Looking back, it is easy to see where Schwarzenegger's optimism sprung from. California has always been a special place, with its own idea of what could be achieved in life. There is no such thing as a British dream. Even within America, there is no Kansas dream or New Jersey dream. But for California the concept is natural. It has always been a place apart. It is of the American West, the destination point in a nation whose history has been marked by restless pioneers. It is the home of Hollywood, the nation's very own fantasy land. Getting on a bus or a train or a plane and heading out for California has been a regular trope in hundreds of books, movies, plays, and in the popular imagination. It has been writ large in the national psyche as free from the racial divisions of the American South and the traditions and reserve of New England. It was America's own America. Michael Pollan, author of The Omnivore's Dilemma and now an adopted Californian, remembers arriving here from his native New England. "In New England you would have to know people for 10 years before they let you in their home," he says. "Here, when I took my son to his first play date, the mother invited me to a hot tub." Michael Levine is a Hollywood mover and shaker, shaping PR for a stable of A-list clients that once included Michael Jackson. Levine arrived in California 32 years ago. "The concept of the Californian dream was a certain quality of life," he says. "It was experimentalism and creativity. California was a utopia." Levine arrived at the end of the state's golden age, at a time when the dream seemed to have been transformed into reality. The 1950s and 60s had been boom-time in the American economy; jobs had been plentiful and development rapid. Unburdened by environmental concerns, Californian developers built vast suburbs beneath perpetually blue skies. Entire cities sprang from the desert, and orchards were paved over into playgrounds and shopping malls. "They came here, they educated their kids, they had a pool and a house. That was the opportunity for a pretty broad section of society," says Joel Kotkin, an urbanist at Chapman University, in Orange County. This was what attracted immigrants in their millions, flocking to industries – especially defence and aviation – that seemed to promise jobs for life. But the newcomers were mistaken. Levine, among millions of others, does not think California is a utopia now. "California is going to take decades to fix," he says. So where did it all wrong? Few places embody the collapse of California as graphically as the city of Riverside. Dubbed "The Inland Empire", it is an area in the southern part of the state where the desert has been conquered by mile upon mile of housing developments, strip malls and four-lane freeways. The tidal wave of foreclosures and repossessions that burst the state's vastly inflated property bubble first washed ashore here. "We've been hit hard by foreclosures. You can see it everywhere," says political scientist Shaun Bowler, who has lived in California for 20 years after moving here from his native England. The impact of the crisis ranges from boarded-up homes to abandoned swimming pools that have become a breeding ground for mosquitoes. Bowler's sister, visiting from England, was recently taken to hospital suffering from an infected insect bite from such a pool. "You could say she was a victim of the foreclosure crisis, too," he jokes. But it is no laughing matter. One in four American mortgages that are "under water", meaning they are worth more than the home itself, are in California. In the Central Valley town of Merced, house prices have crashed by 70%. Two Democrat politicians have asked for their districts to be declared disaster zones, because of the poor economic conditions caused by foreclosures. In one city near Riverside, a squatter's camp of newly homeless labourers sleeping in their vehicles has grown up in a supermarket car park – the local government has provided toilets and a mobile shower. In the Los Angeles suburb of Pacoima, one in nine homeowners are now in default on their mortgage, and the local priest, the Rev John Lasseigne, has garnered national headlines – swapping saving souls to saving houses, by negotiating directly with banks on behalf of his parishioners. For some campaigners and advocates against suburban sprawl and car culture, it has been a bitter triumph. "Let the gloating begin!" says James Kunstler, author of The Long Emergency, a warning about the high cost of the suburban lifestyle. Others see the end of the housing boom as a man-made disaster akin to a mass hysteria, but with no redemption in sight. "If California was an experiment then it was an experiment of mass irresponsibility – and that has failed," says Michael Levine. Nowhere is the economic cost of California's crisis writ larger than in the Central Valley town of Mendota, smack in the heart of a dusty landscape of flat, endless fields of fruit and vegetables. The town, which boldly terms itself "the cantaloup capital of the world", now has an unemployment rate of 38%. That is expected to rise above 50% as the harvest ends and labourers are laid off. City officials hold food giveaways every two weeks. More than 40% of the town's people live below the poverty level. Shops have shut, restaurants have closed, drugs and alcohol abuse have become a problem. Standing behind the counter of his DVD and grocery store, former Mendota mayor Joseph Riofrio tells me it breaks his heart to watch the town sink into the mire. His father had built the store in the 1950s and constructed a solid middle-class life around it, to raise his family. Now Riofrio has stopped selling booze in a one-man bid to curb the social problems breaking out all around him. "It is so bad, but it has now got to the point where we are getting used to it being like this," he says. Riofrio knows his father's achievements could not be replicated today. The state that once promised opportunities for working men and their families now promises only desperation. "He could not do what he did again. That chance does not exist now," Riofrio says. Outside, in a shop that Riofrio's grandfather built, groups of unemployed men play pool for 25 cents a game. Near every one of the town's liquor stores others lie slumped on the pavements, drinking their sorrows away. Mendota is fighting for survival against heavy odds. The town of 7,000 souls has seen 2,000 people leave in the past two years. But amid the crisis there are a few sparks of hope for the future. California has long been an incubator of fresh ideas, many of which spread across the country. If America emerges from its crisis a greener, more economically and politically responsible nation, it is likely that renewal will have begun here. The clues to California's salvation – and perhaps even the country as a whole – are starting to emerge. Take Anthony "Van" Jones, a man now in the vanguard of the movement to build a future green economy, creating millions of jobs, solving environmental problems and reducing climate change at a stroke. It is a beguiling vision and one that Jones conceived in the northern Californian city of Oakland. He began political life as an anti-poverty campaigner, but gradually combined that with environmentalism, believing that greening the economy could also revitalise it and lift up the poor. He founded Green for All as an advocacy group and published a best-selling book, The Green Collar Economy. Then Obama came to power and Jones got the call from the White House. In just a few years, his ideas had spread from the streets of Oakland to White House policy papers. Jones was later ousted from his role, but his ideas remain. Green jobs are at the forefront of Obama's ideas on both the economy and the environment. Jones believes California will once more change itself, and then change the nation. "California remains a beacon of hope… This is a new time for a new direction to grow a new society and a new economy," Jones has said. It is already happening. California may have sprawling development and awful smog, but it leads the way in environmental issues. Arnold Schwarzenegger was seen as a leading light, taking the state far ahead of the federal government on eco-issues. The number of solar panels in the state has risen from 500 a decade ago to more than 50,000 now. California generates twice as much energy from solar power as all the other US states combined. Its own government is starting to turn on the reckless sprawl that has marked the state's development. California's attorney-general, Jerry Brown, recently sued one county government for not paying enough attention to global warming when it came to urban planning. Even those, like Kotkin, who are sceptical about the end of suburbia, think California will develop a new model for modern living: comfortable, yes, but more modest and eco-friendly. Kotkin, who is writing an eagerly anticipated book about what America will look like in 2050, thinks much of it will still resemble the bedrock of the Californian dream: sturdy, wholesome suburbs for all – just done more responsibly. "We will still live in suburbs. You work with the society you have got. The question is how we make them more sustainable," he says. Even the way America eats is being changed in California. Every freeway may be lined with fast-food outlets, but California is also the state of Alice Waters, the guru of the slow-food movement, who inspired Michelle Obama to plant a vegetable garden in the White House. She thinks the state is changing its values. "The crisis is bringing us back to our senses. We had adopted a fast and easy way of living, but we are moving away from that now," she says. There is hope in politics, too. There is a growing movement to call for a constitutional convention that could redraw the way the state is governed. It could change how the state passes budgets and make the political system more open, recreating the lost middle ground. Recently, the powerful mayor of Los Angeles, Antonio Villaraigosa, signed on to the idea. Gerrymandering, too, is set to take a hit. Next year Schwarzenegger will take steps to redraw some districts to make them more competitive, breaking the stranglehold of party politics. He wants district boundaries to be drawn up by impartial judges, not politicians. In previous times that would have been the equivalent of a turkey voting for Christmas. But now the bold move is seen for what it is: a necessary step to change things. And there is no denying that innovation is something that California does well. Even in the most deprived corners of the state there is a sense that things can still turn around. California has always been able to reinvent itself, and some of its most hardcore critics still like the idea of it having a "dream". "I believe in California. It pains me at the moment to see it where it is, but I still believe in it," said Michael Levine. Perhaps more surprisingly, a fellow believer is to be found in Mendota in the shape of Joseph Riofrio. His shop operates as a sort of informal meeting place for the town. People drop in to chat, to get advice, or to buy a cold soft drink to relieve the unrelenting heat outside. The people are poor, many of them out of work, often hiring a bunch of DVDs as a cheap way of passing the time. But Riofrio sees them as a community, one that he grew up in. He is proud of his town and determined to stick it out. "This is a good place to live," he says. "I want to be here when it turns around." He is talking of the stricken town outside. But he could be describing the whole state.★ • This article was amended on 5 October 2009 because we inadvertently referred to the historian, Kevin Starr, as Kenneth.
  19. Interesting video from a MIT economy teacher: http://wallstreetpit.com/13455-simon-johnson-says-the-crisis-is-just-beginning http://www.smh.com.au/business/call-that-a-crisis-stand-by-for-the-worst-is-yet-to-come-20100108-lyzc.html World leaders and central bankers cannot count their chickens yet, writes Ambrose Evans-Pritchard. The contraction of the money supply in the US and Europe over the past six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke, the chairman of the US Federal Reserve, will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises - the final error that triggered the implosion of Lehman, American International Group and the Western banking system. As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st-century depression - more akin to Japan's lost decade than the 1840s or 1930s, but nothing like the normal cycles of the postwar era. The surplus regions - China, Japan, Northern Europe (or Germania), the Gulf - have not increased demand enough to compensate for belt-tightening in the deficit bloc - the Anglo-sphere, Southern Europe (or Club Med), Eastern Europe - and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of gross domestic product sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent. Yields on AAA German, French, US and Canadian bonds will slither back down for a while in a fresh deflation scare. Exit strategies will go back into the deep freeze. Far from ending the practice of central banks buying their own governments' bonds (known as quantitative easing, or QE), the Fed will step it up. Bernanke will get religion again and ram down 10-year US Treasury yields, quietly targeting 2.5 per cent. The funds will try to play the liquidity game yet again, piling into crude oil, gold and Russian equities but this time returns will be meagre. They will learn to respect secular deflation. Weak sovereign wealth funds will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1 per cent from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of Japanese Government bonds will be a news event as the public debt punches above 225 per cent of GDP. Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom. By then China, too, will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while but only at the price of an asset bubble. Beijing must hit the brakes this year or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-08. The European Central Bank will stick to its Wagnerian course, standing aloof as ugly loan books set off wave two of Europe's banking woes. The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med. More hedge funds will join the European Monetary Union divergence play, betting that the north-south split has gone beyond the point of no return for a currency union. This will enrage the Euro-group. Brussels will dust down its paper exploring the legal basis for capital controls. Italy's Economy and Finance Minister, Giulio Tremonti, will suggest using European Union anti-terrorism legislation against ''speculators''. Wage cuts will prove a self-defeating policy for Club Med, trapping it in textbook debt-deflation. The victims will start to notice this. Articles will appear in the Greek, Spanish, and Portuguese press airing doubts about EMU. Eurosceptic professors will be ungagged. Heresy will spread into mainstream parties. Greece's Prime Minister, George Papandreou, will baulk at EMU immolation. The Hellenic Socialists will call Europe's bluff, extracting loans that gain time but solve nothing. Berlin will climb down and pay, but only once. In the end the euro's fate will be decided by strikes, street protest and car bombs as the primacy of politics returns. I doubt that 2010 will see the denouement but the mood music will be bad enough to knock the euro off its stilts. The US dollar rally will gather pace. America's economy - though sick - will shine within the even sicker Organisation of Economic Co-operation and Development. The British will need a gilts crisis to shatter their complacency. In time the Dunkirk spirit will rise again. The pre-emptive QE by the Bank of England's governor, Mervyn King, and timely devaluation will bear fruit this year, sparing Britain the worst. By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.