Again, very, very bad news for the U.S. economy: after contracting at a 6.3 percent annual rate in the final quarter of 2008, it contracted at a 6.1 percent rate in the first quarter of 2009.
That means the economy shrank 2.6 percent compared with last year's first quarter. It's a point-and-a-half higher annualized rate than economists predicted.
What's most worrisome is that the recession isn't easing at all, yet -- there's no real bottom there. We aren't close to talking about the economy growing again. We're still waiting for it to shrink less quickly.
The only green shoots: economists believe that inventory and production are so anemic that any rise in demand will force businesses to grow -- that would be a good thing. And consumer spending rose 2.2 percent.
One question. The Wall Street Journal reports, "Federal government spending decreased 4.0%, after rising in the fourth quarter by 7.0%. State and local government outlays fell 3.9%, after going down by 2.0% in the fourth quarter."
Even with cuts in military spending, shouldn't that number go up?
A man urinates on April 25, 2009 in the toilets of the Sodoma bar in central Reykjavik where photographs of the former bankers who left their country after the financial crash have been stuck on the urinals. AFP PHOTO OLIVIER MORIN.
Someday very soon, a graduate student is going to have a field day with the gender dynamics of Iceland's transfer-of-power.
The complete IMF World Economic Outlook, the most detailed and exhaustive examination of the global effects of the Great Recession, is out. It's long, it's complicated, and it's important, so I'm going to take some time reading it this morning, but at first blush:
Lots of big, depressing, IMF-related news this morning:
Liberia, with the aid of the World Bank, has been negotiating with vulture funds holding $1.2 billion of its debt. You know what vulture funds are, right? They’re evil hedge-fund types who buy up debt at pennies on the dollar, and then sue for repayment in full, with interest and penalties and everything.
Just look at the deal they drove in this case! Liberia, one of the poorest countries in the world, is going to have to pay them, er, nothing at all. The World Bank is kicking in $19 million, a few rich countries are matching that sum, and the vultures are walking away with a not-very-princely-at-all $38 million, or just 3 cents on the dollar. Which probably barely covers their legal fees, let alone the amount they paid for the debt in the first place.
Let's read that again: the World Bank and Liberian government negotiated a deal so that vulture funds holding $1.2 billion in debt ended up with a check for $38 million -- three percent!
It's distressing that Liberia got in such a bad fix. It needed to raise funds and banked on future growth to make the payments -- but a bloody civil war meant it couldn't. The original lenders decided to sell the loans off to vulture and hedge funds who drove a hard bargain. Which meant that at one point, Liberia owed seven times its national income to creditors.
So, the balance sheet -- in redux:
Ultimately, though, Liberia isn't the story here. Emerging market and developing economies, like Liberia, will be among the hardest-hit in the Great Recession. Unlike OECD countries, they won't be able to issue debt or raise funds easily. They'll need the help of the international community -- and especially international organizations -- to ensure that their loans come with advisement and affordable repayment options.
The hero here's the World Bank. Suddenly, it and the IMF -- especially the IMF, perhaps -- have become the world's most important international organizations.
Dan Kitwood/Getty Images
Two out of four chapters of the IMF's major World Economic Outlook are available -- the other two are expected on April 22.
The short of it? Bad news.
Chapter three includes a long comparison of the current Great Recession with the Great Depression of the 1920s. Ours is now a global down-turn, a "synchronized downturn," the paper argues -- that makes it worse. The only available counterballast lies in coordinated, synchronized governmental spending. Nevertheless, there are worrisome parallels.
There is continued pressure on asset prices, lending remains constrained by financial sector deleveraging and widespread lack of confidence in financial intermediaries, financial shocks have affected real activity on a global scale, and inflation is decelerating rapidly and is likely to approach values close to zero in a number of countries. Moreover, declining activity is beginning to create feedback effects...
The fourth chapter takes a look at how the crisis originated in advanced economies, and spread like wildfire to emerging economies.
As the crises in advanced economies continue to deepen, and trade and capital flows decline further, exchange rates and financial systems in emerging economies could come under more severe pressure. In turn, a broad-based economic and financial collapse in emerging economies would have a significant negative impact on the portfolios of advanced economies....
In light of such cross-country spillovers, there is a strong case for a coordinated approach to a range of policies...
So, some predictions for chapters one and two, and for the IMF in general.
Bloomberg reports that the holding company for collapsed New York investment bank Lehman Brothers is hanging on to a valuable asset until prices rebound, to help pay off the company's creditors.
The asset? Uranium. How much? Enough for a bomb, if you knew how to do it.
Lehman, once the fourth-largest investment bank, has an estimated $200 billion in unsecured liabilities left to pay. The uranium, which may be as much as 500,000 pounds, might fetch $20 million at today’s prices of about $40.50 per pound, said traders who asked not to be named because of the confidential nature of the data. Marsal said the traders’ estimate of Lehman’s uranium holding is “reasonable,” while declining to be more specific....
Lehman “tested” the uranium market after its bankruptcy filing in an effort to raise cash, pulling back after it did because “everyone was low balling,” Marsal said. With $10 billion in the till today from other asset sales, Lehman isn’t in a hurry any longer to sell uranium, he said.
“We plan on gradually selling this material over the next two years,” he said. “We are not dumping this on the market and have no fire-sale mentality.”
My question yesterday about which countries might be next to come forward for IMF loans has been amply answered!
Today, the IMF announced Poland would seek a $20.5 billion flexible credit line, to insure against any future problems and help it meet its financial commitments.
Now, the New York Times has a story up about how Britain may require IMF assistance. It faces a deficit likely to reach 11 percent of its gross domestic product and rising unemployment. Worryingly, it failed to sell its full offering of government bonds at an auction last month. The NYT article reads:
...Britain’s deteriorating public finances might require the government to seek aid from the International Monetary Fund, just as it did back in 1976 when the country’s economy was on its knees.
As remote as that possibility might be, it underscores the financial bind Britain is in and represents another humbling comedown for a country that once had ambitions to overtake New York as the world’s financial capital.
The IMF has tried to alleviate the stigma attached with seeking a loan, usually provided to truly failed economies. And Poland's received plaudits for seeking aid from the IMF; the finance minister said, "This is the reflection of our cautious and responsible economic policy."
Thus, the question becomes: if the IMF offered a loan that cost less than borrowing in other ways, would once-strong and still-responsible governments still turn them down? That is, would politics stand in the way of economics?
Yesterday, given a spate of bad economic data, I wondered which country would be the next to tap the IMF's new flexible credit line.
Today, the answer: Poland.
The country has sought a precautionary $20.5 billion dollar loan, to help it meet large short-term financing needs.
Poland hopes to adopt the euro currency in 2012; if taking the precautionary IMF loan demonstrates financial responsibility and helps keep the country's fundamentals sound, it should not disrupt that process.
Update: The head of the IMF indicates the organization will meet the request. "Its economic fundamentals and policy framework are strong, and the Polish authorities have demonstrated a commitment to maintaining this solid record," Dominique Strauss-Kahn said.
"Scholars on the Sidelines," by Joseph S. Nye Jr. in the Washington Post. Referencing FP's "Inside the Ivory Tower," Nye argues that American academics are "paying less attention to questions about how their work relates to the policy world" and that more scholarship should have "real-world relevance."
David Gardner asks a provocative question in this weekend's Financial Times: Is the West's fear of political Islam condemning the Middle East to a generation of poor leadership? Political Islam is the new communism, he argues; the United States fears it so much that it prefers despots to even the most moderate Islamists. The Middle East, by implication, might be going through the same bout of poor leadership that afflicted Latin America and Africa as the Cold War contest played out in their regions.
"War By Any Other Name." Joe Queenan takes a look at the ripples of the Obama administration's "semi-official" move to revamp the vocabulary for "the war on terror" and the attempt to distance itself from the Bush administration's "fierce" rhetoric. Money quote: "From now on, the bad guys will be referred to as 'the ostensibly malefic.' We'll get back to you when we have a new term for 'the good guys.'"
(Bonus pick: Presidential Pets. Couldn't resist...)
Walter Benn Michaels's essay "Going Boom," in the February/March issue of Bookforum. According to Michaels, boom time for markets is bust time for literature, which turns back to unhappy but irrelevant periods of the past when there's not enough drama in the present day (the 1990s-2000s spike in popular fiction about the Holocaust), or focuses boringly inward (the memoir, anything Oprah's Book Club recommends). But, during an economic collapse, Western novelists will have enough material to deal relevantly with the present, and financial crisis fiction will blossom. (Hat tip: Paper Cuts)
U.S. Office of Management and Budget Director Peter Orszag blogs that crime has fallen in New York City during the recession. Indeed, Orszag says economic bad-times tend to spur property crimes, but not violent crimes. "One reason may be that alcohol use tends to decline during recessions (another potentially surprising finding), and that the reduction in alcohol use reduces violent crime," he notes. (Hat tip: Tapped)
Nouriel Roubini puts a brake on all the sanguine predictions for China’s 2009 recovery prospects in a report titled "Outlook for China's Economy in 2009 and Beyond." In the analysis, Dr. Doom tells investors not to get ahead of themselves, as the Chinese economy has not seen a true rebalancing toward domestic consumption, but he also notes one major positive: The country's trade surplus might finally be shrinking.
Today's big story on the high seas are the Somalian buccaneers, but the future of naval warfare may be developing in another part of the Indian Ocean. While India is taking measures to protect its vulnerable coast from terrorist attacks, China is preparing to make a major announcement at the 60th anniversary of the People's Liberation Army Navy (PLAN) on April 23rd. Writing in Time Magazine, Howard Chua-Eoan describes the brewing naval rivalry developing between Asia's two aspiring superpowers.
The current Great Recession is a global one, with even the most buoyant economies struggling. Reports today suggest that Japan may follow Georgia, Ireland, Switzerland, and Spain in suffering from deflation. Economic woes caused the collapse of the government of the Czech Republic. And dozens of other countries face similar specters.
All of which means the IMF, the international lender of last resort, has become very, very, very important. In the past, the IMF provided loans to countries out of ways to solve their own economic problems. In return for the loan, the IMF imposed strict conditionalities, requiring governments to clean up their act, sell assets, change tax policies, etc.
But the realities of the global recession mean that even countries with responsible policies may need IMF loans -- and may not want to accept them, for fear of the conditionalities and the optics. (See: Brown, Gordon.)
And the IMF, with its new $1 trillion budget, figured that out quickly. So, they changed the rules:
The IMF’s intention is to do away with procedures that have hampered dialogue with some countries, and prevented other countries from seeking financial assistance because of the perceived stigma in some regions of the world of being involved with the Fund.
To this end, the IMF announced the creation of a "flexible credit line" policy.
[It is an] insurance policy for strong performers, mainly emerging market countries. Access to the FCL is restricted to countries that meet strict qualification criteria. But once a credit line has been approved, a country can draw on it without having to meet specified policy goals, as is normally the case for IMF loans.
Mexico has already applied for the FCL loan, a $47 billion "precautionary credit line," last month. Question is, with new scary data emerging, which countries will be next to approach the IMF?
Speaking with the New York Times, a top Chinese economist explained why China is cutting its holdings of U.S. bonds by quoting John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”
With that reasoning in mind, China sold U.S. Treasuries and other foreign bonds in the first two months of the year; it returned to buying them in March. Around two-thirds of China’s foreign reserves are held in dollars.
That bulk holding has complicated relations between the two economic super-powers during the Great Recession. Chinese Premier Wen Jiabao and the central bank governors have expressed concern about the U.S. economic situation and their exposure to it -- though the resumption of purchases in March suggests they may believe the outlook is better.
Still, numerous economists and policy experts have suggested careful, controlled, slow draw-down would be a good thing for both countries.
Reuters reports on the details of Japan's largest-ever economic stimulus plan, revealed by Prime Minister Taro Aso. He intends to make cultural products 18 percent of Japan's exports, up from around 2 percent now.
Aso waved glossy magazines from China and Taiwan featuring Japanese pop stars on their covers.
"Japanese content, such as anime and video games, and fashion draw attention from consumers around the world," he said.
"Unfortunately, this 'soft power' is not being linked to business overseas ... By linking the popularity of Japan's 'soft power' to business, I want to create a 20-30 trillion yen ($200-300 billion) market by 2020 and create 500,000 new jobs."
The proposal seems a bit pie-in-the-sky -- Japan's exports have more than halved this year. But the country's certainly on a mission to expand its cultural importance (including in all things cute). Nota bene, Gwen Stefani.
Photo: Flickr user dogonthesidewalk
At the Boston Globe, economist Laurence Kotlikoff joins Jeffrey Sachs in indicting the Geithner bank bail-out plan on the grounds that investment banks and the like will simply game the system -- allowing a government-sanctioned and epically unfair socialization of losses and privatization of gains. Kotlikoff writes:
It's one thing for the U.S. Treasury Department to overpay banks for their toxic assets on the prayer that bank shareholders will do something besides pocket it -- something that will help the economy. It's another thing to set up a complex leveraged auction scheme to surreptitiously make the transfer. And it's yet a third thing to set up a scheme that will lead the banks to overbid for their own toxics to garner even larger windfalls and end up with the toxics still in their hands.
He outlines one way for banks to game the Geithner plan, which lets banks auction off their bad (but not totally toxic) assets to investors who earn most of the possible upside if the asset makes money, while the Treasury accepts the loss if it doesn't.
Kotlikoff notes that it's a pretty easy move for banks: they set up and fund subsidiaries to buy the mortgage-backed securities -- effectively insuring against any losses that asset might accrue. The Treasury has promised that investors won't be able to buy their own assets in this way -- officials won't let them. But there still plenty of ways to get around it.
But there's a big problem -- not with the details of Sachs' and Kotlikoff's arguments, but with their very premise.
First, there's no incentive for a bank to buy its own bad debts as opposed swapping with someone else's. Say Goldman Sachs' hedge fund, GSAM, buys J.P. Morgan's assets, and a J.P. Morgan subsidiary buys Goldman's. There's nothing wrong with that, and it's effectively the same as the banks buying their own. A recent report shows that i-banks are still major global hedge fund players -- the government needs those funds to play.
Second, the gaming proposal presumes that the banks have cash to buy up the assets at auction at all. But most of the banks who will sell bad assets really don't have a lot of cash floating around -- anywhere. Many are in debt, and nobody will lend to them, so theorizing that they'll fund a bunch of subsidiaries to nick taxpayer money seems far-fetched. Even if they do it, the scale would be limited by their available capital.
Finally, in a macro sense, the Geithner plan is set up precisely to recapitalize the banks, create a market for the bad assets, and to get the assets off the banks' books. Gaming the system does recapitalize the banks. It does bolster the market for the bad assets. And it does sequester the assets in spin-off companies -- a kind of good-bank/bad-bank scenario.
In short: the Geithner plan might not be fair. It, in some sense, props up and rewards companies that took massive risks and now need taxpayers and the government to bail them out. But, taking the Geithner plan as it is, gaming doesn't seem so bad.
On his New York Times blog, Nobel-prize winning economist Paul Krugman has reponded to a VoxEU post showing that the current Great Recession might be accelerating deeper and faster than the Great Depression. Krugman writes:
What hasn’t happened — at least not yet — is any counterpart to the catastrophes of 1931: the wave of bank runs in the US, the failure of Credit Anstalt in Austria, and the great perverse response of central banks that was triggered by the death spasms of the gold standard.
What Eichengreen-O’Rourke show, it seems to me, is that knowledge is the only thing standing between us and Great Depression 2.0. It’s only to the extent that we understand these things a bit better than our grandfathers — and that we act on that knowledge — that we have any real reason to think this time will be better.
Eichengreen and O'Rourke convincingly argue that two indicators, trade volume and stock values (they don't take on other indicators, like global GDP or unemployment), are plummeting. But they also show the alacrity and force of governmental responses -- the only option for staunching the bleeding and returning the world economy to health.
At VoxEU, economists Barry Eichengreen and Kevin O'Rourke compare the current global recession and the Great Depression -- or, more accurately, parse the comparisons. They note that many commentators, like Paul Krugman, include only U.S. stock and economic indicators, in which case, some evidence suggests this downturn may be shorter and milder.
But, they argue, the Great Depression was a global phenomenon; it originated with the U.S. stock crash and soon engulfed the world economy. The current recession, likewise, is one of a globalized world. The U.S. led the fall, but didn't fall alone.
So, they write: "the global picture provides a very different and, indeed, more disturbing perspective than the U.S. case...which as noted earlier shows a smaller decline in manufacturing production now than then." And they demonstrate the effect, with a series of compelling and frightening graphs.
Here's the global stock market, the blue line representing its value during the Depression and red during the current recession:
And here is global trade volume, another indicator. They write, "This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression."
The one bright spot, they note: the policy responses have been far, far better this time around. Central banks have slashed interest rates earlier and lower, and increased the money supply more and faster. And, globally, there is heightened government deficit spending, intended to arrest decline.
Still, Eichengreen and O'Rourke's analysis demonstrates that the global recession may be worse than people think, even if the U.S. manages a recovery.
Today, the U.S. Bureau of Labor Statistics released a frankly horrific set of numbers. The unemployment rate hit 8.5%, the highest in more than 25 years; 663,000 workers lost their jobs in March alone; 25 million are underemployed; and over the course of the recession, the U.S. has bled more than 5 million jobs.
Certainly, the U.S. has fewer social safeguards against the disruptions of unemployment than many other high-income economies, meaning fewer protections against lay-offs and less-generous unemployment benefits. (FP looked at the best places to lose your job last month.) This generally means more volatility in the unemployment rate.
But is the U.S. really doing worse than, say, France and the United Kingdom, countries with historically high unemployment?
The short answer is yes; the U.S. recession has gone on for longer and is deeper than in Europe, and therefore has sapped three times as many jobs. The unemployment rate in the U.S. is higher than in the U.K., and close to France's. (The U.K. and French numbers above are estimates.) And the job-losses are accelerating faster in the U.S. than in other countries.
Here's hoping for it to bottom-out soon.
Amid the financial crisis, U.S. media outlets have paid extra attention to the two nations worst-hit in western Europe: Iceland and Ireland. Publications from The New Yorker to the A.P., and everything in between, have parsed the deflationary risks, excess housing, and fiscal problems. They've talked about the strains on social welfare safety-nets and rising unemployment.
And they've done so with lots of bloated and condescending scrim on how Ireland and Iceland are the magically quaint fairy-lands of leprechauns, vikings, alcohol, and the in-bred!
For instance, in Vanity Fair, top financial reporter Michael Lewis came out with these brilliant insights into the denizens of Reykjavik: those "mousy-haired and lumpy" people, one of whom he calls a "bearded troll," love to "drink themselves into oblivion and wander the streets until what should be sunrise." He describes "orc shrieks" emanating from a hotel room. Zany laws mean citizens have to "write to the government and quit" to "stop being Lutherans." And Icelanders, "sincerely" believing in elves, made an industrial conglomerate "pay hard cash to declare the site" of a smelter "elf-free."
Today, in the New York Times, veteran reporter Timothy Egan makes an equally enlightened assessment of Irish culture in his article about, erm, housing stock.
"Every village that had seen nary a rock wall or a cottage window unchanged suddenly had a cul de sac of insta-homes and a half-dozen O’Mansions," he writes. "Anyone with a mortgage could get rich in little more time than it took for a head of Guinness to settle."
Needless to say, the Irish and the Icelandic are, well, unhappy.
A online commenter on the NYT piece writes:
Yet more condescending, starry-eyed tosh from the New York Times regarding Ireland...Oh and, is it mandated by the New York Times editorial board, that every article about Ireland contain boilerplate about flowing pints of guinness and gap toothed peasantry? Perhaps the Irish media will take to writing colourpieces about New York in which the sky is compared to a swirling tankard of Budweiser.
New York magazine ran a take-down of Lewis' reportage from a more bemused resident of Iceland:
"His is a wild account of a backwards Nordic island populated by 'lumpy' and 'inbred' people who might force you to shower in scalding water or, worse, blow up a Range Rover. If you didn’t know any better, you’d think we were a sitcom waiting to happen. Unfortunately, none of this is exactly true."
At CounterPunch, Gregory Burris likewise takes Lewis down a notch:
"As I masochistically forced myself to continue reading Lewis’ article, I could not help but wonder: how did such a dimwitted diatribe ever make it through Vanity Fair’s editorial process? Did the editors really find it fit to print? Yes, unfortunately for us, they really did."
In today's G-20 communiqué (just a fact sheet, really) world leaders pledged an additional $1.1 trillion in loans and debt guarantees to aid trade and help shore up the worst-ailing economies.
The fact sheet (let's call it a fact sheet) notably included toothy regulatory measures and a lack of fiscal stimulus -- which Britain, the United States, and China have undertaken, to the cold shoulder of most of continental Europe.
It also dramatically increased the budget of the IMF. The New York Times summarizes:
The most concrete measures relate to support for the International Monetary Fund, which has emerged as a “first responder” in this global crisis, making emergency loans to dozens of countries.
The Group of 20 pledged to triple the resources of the Fund to $750 billion — through a mix of $500 billion in loans from countries, and a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the Fund, which will be parceled out to all its 185 members.
So what on earth is a Special Drawing Right (SDR) anyway?
Basically: it's a currency.
Back in 1969, the world economy was still suffering from the effects of the Great Depression and the world wars. At the Bretton Woods conference at the end of World War II, the heads of state attending decided against creating a global reserve currency, instead instituting a fixed-rate exchange system.
Twenty-five years later, there weren't enough key exchange assets -- units of gold bullion and dollars -- to keep up with the growing global economy. So, the IMF's member states decided to create the SDR system.
A basket of stable major currencies -- like the dollar, pound, and yen -- determined its value. Some countries, like Latvia, pegged their currencies to the value of the SDR. But most just used their allocated portion in various international transactions.
But, just a few years after the IMF bothered to make the SDRs, the Bretton Woods fixed-rate system collapsed and the modern world currency market, where exchange rates float freely, emerged. This rendered the SDRs pretty much useless.
Indeed, the current market for SDRs, until the I.M.F. injection, was just $32 billion. The value of current oustanding U.S. currency? Just over $1 trillion.
The G-20 just released its final communique, summarizing the agreements made during the one-day conference. And, it's a doozy.
The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.
It's certainly on an "unprecedented scale." Plus, it's the first global action plan to really emerge from a G-20 conference -- note the sale of gold to shore up developing economies. See more detailed analysis from FP bloggers throughout the day.
After all of France and Germany's sturm und drang over the need for new financial regulations, it looks like the major regulatory measure that will come out of this week's G-20 summit will be a new crackdown on tax havens.
While not completely irrelevant, in the context of the financial crisis, tax havens seem pretty small-fry compared to hedge funds or credit-rating agencies and it's an issue Germany, in particular, has been keen about for years. Is this really what Nicolas Sarkozy's hardball diplomacy was all for?
The tax haven issue seems tailored to allow Sarkozy and Merkel to claim a political victory without actually enacting the tough new international financial oversight they said they were pushing for, but that the United States objected to.
ERIC FEFERBERG/AFP/Getty Images
Authorities hope to avoid a repeat of the June 1999 anti-capitalist demonstrations when some City workers sprayed protesters with champagne and threw photocopied £50 notes at them. That protest ended in a riot and caused up to £2m of damage.
Hmmm... let's see here. Wouldn't the first step be to not spray protesters with champage or throw fake money at them?
Photo: Matt Cardy/Getty Images News
The World Bank's crystal ball is not emitting pleasant forecasts this morning, with the release of the latest Global Economic Prospects Report: "Global GDP is expected to contract by 1.7 percent in 2009, which would be the first decline in world output on record," the report concludes. Developed economies will fall into "deep recession" -- witness Japan's 12.1 percent drop in GDP in the 4th quarter of 2008, or worse still, 21 and 25 percent drops in South Korea and Japan respectively. Ouch.
By region, Eastern Europe and Central Asia are worst off thanks to their coming into the crisis with deficits and a binge of foreign cash (which, as you guessed, has now fled.) Latin America will suffer; so will Africa as commodity prices will stay low, trade slows, and foreign investment dries up. East Asia will be hit by the 6.1 percent gutting of global trade expected in 2009. 84 of 109 developing countries are expected to face "financing gaps" in their government budgets this year.
The good news? A modest recovery might be coming in 2010..."However, continued banking problems or even new waves of tension in financial markets could lead to stagnation in global GDP or even to another year of decline in 2010."
Dan Kitwood/Getty Images
Czech Prime Minsiter Mirek Topolanek softens his AC/DC-inspired critique of the U.S. economic stimulus a bit in a new Times column. Topolanek says he simply meant that Europe does not need the same amount of stimulus as the United States. Call it the Simon & Garfunkel version:
I expected that this strong expression would not go unnoticed. But I did not expect that this legitimate warning, which comes to me as naturally as telling a friend walking next to me on an uneven path that he may stumble, would be rejected in principle and interpreted by some as criticism of the US Administration.
I believe that I do not need to explain that my country has been a long-standing partner of the US. And I also believe that as a conservative politician I do not need to explain that the welfare states of Europe act as “automatic stabilisers”, sustaining consumer spending even in a slump. This means that Europe does not need such a large fiscal stimulus compared with the US, which does not have such a system of social support.
FREDERICK FLORIN/AFP/Getty Images
The financial crisis seems to be boosting extreme nationalist sentiment in Ukraine:
On March 15, voters in the Ternopil region of western Ukraine elected a new regional assembly. This was an Orange Revolution bastion, a region that has long sought to embrace the West and shun Russia.
But it is also has Ukraine's highest unemployment. In a crowded field, the previously little-known Freedom Party won 50 of the regional assembly's 120 seats as voters embraced its hard Right leader, Oleg Tyagnibok, who has urged the expulsion of all Jews and Russians from Ukraine.
"The problem is less the popularity of the nationalists than the universal disappointment with mainstream parties," said Viktor Chumak, a political scientist in Ukraine's capital, Kiev. "Voters are sympathising with radicals more and more as a result of the crisis."
I'm actually surprised we haven't seen more of this around the world yet.
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). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
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.
Johnson shows how financial firms became more and more profitable, and a bigger and bigger part of the U.S. economy. More capital meant more political capital, he argues, which eventually meant nobody prevented the melt-down. The same political entrenchment makes fixing the banks difficult.
The obvious solution to the financial crisis, Johnson says -- informed by his time at the I.M.F. -- is simple. The United States should determine which banks can't survive and temporarily nationalize them, instead of simply recapitalizing them, he says. But the relationship between top financiers and the government means this won't happen -- at least not unless things get much worse.
Still, his article includes a list of the policies (or lack thereof) which most contributed to the bubble and burst. It's a great crib sheet of what Capitol Hill and the G-20 Summit will tackle, piece by piece, to reform the system.
• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
It's fascinating, scary reading.
Brazilian President Luiz Inácio Lula da Silva says white people are to blame for the financial crisis, specifically blue-eyed ones:
“This crisis was caused by the irrational behaviour of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing.”
“I do not know any black or indigenous bankers so I can only say [it is wrong] that this part of mankind which is victimised more than any other should pay for the crisis.”
For the past few months, the in-vogue comparison for the U.S. financial crisis and government intervention has been the "lost decade" in Japan. But, over at Marginal Revolution, Tyler Cowen toys with the comparison between the current U.S. fiscal stimulus and the Bundesbank's massive spending policy just after German reunification. He writes:
The results were less than wonderful. The higher demand boosted measured gdp growth in the short run (bananas and porn, plus reconstruction) but Germany fell into economic stagnation. The new demands took the West German economy only so far. The higher taxes and debt then kept the German economy down for many years. Few Germans were happy with the economic fallout from this "stimulus." And that was with a relatively well-functioning financial system and a reasonable amount of initial optimism.
You can list many dissimilarities between German unification and the current U.S. situation (and in the comments I am sure you will). Still, as historical examples go, I believe this one has some relevance. When European leaders are skeptical about fiscal stimulus, they have some reasons, some of them quite recent.
Photo: Flickr user gavinandrewstewart
The New York Times reports that embattled Czech Prime Minister and E.U. President Mirek Topolanek, addressing the European Parliament, described Obama's fiscal package as the "road to hell," saying the bailout would "undermine the stability of the global financial market."
Yesterday, Topolanek was defeated in a no-confidence vote by the Czech parliament -- largely due to criticism of his handling of the financial crisis.
Photo: Dominique Faget/AFP/Getty Images
Today's Johnson's Russia List e-mail featured an Interfax account of the only-in-Russia story of a state-directed activist group (Nashi) picketing a state-controlled bank (Sberbank) over (what else) excessive executive bonuses:
Nashi spokesperson Kristina Potupchik said that the demonstrators demanded that Sberbank managers voluntarily refuse to accept
the bonus payment for last year. "We believe that such a lavish remuneration at a time of crisis is an open challenge to the state and society," she said.
Sberbank in the fourth quarter of 2008 paid the board members bonus payments totalling R933m (28m dollars at the current exchange rate), increasing the salary and bonus payment to the managers by 5 per cent from R892m in 2007. The payment rise is linked with the increase of the number of board members, the bonus payment for one top manager in 2008 was reduced over 2007.
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