The current state of
the US housing market was summed up by a Miami real estate agent as
follows : “It’s the typical family of four with a dog who’s losing
their home now”.
At the recent IMF/World
Bank Annual Meeting in Istanbul the major developing countries, once
bit players at these meetings, continued to display how the slippage
in the US status has boosted their confidence & impacted on global
power relationships. For it has sapped the West’s erstwhile ability
to control the agenda to the point where one observer commented “The
student has become the teacher” (& they have long had reason to
feel slighted; thus while Belgium having more voting power in the IMF
than China may have made sense in the immediate post-WW II period when
the IMF came into being, perpetuating that today is a sad comment on
its ability to adapt, or rather on the developed countries’ willingness
to let it adapt, to changing circumstances. And with events in the US
having revealed flaws in its ‘free market template’, they are responding
to criticism of their buildup of reserves by saying these enabled them
to cope better with the recession, of capital controls by pointing out
that countries with controls had fared better than those without, and
of their reluctance to give foreign banks free reign in their economies
by noting that where this had been allowed, as in Mexico, the local
economy had experienced more of a setback than where foreign banks had
been limited to a more modest role (Brazil, whose global role has been
in a sharp ascendancy, since announced plans for a 2% tax on foreign
purchases of local securities, a move derided by a former Brazilian
central banker since “investors will find a way around it”).
Recently a rust bucket
ship with 76 Sri Lankans aboard was apprehended off Canada’s West
Coast. Those aboard purportedly had paid a mysterious Indonesian known
as ‘Captain Bram’ $45,000 each for their passage & are currently
being held in isolation while being ‘processed’ by the Canadian
authorities, among others to find out who they are & whether they
have a criminal records. While this has given rise to press comments
that such human traffickers should be prosecuted, the sad truth is that
the only way to put the Captain Brams of this world out of this business
would be to send these people back to where they came from without any
further ado. But Canada’s immigration laws being what they are &
given the political pressure from their relatives, friends, acquaintances
& (former) countrymen already in Canada (most of whom live in the
Toronto area where Mr. Harper wants to make inroads in the next election)
means that many, most, or all of them will end up being given refugee
status (at which point they become eligible for government welfare payments
about 50% higher than the Social Security entitlements of Canadian seniors
who paid taxes, & made contributions to the Canada Pension Plan,
for thirty or more years).
GLEANINGS VERSION
II
No. 334 - October
22nd, 2009
MASTER OF THATCHER’S
DEREGULATION WANTS TO REIN IN BUCCANEERS
(Vancouver Sun, Don
Cayo)
∙ Prior to addressing
a Fraser Institute gathering in Vancouver in early October, Nigel Lawson,
the UK Chancellor of the Exchequer for Thatcher’s final two terms
in office, said in an interview that “What we have seen is a combination
of two things - quite an extraordinary degree of greed and folly on
the part of a large number of bankers coupled with a wholly inadequate
system of bank supervision and regulation in most countries ... When
I was chancellor I did, indeed, deregulate in a whole lot of ways. But
the one thing I was concerned to strengthen was prudential supervision.
And I did strengthen it substantially ... But that system was dismantled
by the current government, allowing conservative commercial banks serving
local communities to merge with risk-taking investment banks to become
huge - & vulnerable - conglomerates ... What I think we should do
is have a clear separation between the plain vanilla commercial banks
and the buccaneering, creative, speculative, inventive investment banks.”
At the depth of the
Depression the Roosevelt Administration in 1933, following hearings
that revealed serious conflicts of interest & fraud in some banks’
securities’ activities, passed the Glass Steagall Act that, among
others, barred the mixing of commercial & investment banking activities
(but that was reversed in 1999 by a Republican-controlled Congress
in the Gramm-Leach-Bliley Act). So while Lawson is advocating simply
introducing Glass Steagall 2.0, the Obama Administration seems intent
on seeking salvation in tinkering with more regulation in total disregard
of the fact that, while both commercial- and investment banking have
potentially positive roles to play in making the economy hum, it has
now been proven twice that combining the two does more for bank executives
egos than for the economy.
BAILOUT FUELS NEW
ERA OF WALL STREET WEALTH (NYT, Graham Bowley)
∙ Washington is
driving Wall Street’s resurgence. Slashing interest rates, bolstering
big banks with taxpayers’ money & guaranteeing billions of their
debt, and allowing Goldman & Morgan Stanley to become bank
holding companies so that they can
access to the Fed’s ‘discount window’
for day-to-day liquidity management purposes, have heralded a new
era of prosperity for the big players that has caused them to resume
the high risk financial legerdemain that led to the recent crisis, but
now with less competition & with confirmation that they have “too
big to fail” status (which will increase the “moral hazard” risk).
So all the frenetic
activity by Fed & Treasury policy makers over the past two years
achieved was is to sanction more of the
short-sighted, short-term profit-driven activities with limited benefits
for the real economy by a select few on Wall Street
who brought on the crisis in the first place, while on Main Street thousands
of banks that stuck to their knitting by engaging in traditional banking
activities that make the economy tick
were caught in the backwash & now have less capacity/appetite for
the kind of grass roots lending that powers the real economy & would
help it to get back on its feet quicker.
SMALL BUSINESS
OWNERS FACE CREDIT SQUEEZE (Reuters)
∙ Small companies
account for over half of America’s job growth but even owners of such
companies with long-term profit track records are having their home
equity loans cut, their credit lines withdrawn & their credit card
limits slashed.
President Obama
since announced plans to shift the focus of the US$700BN TARP
program from Wall Street’s big financial institutions to small businesses
on Main Street, telling employees of a small warehousing operation near
Washington that they “are the engine of job growth in America ...
(and) fuel our prosperity.” But this won’t satisfy the liberals
in his own party who want him to use TARP to reduce home foreclosures
nor the Republicans who want him to just kill it.
WATCHDOG : BAILOUT
HELPED BUT AT A GREAT COST (AP)
∙ In his quarterly
report published October 21st the Special Inspector General
for TARP in unusually blunt language said “Despite the aspects of
TARP that could ... be viewed as a substantial success ... Treasury’s
(& the Fed’s) actions ... have contributed to damage the
credibility of the program and of the government itself, and the anger,
cynicism and distrust created must be chalked up as one of the substantial,
albeit unnecessary, costs of TARP.”
In other words,
short-term gain (bailing out the all but criminally foolhardy and/or
stupid) for long-term pain (boosting grass roots’ cynicism about the
political process).
BIG PAY CUTS FOR
BAILED-OUT FIRMS (NYT, Stephen Labaton)
∙ Those that received
the bulk of the bailout funding (AIG, Citigroup & Bank of America,
and GM & Chrysler and their financing arms) will have to cut the
annual salaries of their five top executives & their 20 other highest-paid
employees by an average 90% from last year (reducing their total compensation,
incl. bonuses & retirement contributions, by about half). And any
executive seeking over US$25,000 in perks (for things like country club
memberships) must obtain government approval. And the now 85% government-owned
AIG has been told that it must cut the US$198MM in bonuses promised
to employees in its financial products division (which was Ground
Zero for most of its problems)
One
supposed early ‘success’ of this hard line was the decision of the
Bank of America’s former CEO to forgo his 2009 salary & bonus
(although he still walked away with US$50+MM in his jeans).
DON’T PROP UP
GREENBACK, STIGLITZ WARNS (Reuters)
∙ He said in an
interview “The government has to think twice about intervening in
exchange rates ... (there are) fundamental reasons why the dollar is
weak and trying to keep it up from where the market level is, would
be very costly.” He cited the US gargantuan fiscal deficit, exacerbated
by the stimulus measures to underpin an economy in recession, as one
reason for the market’s bearish stance on the US dollar & warned
that while “It [a weak dollar] does help to redress global imbalances”,
only an orderly decline will help the US economy.
A Nobel laureate
who now teaches at Columbia, he is
a former Chief Economist of the World Ban and an
iconoclast who was the first to question Alan Greenspan’s walk-on-water
reputation. Among his recent prognostications have been that the US
banking system’s problems are now greater than pre-Lehman (a view
shared by Paul Volcker & Bank of Israel
Governor Stanley Fisher, a former Deputy Managing
Director of the IMF), that the US economy is
headed for a protracted period of Japan-like malaise & that the
expected 3% annual rate of growth for the Third & Fourth Quarters
won’t be sustainable, and that GDP growth is
‘not a good measure of economic performance’. While
in forecasting past success does not
guarantee future success, his views are nevertheless worth paying attention
to.
IMPORT PRICES PICK
UP IN SEPTEMBER (MarketWatch, Greg Robb)
∙ Prices of non-fuel
imports rose 0.6% in September, the most in over a year & twice
the rate economists had expected. YTD they have risen 7.3% but are still
down 12% YoY.
With the US$ down
15% on a trade-weighted basis, there
is likely more to come.
ON A COST BASIS,
CARBON-CAPTURE PROJECTS ARE MADNESS
(G&M, Jeffrey
Simpson)
∙ The Federal &
Provincial governments are giving Transalta & Shell $1.6BN of taxpayer’s
money for projects to capture & store (CCS) CO2 produced by their coal-fired power plants in
Alberta. And what we may
get in return is a 2.1MM tonne/year cut in their greenhouse gas emissions
(the announcements leave one with the impression that the 2.1MM tonne
number is a hoped-for target, not a hard number). So, since Canada produces
720MM tonnes of CO2 annually & the Prime Minister has pledged to
cut that by 20% by 2020, the governments are spending $1.6BN to achieve
1.4% of the pledged reduction (& cut Alberta’s emissions by 1%).
Using taxpayers’ money in this manner is utter madness.
The idea of first
creating CO2 & then
having to try & dispose of it, rather than not producing it in the
first place always seemed irrational. This quantifies
how irrational.
GOING WITH THE
NEW FLOW (G&M, David Ebner)
∙ A 74 year-old
Winnipeg manufacturer of hydraulic cylinders wants to triple its annual
sales to $300MM over the next decade & generate 80% of them from
outside, rather than inside, North America. So it has mandated eight
people to crack the Chinese market. Traditionally Canadian exporters
have almost exclusively focused their export activities on the US, with
the result that Canada became the US’ most important trading partner.
But times have changed : Canadian exports to the US YTD have been a
mere 75% of China’s.
Kudos to a company
willing the face up to changing realitiesrather than whine.
GAZA REPORT SENT
TO SECURITY COUNCIL (AP)
∙ After two days
of debate the UN Human Rights Council on October 16th
voted to refer the Goldstone Report to the Security Council. Twenty-six
countries, incl. China & Russia - both permanent Security Council
members with vetoes, voted in favour & six (the US, Hungary, Italy,
Netherlands, Slovenia & Ukraine) against, with eleven mostly European
& African countries abstaining & the remaining five, incl. Britain
& France, declining to vote. The US delegate told the Council afterwards
that Washington was disappointed since “We’re focused on moving
forward in the peace process and we feel that this is a distraction
from that.”
Another potential
lose-lose decision in the making for Obama? If Washington used its veto
in the Security Council to ensure this will go nowhere, it will be taken
by the Arab world as a sign his peace process
“walk” is not up to his “talk”. And while not vetoing, unlikely
as that would be, would send a useful signal to Israeli hardliners,
it would be so at the cost of an unhelpful signal to Palestinian hardliners.
The ideal outcome would be a veto by China and/or Russia that would
enable the US to abstain from voting.
NETANYAHU STANDS
BY HIS HARDLINE TERMS ON PEACE
(Reuters, Jeffrey
Heller)
∙ In his speech
at the start of the Knesset’s winter session he gave no indication
that President Obama’s efforts to re-start Israeli-Palestinian peace
talks, now suspended for almost a year, are having any effect. For he
said ”There is no alternative to Palestinian leaders showing courage
by recognizing the Jewish state ... This has been and remains the true
key to peace” but made no mention of the fact that a main issue holding
up a return to the talks on Palestinian statehood continues to be the
ongoing construction in the Jewish settlements in the West Bank, that
the Palestinians maintain must stop completely in accordance with the
2003 “road map.”
The courage bit cuts
both ways; for the 1967 border has just as emotional a quality for Palestinians
as recognition of the Jewish state has for the Israelis. In a contest
between an immovable object & an irresistible force the former eventually
tends to lose out.
AN OPEN LETTER
TO AMBASSADOR MICHAEL COREN
(Jerusalem Post, Jeremy
ben-Ami)
∙ You have spoken
publicly of the need for Israeli officials to engage with progressive
elements in the American Jewish community that have traditionally not
been attracted to pro-Israel lobbying. Hence we wish to reiterate our
invitation for you to address the first National Conference of the new
pro-Israel J Street lobby. It will be attended by over 1,000 people,
representing 20+ organizations, who are united by their liberal &
progressive political activism in other aspects of their lives and who
are coming together as pro-Israel activists to discuss the best
path forward for Israel & the US in troubling circumstances.
J Street is
attracting growing numbers of mostly
younger American Jews with less connection to Israel, & fewer pre-conceived
notions, than their Holocaust- & post-Holocaust generation grandparents
& parents. This letter was prompted by a comment
by an spokesman for the Israeli Embassy in Washington
following the initial invitation that it had
“concerns over certain policies [of J Street’s] that could impair
Israel’s interests” (i.e. that the current hard line policies are
not in Israel’s long-term interest).
THE RECONCILIATION
BETWEEN FATAH & HAMAS FACES NEW OBSTACLES (Arab News)
∙ On October 20th,
with Mahmoud Abbas enroute to Cairo for talks with President Mubarrak,
Hamas’ military wing announced “Dismantling Al-Qassam Brigades (Hamas’
military wing), or any other wing of the Palestinian resistance
as part of any Egypt-brokered unity deal is a fantasy that will
never materialize ... It is easier to dismantle the Palestinian Authority
than it is to dismantle us.”
Cairo has been labouring
for months to broker the unity deal between Fatah & Hamas that was
to have been signed by October 25th (&
that Abbas has already signed although he has since
apparently had second thoughts about
its military aspects). It provides for both Presidential & parliamentary
elections next June (Abbas’ term expired last January so in strictly
legal terms his Presidential status is bogus)
& for the Palestinian territories
to be de-militarized for all intents & purposes.
DEFYING BAGHDAD,
KURDISTAN HALTS OIL EXPORTS (NYT, Timothy Williams)
∙ The semi-autonomous
Kurdish region has been cutting its own deals with international oil
companies, bypassing Baghdad. But its oil can only flow into world markets
through Iraqi government-owned pipelines. After a Norwegian- &
a Turkish company last year struck oil in Kurdistan’s Tawke field,
Baghdad initially refused it access to its pipelines but later relented.
Since then, however, it declared it “is not willing to pay” for
this oil because it regards the companies’ contracts with Kurdistan
as illegal. So on October 12th the Kurdistan government decided,
in concert with the companies concerned, to stop all oil exports.
Kurdistan holds all
the deuces & Baghdad all the aces. While for Kurdistan
pipeline access is critical, for Baghdad the revenue stream produced
by moving 100,000 bbld or so of Kurdistan oil to world markets is a
mere bagatelle (& could actually be revenue-negative if it pre-empted
pipeline capacity that could have been used more profitably
to move its own oil to the export terminals).
CHINA AGAINST REPORT’S
REFERRAL TO UNSC (Jerusalem Post)
∙ On October 21st
Tzahi Hanegbi, the Kadima Party member who chairs the Knesset’s Foreign
Affairs & Defence Committee, on a visit with his committee to Beijing
slammed China for voting on October 16th in the UN Human
Rights Commission in favour of referring the Goldstone Report to the
Security Council. But he explained later on Israel Radio that “the
Arabs did something clever, they included in the resolution issues other
than the Goldstone Report ... supported by the majority of UN member
states, such as the importance of preventing violations of the rights
of Arabs in Jerusalem and including the Palestinians in international
dialogue on the establishment of a Palestinian state ... Both Russia
and China have stressed that they wouldn’t have voted in favor of
the resolution if it had dealt only with the Goldstone report ... China,
Russia and other states that endorsed the report understand that this
must be the end of the road because progress on this issue [i.e.
a Security Council referral of the matter to the International Criminal
Court] would have dire consequences for the peace talks.” Asked
if the delegation had explained Israel’s difficult position regarding
the Palestinians, he said the Chinese were less interested in the peace
process than in Iran because “China and Iran have very strong ties
... China imports 14% of its gas from Iran.”
A flagrantly flawed
headline : the Chinese told him to get stuffed.
CHINA TO LEAD ASIAN
RECOVERY WITH 8.5% GROWTH : IMF (China Daily)
∙ The IMF on October
8th in its World Economic Outlook adjusted its 2010
forecast of global economic growth for 2010 from 2½% to 3.1%, led by
9.0% growth in the Chinese economy (up from 8.5% this year), and 6.8%
in “emerging Asia” (up from 5.0% this year), with the rebound in
Asia fueled by three factors : expansionary fiscal & monetary policies,
a rebound in financial markets & capital flows, and extensive inventory
rebuilding.
The IMF numbers
imply minimal US growth in 2010. And of the
factors credited for Asia’s rebound two are temporary impulses &
the third can turn, & often has turned, on a dime
IN THE RECESSION,
CHINA CONSOLIDATES ITS POSITION (NYT, David Barboza)
∙ It is grabbing
export market share in a trend with potentially long-term consequences.
It has displaced Germany as the world’s biggest exporter and Canada
as the largest supplier of US imports (while in the first seven months
of 2008 Canada provided nearly 17% of US imports & China < 15%,
during the same period this year China’s grew to 19% & Canada’s
shrank to 14½%). And in knit apparel, US imports from China during
the period jumped 10% while those from Mexico, Honduras, Guatemala &
El Salvador slipped from 24% to 19%. So, while China’s exports in
the first half of this year were down 22% YoY, this compared favourably
with Japan’s 37% & Germany’s 34% respectively.
∙ One factor has
been Chinese manufacturers’ ability to slash prices in response to
foreign buyers’ demands by cutting wages. Another the expiration this
year of textile quotas in many parts of the world. And the third Beijing
keeping its currency weak against the dollar, and subsidizing exporters
through tax credits & low cost loans from state-owned banks.
The Bush Administration
agitated for China to appreciate its currency against the US$ &
Beijing eventually responded by letting it do so in minute steps starting
in July 2005. But, while recently it has
informally re-pegged it again to the dollar,
which has to date given it an average 15% competitive edge over other
exporters, the Obama Administration has been
remarkably silent on the issue since, according to Credit Suisse economist
Dong Tao, “Obama’s interest/priority is not to push China to appreciate
the currency, but to get them to pay the bills” (i.e. to keep on buying
US$ debt to fund the US trade deficit).
