The market is almost closed. It's been a good week. So -- relax and don't think about anything related to the market or the economy for the next few days.
To that end
INET Hong Kong: The RMB and the Future of Asian Finance
40 minutes ago
Carlos Cruz has a strategy for surviving the worst global recession in 60 years: pay less in taxes and pass the savings along to customers.
“I’m declaring half as much as I used to,” said Cruz, 29, who runs a painting business in Madrid. “Prices have fallen by 30 percent and customers will choose you for a difference of as little as 50 euros ($67.70),” said Cruz, an Ecuadorian who has lived in Spain since 2001.
Even as the U.S., Japan and Europe weather the first simultaneous recessions since World War II, some types of activity are expanding worldwide -- just below government radar. The production of goods and services that are lawful, though not declared, may grow the most as a proportion of total output since 2000, according to Friedrich Schneider, a professor at Austria’s Johannes Kepler University of Linz.
In 21 of the 30 countries in the Organization for Economic Co-operation and Development, Schneider estimates the informal economy will equal 13.8 percent of official gross domestic product in 2009, up from 13.3 percent last year. On that basis, its value will climb by $200 billion to $5.59 trillion in those nations from $5.39 trillion, using constant 2008 GDP because data for this year isn’t yet available.
The U.S. economy experienced its most violent contraction in a generation during the fourth quarter, with real gross domestic product plunging at a 6.3% annualized seasonally adjusted rate, the Commerce Department reported Thursday in its third estimate of quarterly growth.
GDP hadn't fallen so much since the first quarter of 1982. It was the third largest decline in GDP in 50 years.
Economists believe the current quarter, which ends March 31, was nearly as bad.
Current projections look for GDP to fall at a 5.1% annual pace. Since 1947, GDP has never fallen by more than 4% for two quarters in a row.
Some have a more extreme view: "The economy will contract by a staggering 7% to 8% in the first quarter, before the economy begins to stabilize,"wrote Nariman Behravesh, chief economist for IHS Global Insight.
GDP is expected to fall 2% in the second quarter, according to a suvey of economists conducted by MarketWatch.
Bank of England Governor Mervyn King says Gordon Brown should be “cautious” on public spending while the official in charge of U.K. bond sales says the central bank is undermining demand for government debt.
For the first time in almost seven years, the U.K. couldn’t find enough buyers for one of its debt sales when it offered 1.75 billion pounds ($2.55 billion) of bonds yesterday. The yield on 10-year gilts rose after the sale by as much as 20 basis points, or 0.2 percentage point, to 3.53 percent, the highest since March 5.
The failure came a day after King said the government needs to be “cautious about going further in using discretionary measures” to expand government deficits as it tries to pull the economy out of a recession. Robert Stheeman, head of the U.K.’s Debt Management Office, which runs the bond auctions, says it wasn’t able to attract enough bids partly because of the Bank of England’s efforts to lower yields through debt purchases.
“Yields at these levels are not at all attractive,” Stheeman, chief executive officer of the Debt Management Office, said yesterday in an interview in London. “Yields have shifted downward. Why have they shifted down? It’s partly because of the Bank of England’s announcement about quantitative easing.”
Investors say both are to blame for the failed debt sale.
‘Buying or Selling?’
Gilts have “only one buyer and that’s Mervyn King,” said John Anderson, a money manager who oversees about $3 billion in pound-denominated assets at Rensburg Fund Management in London. “You don’t need to look anywhere beyond that. Make your mind up, please, government. Do you want to buy gilts or do you want to sell them? You can’t do both.”
Although some experts attributed the failure to confusion in the market, rather than concern over Britain’s solvency, it was highly embarrassing for Mr Brown coming just days before world leaders are due to meet in London for the G20 summit to discuss the economic crisis.
New orders for manufactured durable goods in February increased $5.5 billion or 3.4 percent to $165.6 billion, the U.S. Census Bureau announced today. This increase follows six consecutive monthly decreases, including a 7.3 percent January decrease. Excluding transportation, new orders increased 3.9 percent. Excluding defense, new orders increased 1.7 percent.
Treasury Secretary Timothy Geithner and Federal Reserve Board Chairman Ben Bernanke called for broad new powers to regulate the nation's financial system on Tuesday, arguing that the $170 billion rescue of AIG and the outcry over its bonuses would have never happened if the government had the right regulatory system.
Called before the House Financial Services Committee to answer for the $165 million in bonuses paid to employees of a unit of American International Group (AIG:
American International Group Inc Geithner and Bernanke tried to change the subject to a more elevated topic: How to avoid the next mess. They said Congress should broaden the authority of financial regulators to cover institutions, such as AIG, that can pose systemic risks but that aren't regulated very well.
If AIG had failed last September, the result could have been "a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke said.
The broader powers would give regulators tools to close down financial firms in an orderly manner and avoid a cascading collapse of financial market firms, the two officials told the committee.
Geithner said the decision to seize a financial company deemed "too big to fail" would have to have the agreement of the White House, the Fed and other top regulators.
The Obama administration is preparing an overhaul of U.S. banking rules that would force financial companies to keep more cash on hand in case their trading bets go wrong.
Even as a few rays of hope peek out for housing, a dark cloud of unlisted and unsold foreclosed homes threatens to further delay a recovery and undermine lenders' financials.
The government is riding in with new programs almost every week, including Monday, that may rescue lenders. But they also cause paralysis in the short term.
Lenders are holding "between 600,000 and 700,000 residential properties that are not on the multiple listing service (MLS)," said Rick Sharga, senior vice president at RealtyTrac, a foreclosure listing firm in Irvine, Calif.
This shadow supply isn't counted as part of the housing inventory. There were 3.8 million existing homes on the market in February, equal to 9.7 months' worth at the current sales pace.
Add in the shadow supply and selling all the available homes will take even longer, and that suggests prices have even further to fall.
World airlines are set to lose $4.7 billion this year as a result of the global recession that has shrunk passenger and cargo demand, industry body IATA said.
The International Air Transport Association had estimated in December the industry would lose $2.5 billion in 2009.
"The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago," Director-General Giovanni Bisignani said on Tuesday.
"The relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. The industry is in intensive care."
IATA, which represents 230 airlines including British Airways (BAY.L), Cathay Pacific (0293.HK), United Airlines (UAUA.O), and Emirates (EMIRA.UL), also raised its estimate of international airline losses in 2008 to $8.5 billion, from its previous $8 billion estimate.
Purchases rose 5.1 percent to an annual rate of 4.72 million from 4.49 million in January, the National Association of Realtors said today in Washington. The median price slumped 15.5 percent from a year ago, the second-biggest drop on record, and distressed properties accounted for 45 percent of all sales.
Home sales have been falling since 2005 and prices peaked in 2006. The S&P/Case-Shiller home-price index of 20 metropolitan cities was down 18.5 percent in December from a year earlier, a record decline, the group said last month.
The realtor group’s affordability index reached a record high in January.
Fed policy makers last week announced the central bank will buy as much as $300 billion in long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion. The central bank had already committed to buying $600 billion of mortgage-backed securities and bonds sold by government- sponsored housing agencies.
However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.
Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.
The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.
The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.
Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.
The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.
This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.
We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation's commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.
Three Basic Principles: Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time. The Public-Private Investment Program will be designed around three basic principles:
* Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
* Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
* Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.
The Merits of This Approach: This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.
* Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
* Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
* Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
* Private Sector Partners Manage the Assets: Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.