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Start Spreadin’ the News. Jobs Leaving Today.
Brett Philbin reports:
The financial crisis could lead to 225,000 job cuts and the loss of $6.5 billion in securities industry-related tax revenue in New York over the next two years, according to report issued Monday by the state comptroller’s office.
With massive writedowns and credit losses, consolidation, and downsizing in the financial services industry, the report also forecast a steep decline in Wall Street bonuses.
“Wall Street is the engine that drives the economies of New York state and New York city, but the global credit crunch has slowed that engine down,” New York State Comptroller Thomas DiNapoli said in a statement.
Through the first half of 2008, broker-dealer operations of New York Stock Exchange member firms reported a loss of nearly $21 billion, the report said. Over the past year, the securities industry in New York City has lost 16,300 jobs, according to the report. Mr. DiNapoli predicted that the securities industry could lose 38,000 jobs by October 2009 and another 10,000 could be lost in banking, insurance and real estate.
The Comptroller’s office estimates that total private sector job losses could reach 175,000 in New York City but losses could be greater if the economic downturn is deeper and longer than currently forecast. While Wall Street bonuses fell by nearly half in the two years following the
burst of the dot-come bubble, the report expects a similar decline for 2008.
Mr. DiNapoli stressed that top executives should forgo bonuses during the difficult time period, saying “it’s inappropriate to reward poor performance.”
Seven top executives at Goldman Sachs Group Inc., including Chief Executive Lloyd Blankfein, have already decided to do without their 2008 bonuses. Citigroup Inc. agreed to “comply with enhanced executive compensation restrictions,” as part of the government’s plan to rescue the banking giant by helping to absorb potentially hundreds of billions of dollars in losses on toxic assets on its balance sheet and injecting fresh capital into the troubled financial giant.
Mr. DiNapoli added that bonuses paid to lower level employees are often used to purchase goods and services in other industries, which benefits the overall economy. The report estimated that tax collections, both personal income and business taxes, from Wall Street-related activities could drop by $4.5 billion for New York state and $2 billion for New York City by 2010. Wall Street-related activities account for 12% of New York City tax revenues and up to 20% of New York state revenues.
Berkeley economist to head Obama economic council
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President-elect Obama plans to name Christina Romer, an expert on tax cuts and recessions who is an economics professor at the University of California at Berkeley, to chair his Council of Economic Advisers, aides said.
This should come in handy: Romer was once the co-author of a paper called, “What Ends Recessions?”
The three-person council, appointed by the President and confirmed by the Senate, is a part of the White House apparatus designed to give the president policy advice and objective economic analysis.
The Romer selection is to be announced by Obama and Vice President-elect Joe Biden at a news conference at noon Eastern on Monday in Chicago, where he is to present New York Federal Reserve President Tim Geithner as Treasury secretary and Larry Summers, who was Treasury secretary under President Bill Clinton, as White House economic adviser.
Romer and her husband David Romer, also a Berkeley economist, were both campaign economics advisers to Obama.
In March, National Journal had this précis on the couple: “As professors at the University of California (Berkeley), they are well-known macroeconomists — experts on the workings of the U.S. economy — who jointly hold one of six spots on the academic committee of economists that decides when recessions begin and end. They are both steeped in the history of the country's economy and have recently produced a series of papers looking at the causes and effects of most of the major changes in tax policy in the last 100 years.
“At the same time that Obama is calling for higher income taxes on people making $250,000 or more, the Romers have found that tax increases are generally bad for economic growth and that they primarily discourage investment — the supply-side argument that conservatives use to justify tax cuts for the rich. On the other hand, the Romers have shredded the conservative premise that tax cuts eventually force spending reductions (‘starving the beast’). Instead, they concluded that tax reductions lead only to one thing — offsetting tax increases to recover lost revenue.”
Romer’s selection was first reported by ABC’s Jake Tapper.
Citigroup Scores
ROBERT REICHIf you had any doubt at all about the primacy of Wall Street over Main Street; the utter lack of transparency behind the biggest government giveaway in history to financial executives, and their shareholders, directors, and creditors; and the intimate connections the lie between Administrations -- both Republican and Democratic -- and the heavyweights on Wall Street, your doubts should be laid to rest. Today it was decided the government will guarantee more than $300 billion of troubled mortgages and other assets of Citigroup under a federal plan to stabilize the lender after its stock fell 60 percent last week. The company will also will get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion the bank received last month under the Troubled Asset Relief Program.
This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
Meanwhile, more than a million workers in the automobile industry, along with six million homeowners in danger of losing their homes, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all.
Finance Has Lost Sight of Its Role
But these still are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.
I will confess to not having addressed this particular line of thought directly, even thought it has crossed my mind plenty of times. Many readers have noted, and I agree completely, that the financial sector has become too large relative to the real economy. But many commentators, your humble blogger included, have failed to probe deeply how such a distorted economy came to be seen as a good policy outcome.
In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.
Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do (aside: I had a lawyer from an entrepreneurial family who was refreshingly aware of that issue, and would write off hours before sending bills to clients, recognizing that the amount of time her firm had spent on certain matters simply wasn't worth it from an economic standpoint to the client). It is ironic that free market fundamentalists have so vociferously argued for unfettered markets, without understanding (or perhaps understanding all too well) that the house always wins.
When I was a kid and had my first serious jobs on Wall Street, there was no explicit formulation of that conundrum, but the firms understood their place. You could make a very very nice living on Wall Street. The barriers to entry were high enough to allow for oligopoly pricing, but that meant for rich pay packages rather than an easy life. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed.
And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.
But I digress. There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire. And in the process, they keep trying to validate overly inflated asset values (a measure straight out of the failed Japan playbook) rather than try to ascertain what their real value might be so as to determine how much recapitalization might ultimately be needed (if you doubt me, Exhibit One is the pending Citi bailout, in which lousy assets will be guaranteed at phony values). Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.
And why is that? Back to the cult issue. Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults). The particular target for ire is the autoworker pensions and health plans, as well as their work rules. But the pension plans being underwater is the fault of GM management for not providing for them in the fat years; I personally have trouble with the idea that health care should vary by class; and for the work rules, German and Swedish automakers have strong unions and yet can compete. I see the UAW as having correctly seen GM management feeding at the trough and doing a good job at extracting their share.
And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.
I don't know how to convey a sense of how deeply indoctrinated we all have been. This Independent story may give a sense of how banks have completely lost sense of their place.:
High-street banks are continuing to hit businesses with punitive interest rates for loans and overdrafts and are resorting to more severe measures to ensure they are paid.
Some are demanding that owners of small businesses put up personal assets as collateral in return for a business loan. Others are changing conditions of loans by sending emails rather than meeting in person, and giving borrowers just 48 hours to comply with unilaterally-rearranged overdraft and lending agreements.
The Business Secretary, Lord Mandelson, said he was alarmed by the banks' behaviour: "That is not the sort of constructive relationship that is sustainable between banks and businesses...
Paul Cox, from Surrey, was also asked for his personal property to be put up as collateral against a business loan by the Royal Bank of Scotland just last month – despite an excellent record with the bank. "I'm fortunate – I could walk away," said Mr Cox. "Others have to accept punitive terms." RBS received the biggest slice of the Government's bailout deal – up to £20bn.
The Federation of Small Businesses (FSB) said that when some members approached banks to discuss loan agreements, their accounts were reissued under harsher lending terms.
Chief executives of Britain's big banks, who have been regularly meeting with the Government and small business groups, have all made positive noises about ensuring viable small businesses have the access to finance that they need. But branch managers are often reluctant to return to relaxed lending policies which may put their branches in a perilous position.
There are several issues conflated in this story that need to be picked apart. One is that there were a lot of loan made in the frothy years that were not sound. Some people who had access to a lot of credit will correctly have a lot less, and that on dearer terms. But there are also perfectly worthwhile businesses and individuals who are also caught in the meat grinder of indiscriminate reduction of loan balances. And because government support has been extended with the explicit understanding that banks would make loans, the punitive treatment of high quality borrowers is indefensible.
But those are not my main focus. What stuck we was the subtext of the piece: times are bad, and any efforts to extract more revenues from customers, even if it is blood from a turnip, or worse, even if it puts a viable business under, is warranted. The idea that the needs of the financial sector can trump those of the productive sector are dangerous and destructive to our collective well being, and need to be combatted frontally.
Bring back the link between gold and the dollar
By Richard Duncan
The events of September 2008 – the nationalisation of Fannie Mae, Freddie Mac and AIG; the disappearance of the investment banking industry in the US; and the Bush administration’s $700bn bailout to save what is left of Anglo-American capitalism – demonstrate that the 37-year experiment with fiat money and floating exchange rates has failed catastrophically.
When Richard Nixon destroyed the Bretton Woods International Monetary System in 1971 by closing the “gold window” at the Treasury, he severed the last link between dollars and gold. What followed was a spiralling proliferation of increasingly spurious credit instruments denominated in a debased currency. The most glaring and lethal example of this madness has been the growth of the unregulated derivatives market, which has ballooned in size to $600,000bn, the equivalent of almost $100,000 per person on Earth.
Under the post-Bretton Woods dollar standard, credit growth powered economic growth. In the US, the ratio of total credit to gross domestic product rose from 150 per cent in 1969 to 350 per cent in 2007. Credit financed consumption and sucked in imports with a devastating impact on America’s trade balance. By 2006, the US current account deficit had reached almost $800bn.
As the dollar standard flooded the world with funny money, economic instability spread around the globe. The reinvestment of “petrodollars” created the Latin American economic boom in the 1970s and then the third world debt crisis of the 1980s. Japan’s trade surplus with the US drove up Japanese property prices in the late 1980s until the imperial gardens in Tokyo were worth more than California; and then produced the lost decade in Japan when that bubble popped in 1990. Next came the rise and fall of the Asian miracle bubble. Each economic convulsion resulted from the excessive influx of dollars into those economies. No regulatory regime could cope when confronted with such an extraordinary incursion of exogenous money.
The Bretton Woods collapse severed the link between the world’s currencies and gold. Central banks were then free to create as much money as they wished. Between 2001 and today, central banks outside the US created the equivalent of about $6,000bn. This can be seen in the seven-fold increase in foreign exchange reserves in that period. The money created (which accounted for most, if not all, of Federal Reserve chairman Ben Bernanke’s so-called global savings glut) was used to buy dollars and suppress the value of the currencies of US trading partners to perpetuate their trade advantage.
When those dollars were reinvested in dollar-denominated assets, it was America’s turn to bubble. As central banks bought up US treasury bonds, they drove up their price and drove down their yields. However, there were not enough new Treasury bonds being issued to absorb the rest of the world’s trade surplus earnings, so central banks bought Fannie and Freddie debt as well. That allowed those government-sponsored enterprises to acquire or guarantee more than half of all the mortgages in the country before they failed. Between unnaturally depressed interest rates and the buying spree by Fannie and Freddie, US property prices surged. The US housing bubble followed the ill-fated Nasdaq bubble. However, the inflation of the US housing market was one bubble too far. When it imploded, the global financial system was hurled into crisis, leaving the 21st century version of Anglo-American financial capitalism discredited.
The lesson that must be learnt from this disaster is that “free market” capitalism under a fiat money regime does not produce the same blessings (sustainable prosperity) that are produced by true free market capitalism within a monetary system anchored by gold. When President Nixon severed the link between the dollar and gold, he changed the nature of the Anglo-American economic model and ultimately destroyed it.
The world cannot return to a gold standard overnight without provoking a brutal contraction of credit and a global depression. However, neither can we afford to pretend that nothing has changed and that the global economy can continue to function on the dollar standard. The time has come to convene a forum of the world’s leaders to hammer out and begin the transition to a new rule-based international monetary system predicated on sound money and balanced trade. Current Group of 20 efforts fall well short of what is required.
The writer is author of The Dollar Crisis: Causes, Consequences, Cures
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