The China model
The Beijing consensus is to keep quiet
In the West people worry that developing countries want to copy “the China model”. Such talk makes people in China uncomfortable
CHINESE officials said the opening of the World Expo in Shanghai on April 30th would be simple and frugal. It wasn’t. The display of fireworks, laser beams, fountains and dancers rivalled the extravagance of Beijing’s Olympic ceremonies in 2008. The government’s urge to show off Chinese dynamism proved irresistible. For many, the razzmatazz lit up the China model for all the world to admire.
The multi-billion-dollar expo embodies this supposed model, which has won China many admirers in developing countries and beyond. A survey by the Pew Research Centre, an American polling organisation, found that 85% of Nigerians viewed China favourably last year (compared with 79% in 2008), as did 50% of Americans (up from 39% in 2008) and 26% of Japanese (up from 14%, see chart). China’s ability to organise the largest ever World Expo, including a massive upgrade to Shanghai’s infrastructure, with an apparent minimum of the bickering that plagues democracies, is part of what dazzles.
Scholars and officials in China itself, however, are divided over whether there is a China model (or “Beijing consensus” as it was dubbed in 2004 by Joshua Cooper Ramo, an American consultant, playing on the idea of a declining “Washington consensus”), and if so what the model is and whether it is wise to talk about it. The Communist Party is diffident about laying claim to any development model that other countries might copy. Official websites widely noted a report by a pro-Party newspaper in Hong Kong, Ta Kung Pao, calling the expo “a display platform for the China model”. But Chinese leaders avoid using the term and in public describe the expo in less China-centred language.
Not so China’s publishing industry, which in recent months has been cashing in on an upsurge of debate in China about the notion of a China model (one-party rule, an eclectic approach to free markets and a big role for state enterprise being among its commonly identified ingredients). In November a prominent Party-run publisher produced a 630-page tome titled “China Model: A New Development Model from the Sixty Years of the People’s Republic”. In January came the more modest “China Model: Experiences and Difficulties”. Another China-model book was launched in April and debated at an expo-related forum in Shanghai. Its enthusiastic authors include Zhao Qizheng, a former top Party propaganda official, and John Naisbitt, an American futurologist.
Western publishers have been no less enthused by China’s continued rapid growth. The most recent entry in the field is “The Beijing Consensus, How China’s Authoritarian Model Will Dominate the Twenty-First Century” by Stefan Halper, an American academic. Mr Halper, who has served as an official in various Republican administrations, argues that “just as globalisation is shrinking the world, China is shrinking the West” by quietly limiting the projection of its values.
But despite China’s status as “the world’s largest billboard advertisement for the new alternative” of going capitalist and staying autocratic, Party leaders are, as Mr Halper describes it, gripped by a fear of losing control and of China descending into chaos. It is this fear, he says, that is a driving force behind China’s worrying external behaviour. Party rule, the argument runs, depends on economic growth, which in turn depends on resources supplied by unsavoury countries. Politicians in Africa in fact rarely talk about following a “Beijing consensus”. But they love the flow of aid from China that comes without Western lectures about governance and human rights.
The same fear makes Chinese leaders reluctant to wax lyrical about a China model. They are acutely aware of American sensitivity to any talk suggesting the emergence of a rival power and ideology—and conflict with America could wreck China’s economic growth.
In 2003 Chinese officials began talking of the country’s “peaceful rise”, only to drop the term a few months later amid worries that even the word “rise” would upset the flighty Americans. Zhao Qizheng, the former propaganda official, writes that he prefers “China case” to “China model”. Li Junru, a senior Party theorist, said in December that talk of a China model was “very dangerous” because complacency might set in that would sap enthusiasm for further reforms.
Some Chinese lament that this is already happening. Political reform, which the late architect of China’s developmental model, Deng Xiaoping, once argued was essential for economic liberalisation, has barely progressed since he crushed the Tiananmen Square protests in 1989. Liu Yawei of the Carter Centre, an American human-rights group wrote last month that efforts by Chinese scholars to promote the idea of a China model have become “so intense and effective” that political reform has been “swept aside”.
Chinese leaders’ fear of chaos suggests they themselves are not convinced that they have found the right path. Talk of a model is made all the harder by the stability-threatening problems that breakneck growth engenders, from environmental destruction to rampant corruption and a growing gap between rich and poor. One of China’s more outspoken media organisations, Caixin, this week published an article by Joseph Nye, an American academic. In it Mr Nye writes of the risks posed by China’s uncertain political trajectory. “Generations change, power often creates hubris and appetites sometimes grow with eating,” he says.
One Western diplomat, using the term made famous by Mr Nye, describes the expo as a “competition between soft powers”. But if China’s soft power is in the ascendant and America’s declining—as many Chinese commentators write—the event, which is due to end on October 31st, hardly shows it. True, China succeeded in persuading a record number of countries to take part. But visitor turnout has been far lower than organisers had anticipated. And queues outside America’s dour pavilion have been among the longest.
The price of pragmatism
The euro-area rescue plan
The price of pragmatism
The euro zone’s rescue scheme is big and bold but leaves the ECB looking compromised
FOR weeks there have been calls for the euro zone's policymakers to get ahead of the sovereign-debt crisis, which started in Greece and was in danger of engulfing other countries with big budget deficits and poor growth prospects. In the early hours of May 10th, such a plan finally emerged. After a lengthy summit in Brussels, European finance ministers agreed on a “stabilisation fund” worth up to €500 billion ($640 billion) over three years. That sum would be supplemented by a further €220 billion or more from the IMF. In addition, the European Central Bank (ECB) said it would purchase government bonds to restore calm to “dysfunctional” markets.
The market response was euphoric. Germany’s stockmarket had risen by more than 5% when it closed on May 10th. The CAC 40, the main index in France, was up by almost 10%: big French banks are heavily exposed to Greece, so they stand to benefit from a cast-iron rescue package. The yield on ten-year Greek government bonds plunged from more than 12% to less than 8%. The yields on comparable bonds for Portugal, Spain, Italy and Ireland also fell sharply. The euro rose a bit against the dollar.
The response is a sign of how sceptical markets had previously been that Europe could respond to the deepening crisis with enough scale and speed. Even so, the rescue plan has a patched-together feel to it. One part is based on an existing €50 billion fund for non-euro countries with balance-of-payments problems, which is financed by European Union bonds that can be sold fairly quickly. The EU is to create a similar, €60 billion fund for euro member countries—as much money as could be raised without breaching its budget ceiling. This proposal had to be signed off by countries, like Britain, which do not use the euro, because their taxpayers would also be on the hook were the money not paid back in full.
The mainstay of the rescue fund, an additional €440 billion if needed, will come from a new vehicle to be set up by the 16 euro-zone countries, which will control the money disbursed by it and guarantee its financing. Details on how this would work are sketchy but an EU official said the scheme could be enacted in a week or two. The IMF is expected to chip in with funding worth at least half as much again.
These elements of the rescue plan satisfy the need for a big response but would take a while to be fully operational—too long, perhaps, for jittery financial markets. That is what made the ECB’s participation so necessary: it is the only institution that can react rapidly enough. Market chatter suggests that much of the fall in European bond yields on May 10th was down to the ECB, already in the market, buying bonds. Doing this has the effect of pumping cash into the economy but the bank says it will "sterilise" this by other means (such as selling instruments of its own, to soak up the cash), so that monetary policy will not be loosened.
Jean-Claude Trichet, the central bank’s head, denied that the bank had been pressured into buying bonds, even though it is only a few days since he said publicly that the ECB's governing council had not even discussed buying bonds at its regular monthly meeting. He insisted that the ECB was “fiercely and totally independent.”
However, for all his protestations, the ECB looks a different animal to when the fiscal crisis began. Having balked at buying government bonds last year when other central banks were doing so as part of their monetary policy, the bank now finds itself involved in an explicit support operation to European governments' fiscal policies—which is a far bigger threat to its self-image. This is not the only sharp U-turn Mr Trichet has had to perform in recent weeks. He opposed IMF involvement in the Greek rescue, then welcomed it. And he said the rules would not be changed to suit one country, only to change them to ensure that Greek bonds could be exchanged by banks for ECB cash. The central bank's credibility relies in part on a reputation for living up to its pledges and partly on its disdain for political expediency. On both counts, then, it has lost something.
Even so, it is wrong to conclude that, in trying to get ahead of the crisis, the euro zone's policymakers have gone too far. The threat that Portugal and Spain might be cut off from credit markets, triggering a meltdown in Europe’s financial system, was all too real. The rescue effort will dent the ECB’s reputation as a single-minded inflation-slayer. The insurance provided by the rescue scheme may leave countries that benefit from it a bit less minded to cut deficits and reform their economies. But those faults, real as they are, must be set against the potential costs of doing nothing.
Euro Package Leaves Governments Out ........
Euro Package Leaves Governments Out of Ammunition: Matthew Lynn
Commentary by Matthew Lynn
May 11 (Bloomberg) -- Big problem, big number. The leaders of the euro-area countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea.
In reality, you can’t stabilize a sinking ship.
The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes.
Greece has exposed deep structural problems within the euro. There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries. The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations.
Those are the hard questions. Even 750 billion euros won’t get close to answering any of them.
The markets have greeted the latest package with a wave of euphoria. No great surprise there. Everyone likes a bailout, and particularly the financial markets. There is so much sovereign debt on the books of European banks that the possibility of default, or just sharp losses on those portfolios, was prompting fears of a meltdown in the financial system. It could have been Credit Crunch Round Two. There was bound to be relief at avoiding that.
Relief for Markets
The stock prices on European bourses soared. The euro strengthened the most in 18 months against the yen on foreign- exchange markets. Finance ministers will have been relieved at the reaction. They were looking to reassure the markets, and to punish speculators, and on that measure they succeeded.
Don’t expect it to last. In the next few days, tough questions will be asked about the euro.
First, where are the incentives for governments to stick to rules? The crisis arose because the euro area didn’t enforce the Stability and Growth Pact, which limited budget deficits to 3 percent of gross domestic product in all but exceptional circumstances. If the pact had been rigorously enforced, Greece would never have been allowed into the euro. Once in, it would have been disciplined for allowing its deficits to balloon even when the economy was booming.
No Incentive
If it got bailed out for behaving badly, why should any other government behave itself? The bailout package talks about tougher disciplinary measures, but what are they? Are tanks going to be sent into Dublin if Ireland doesn’t stick to its austerity program? Will the Portuguese get kicked out of the euro if they don’t control their deficit? Of course not. The only credible deterrent was letting Greece default. By wimping out of that, the EU has no ammunition left.
Second, there is no popular support for the massive fiscal transfers between countries that are now proposed. Take a look at the hammering that German Chancellor Angela Merkel’s coalition took in regional elections this weekend. Where is the 750 billion euros supposed to come from? Elected politicians are going to pay a terrible price at the ballot box for offering to foot any of the bill. Don’t be surprised if they start sliding on their commitments once they look at their poll ratings.
Third, the rules of the euro area turned out to be about as solid as a slice of brie left out in the midday sun. We were told there wouldn’t be any bailouts between member states. We were told the European Central Bank wouldn’t buy government bonds in the market. We were told the stability pact would be enforced. None of those promises turned out to be true.
New Rules
If the rules of the euro can be rewritten on a Sunday night in Brussels once, they can be rewritten next time there is a crisis. Investors will remember that. And they won’t believe what they are told about how the euro operates from now on.
Finally, it doesn’t address the issue of how you get the heavily indebted countries growing again. The problem in Greece, Portugal, Spain, Ireland, Italy, and potentially France as well, isn’t just that governments are going to have to push through huge and painful austerity programs. It is that they can’t devalue their currencies at the same time to provide some relief to their economies -- and to provide some hope of future growth.
You can’t run an economy with just sticks -- not in a democracy anyway. You need some carrots as well. The EU not only has to fix the debt problem, it has to provide the money to stimulate growth as well. But, for all the reasons explained above, that isn’t going to happen. The money isn’t available.
“We will do whatever it takes” to defend the euro, European Commission President Jose Barroso said last week. The euro area threw everything it could at the crisis this weekend.
The immediate battle may have been won. The markets will rally and the panic will abate. Yet investors will pick away at the real issues in the next few weeks until we are back where we started. And next time around, there won’t be anything left to throw at the problem.
Euro Erases Gains as Bailout Optimism Ebbs
Euro Erases Gains as Bailout Optimism Ebbs; Stocks, Copper Drop
By James Regan and Ron Harui
May 11 (Bloomberg) -- The euro lost all of yesterday’s gains on concern the almost $1 trillion lending plan to bail out indebted nations in Europe will trim economic growth in the region. Stocks, copper and U.S. index futures fell after China’s inflation rate hit an 18-month high.
The euro weakened to $1.2737 at 8:27 a.m. in London and was 0.2 percent below last week’s close, after strengthening as much as 2.7 percent yesterday. The MSCI Asia Pacific Index dropped 1 percent to 118.99, with five stocks sliding for every two that gained. The Stoxx Euro 600 decreased 1.1 percent to 251.35. Standard & Poor’s 500 Index futures lost 0.8 percent, following the biggest jump in U.S. stocks since March 2009. Copper led commodities lower, falling 1.6 percent.
“Markets realized quickly that this crisis won’t be cured by adding liquidity, no matter how big it is,” said Toshihiko Sakai, head of trading for currencies and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “The structural problems of the euro zone will persist. I’m not surprised at all the euro is losing strength again.”
Accelerating inflation may prompt policy makers in China, the world’s third-largest economy, to tighten lending controls as the European Union’s bailout plan forces nations including Greece, Spain and Portugal to increase taxes and rein in public spending. Greece may have its credit rating lowered to junk within the next month, Moody’s Investors Service said yesterday, citing the country’s “dismal” economic prospects.
‘Multiyear Contractions’
The euro fell 0.5 percent, after yesterday gaining 0.3 percent. It reached $1.2529 on May 6, the weakest level since January 2009. Against the yen, the currency today dropped 1.3 percent to 117.73.
Every “fix” is accompanied by “an adjustment in the real economy,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said late yesterday in an interview on Bloomberg Radio with Tom Keene. “We saw that in Asia in the late ‘90’s, we saw that in the U.S. in ‘08, ‘09, and we’re going to see that in Europe, certainly in the peripheral countries, with significant multiyear contractions in the years ahead.’’
Hong Kong’s Hang Seng Index dropped 1.7 percent, the worst performance among Asia’s major benchmark stock indexes, and the Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 51.31, or 1.9 percent, to close at 2,647.44, the lowest in almost a year. The measure slid 21 percent from the close on Nov. 23, entering a bear market.
China Risk
China today said consumer prices rose 2.8 percent from a year earlier in April and property prices jumped 12.8 percent, the most since data began in 2005. New lending of 774 billion yuan ($113 billion), reported by the central bank, was more than any of 24 economists forecast in a Bloomberg survey.
‘‘Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”
Copper futures on the London Metal Exchange fell to $7,003.50 a metric ton and crude oil decreased 0.6 percent to $76.37 a barrel in New York, paring an earlier 0.8 percent gain. Shares of BHP Billiton Ltd., the world’s largest mining company, declined 2.2 percent to A$38.13 in Sydney.
Mizuho Financial Group Inc. sank 4.7 percent to 163 yen, leading Japanese banks lower, on reports the company plans to sell about 1 trillion yen ($11 billion) of stock to bolster capital. Mitsubishi UFJ Financial Group Inc., the nation’s largest publicly traded bank, fell 1.7 percent to 460 yen.
Philippine Election
The Philippine Stock Exchange Index surged 3.9 percent, the most in eight months, after early results suggested a landslide presidential election victory for Benigno Aquino, whose late mother helped oust former dictator Ferdinand Marcos. Aquino, who was leading in opinion polls prior to the vote, said April 26 only fraud could stop him winning and such an outcome would trigger unrest comparable with the protests that swept his mother to power 24 years ago.
“It looks like it will be a landslide victory,” said Marvin Fausto, who oversees $10.8 billion as chief investment officer at Banco de Oro in Manila. “It seems we are going to a situation where there is a clear mandate.China’s April Inflation Accelerates
China’s April Inflation Accelerates, Lending Surges (Update3)
By Bloomberg News
May 11 (Bloomberg) -- China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.
Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.
Asian stocks fell, with the local benchmark index entering into a bear market, and oil and copper slumped on concern the government will move to cool the fastest-growing major economy. China should focus on preventing excessive increases in asset prices and liquidity after Europe’s almost $1 trillion loan package reduced the risk of another global slump, central bank adviser Li Daokui said yesterday.
“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”
Stocks Slump
The MSCI Asia Pacific Index reversed a gain of as much as 0.7 percent to trade 1 percent lower at 118.91 as of 4:02 p.m. in Hong Kong. The Shanghai Composite Index fell 1.9 percent to close at 2,647.44, the lowest in almost a year. It has slid 21 percent since November, a sign analysts say is a bear market.
Copper futures on the London Metal Exchange fell to $7,003.50 a metric ton and crude oil decreased 0.9 percent to $76.15 a barrel in New York, paring an earlier 0.8 percent gain.
Non-deliverable yuan forwards rose 0.1 percent, indicating that the government will scrap a peg to the dollar and let the currency gain 2.3 percent in the next year.
The increase in consumer prices compared with 2.4 percent in March and the 2.7 percent median estimate of 30 economists surveyed by Bloomberg News. Producer prices jumped 6.8 percent, also topping estimates, today’s release from the statistics bureau showed.
The jump in property prices in 70 cities was the biggest since data began in 2005, defying a government crackdown on speculation that intensified last month.
Price Pressure
Statistics bureau spokesman Sheng Laiyun said that while April’s inflation was “mild” and not broad-based -- largely reflecting food and residential-related costs including rents - - the nation faces significant pressure for bigger price gains. Causes include liquidity, commodity costs and a low comparative base last year, he added.
Europe’s debt crisis may spread even after the rescue plan unveiled yesterday, which could lead to “positive and negative” effects by restricting demand for exports while damping commodity prices, Sheng said.
China’s government aims to contain full-year inflation at 3 percent and avert property bubbles after record credit growth drove an economic rebound. Investors are concerned stimulus withdrawal and a slowdown in construction could choke off growth after an 11.9 percent expansion in the first quarter.
Retail sales growth accelerated to 18.5 percent in April from a year earlier as prices rose. Chen Xiao, the chairman of Gome Electrical Appliances Holdings Ltd., the nation’s largest electronics retailer by stores, said yesterday that sales are “strong,” bolstered by government subsidies for purchases.
Producer Prices Soar
The gain in producer prices was the biggest in 19 months and exceeded economists’ 6.5 percent median estimate. In March the costs of goods as they leave the factory rose by 5.9 percent.
Not all of today’s indicators pointed up.
Industrial production rose 17.8 percent in April from a year earlier, below economists’ estimates and down from 18.1 percent in March. M2, the broadest measure of money supply, grew 21.5 percent, slowing from 22.5 percent.
Urban fixed-asset investment climbed 26.1 percent in the first four months from the same period in 2009, easing from 26.4 percent in the first quarter.
UBS AG economist Wang Tao said loans are typically higher at the start of each quarter and the latest figure doesn’t put the government’s target of limiting lending to 7.5 trillion yuan this year in jeopardy. Economists’ median estimate for April was 585 billion yuan and the previous month’s lending was 510.7 billion yuan.
Economic Growth
China International Capital Corp. yesterday cut its estimate for China’s economic growth this year to 9.5 percent from 10.5 percent, citing property tightening measures and overseas “uncertainties.” Adjustments to interest rates and currency policy may be delayed, the investment bank said.
Developers Guangzhou R&F Properties Co. and China Overseas Land & Investment Ltd. are reporting slowing sales as the real- estate crackdown intensifies. Besides tightening rules for second and third-home purchases, China has increased banks’ reserve requirements three times this year, withdrawing cash from the financial system.
Still, policy makers have left benchmark interest rates and the yuan’s peg to the dollar unchanged.
“The double-dip risk in the world economy is likely to be reduced to a minimum,” Li, the policy adviser, said in an interview in Beijing, expressing his personal view of the European aid plan. “China’s growth rate is not a problem this year, and the main policy focus should be on preventing excessive gains in asset prices and liquidity.”
Labour Talks With Clegg on U.K. Coalition Collapse
Labour Talks With Clegg on U.K. Coalition Collapse, BBC Reports
By Gonzalo Vina and Kitty Donaldson
May 11 (Bloomberg) -- Talks between the Liberal Democrats and Prime Minister Gordon Brown’s Labour Party on forming a U.K. coalition collapsed, the British Broadcasting Corp. reported, without citing sources. The pound rose on the report.
Liberal Democrat leader Nick Clegg said earlier today that talks to form a government were entering their endgame after his Conservative counterpart, David Cameron, pressed for a decision on a coalition offer. Cameron and Clegg spoke at midday before negotiators for their parties met. Liberal Democrat lawmakers were due to convene at 7:30 p.m.
“The discussions between the political parties have now reached a critical and final phase,” Clegg told reporters in London today. “I am as impatient as anyone else to get on with this, to resolve matters one way or another.”
The haggling to form a government is unprecedented in post- World War II British politics and threatens to unnerve investors as it drags on. The pound has weakened since Brown’s announcement as analysts and lawmakers suggested the U.K. faced another election by the end of 2011.
Talks between Clegg and Cameron’s Conservatives, who won the most seats in an inconclusive May 6 vote, were thrown into disarray yesterday when Brown said he would quit as Labour leader if Clegg allied with his party.
Coalition Risks
All the possibilities carry risks: a Cameron-Clegg partnership would pair parties that disagree on tax cuts, immigration and policy toward Europe. A deal between Labour and the Liberal Democrats would exclude the top vote-getter and require support from more parties to reach a majority.
“If Clegg goes with the Conservatives he alienates his activists, if he goes with Labour he alienates voters,” said Stephen Driver, lecturer in politics at Roehampton University in London. “A rainbow coalition between Labour, the Liberal Democrats and others would be a recipe for disaster, like the 1970s every vote would be on a knife-edge.”
The pound, which fell as much as 0.9 percent against the dollar today, was up 0.4 percent at $1.4911 as of 4:22 p.m. in London.
William Hague, the Conservative foreign-affairs spokesman who’s leading his party’s negotiating team, said the Conservatives were proposing “a strong and secure government with an elected prime minister.”
Labour Meeting
The Labour Party’s governing National Executive Committee will also meet this afternoon to discuss the logistics for the leadership election and discuss unease among some members of the party over doing a deal with the Liberal Democrats.
Brown’s intervention shook Conservative hopes of a deal and trust in Clegg after the Liberal Democrats said they would explore an alliance with Labour. Cameron said it was “decision time” for Clegg as Liberal Democrats opened negotiations with Labour.
“Brown has completely destabilized the basis of the Lib Dem-Conservative negotiations,” said Steven Fielding, director of the Centre for British Politics at Nottingham University. “Everyone’s thinking about the next election, which is probably less than 18 months away.”
Brown, 59, said he’ll step down as prime minister after leading his party to its worst election result since 1983 following a 27-year career in national politics. Clegg had resisted allying with a politician who was rejected by voters.
Election Result
In the election, the first since 1974 to produce a so- called hung Parliament, Labour lost its House of Commons majority after 13 years, dropping 91 seats to 258. The Conservatives won 306 districts, a net gain of 97 from the previous election. The Liberal Democrats lost five seats and now have 57 members.
Clegg, 43, said last week Cameron was entitled to the first chance to form a government since he won the most votes and Parliament seats. A proposed deal was rejected by Liberal Democrat lawmakers yesterday, leading Clegg to phone Cameron, 43, and demand a full coalition and a referendum on an overhaul of the voting system to favor smaller parties.
Brown’s surprise announcement came while Cameron was mulling those demands, pushing the Conservatives to respond by making what William Hague, the party’s foreign-affairs spokesman, called an offer that goes “the extra mile” of a referendum on the alternative-vote system.
Under the alternative vote system, voters number candidates in order of preference. Those choices are taken into account to ensure that the winner has the backing of at least half the electorate.
Britain’s first-past-the-post voting method gave the Liberal Democrats 9 percent of the seats in the House of Commons for 23 percent of the popular vote. The party favors proportional representation and the alternative-vote proposal may not go far enough to satisfy it.
Home Prices Gain in 91 U.S. Cities
Home Prices Gain in 91 U.S. Cities in First Quarter (Update2)
By Kathleen M. Howley
May 11 (Bloomberg) -- Home prices rose in 91 U.S. cities in the first quarter as states hard hit by foreclosures began to recover and a tax credit cut the number of properties for sale.
The median price of a single-family home sold in Saginaw, Michigan, doubled to $60,800, the Chicago-based National Association of Realtors said in a report today. Prices in Akron, Ohio, climbed 90 percent to $95,300 and Grand Rapids, Michigan, recorded a 26 percent increase to $90,700. Nationally, the median declined 0.7 percent.
Cities that led the nation in foreclosures a year earlier had the biggest price increases as a tax credit of as much as $8,000 boosted demand and drove the supply of unsold homes to a four-year low in January, according to Lawrence Yun, chief economist for the Realtors’ group. Brian Bethune, chief U.S. financial economist for IHS Global Insight, said an improving job market should sustain the fledgling rebound in real estate.
“In the second half of the year, employment growth and an improving economic situation should keep the housing recovery on track,” Bethune said in a telephone interview from his Lexington, Massachusetts, office.
Today’s report showed the recovery accelerating from the fourth quarter when 67 metropolitan areas reported price gains.
Peak to Trough
The U.S. median home price tumbled 29 percent over three and a half years as defaults among subprime borrowers flooded the housing market with cheaply priced foreclosures and Wall Street piled up $1.78 trillion in losses and asset writedowns.
The median prices of an existing U.S. home peaked at $230,300 in July of 2006 and hit a low of $164,600 in February, according to NAR data. The drop was 13 percent in 2009, outpacing 2008’s 9.5 percent decline.
This year, prices may increase 2.5 percent as the economy improves, according to the Realtors’ forecast.
The median price of a single-family home in the New York metropolitan area rose 1.8 percent to $380,400 in the three months ended March 31. The areas surrounding New Haven and Milford, Connecticut, gained 5.3 percent to $227,900.
The Edison, New Jersey, region had a 1.5 percent gain in the median price; and Hartford, Connecticut, posted a 1.6 percent increase to $225,900. Prices in the Boston metropolitan area increased 11 percent to $321,800.
Transactions Fall
In a separate report, NAR said U.S. sales dropped 14 percent in the first quarter from the prior period, mostly because buyers rushed to purchase homes in the fourth quarter when the tax credit for purchases was originally set to expire.
Congress ultimately extended and expanded the credit for purchase contracts signed by April 30.
South Dakota led the nationwide sales decline with transactions falling 33 percent in the first quarter. Sales in Pennsylvania and Idaho dropped 28 percent. Connecticut transactions decreased almost 15 percent and New York sales were down 9.4 percent, NAR said.
Nationally, home sales probably will rise 4.3 percent to 5.38 million this year and gain 5.1 percent to 5.66 million in 2011, according to a forecast posted on NAR’s website. In 2009, sales climbed for the first time in four years to 5.16 million.
Senate Approves Amendment to Audit the Fed
Senate Approves Amendment to Audit the Fed’s Emergency Lending
By Alison Vekshin and Craig Torres
May 11 (Bloomberg) -- The Senate approved an amendment to the regulatory-overhaul bill to audit the Federal Reserve’s emergency-lending programs during the financial crisis.
The Senate voted 96-0 today to approve the proposal offered by Senator Bernard Sanders to allow a congressional watchdog to conduct a one-time audit of every Fed emergency action since December 2007.
“The time is now that we have got to end secrecy at the Fed,” Sanders, a Vermont independent, said before the vote. “This money does not belong to the Fed. It belongs to the American people, and the American people have a right to know where their taxpayer money is going.”
The amendment is aimed at forcing the Fed to release information about its use of emergency powers to help rescue financial firms during the crisis. Fed Chairman Ben S. Bernanke used Depression-era emergency authority to loan billions to U.S. corporations and bond dealers, and to rescue Bear Stearns Cos. and American International Group Inc.
Sanders last week narrowed the amendment in response to concerns raised by Bernanke, the Treasury Department and senators that his original amendment calling for broader audits could threaten the central bank’s independence. The change drew support from Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, who wrote the broader financial bill.
Revised Proposal
Sanders revised his proposal to seek a one-time audit by the Government Accountability Office for the period beginning Dec. 1, 2007, through the date of the bill’s enactment, of Fed loans and financial assistance, including foreign currency swap lines. The amendment also requires the Fed to publish on its Web site the names of businesses, people and foreign central banks that got aid, the type of assistance, amounts and other information.
The Senate is expected to consider a competing amendment offered by Senator David Vitter, a Louisiana Republican, who said he modeled the language after a proposal by Representative Ron Paul, a Texas Republican, that was included in the House’s financial-overhaul bill.
Vitter, who endorsed Sanders’s amendment, said he decided to offer his amendment after Sanders altered his last week. Vitter’s plan would allow for future audits of the Fed.
“We must go beyond the Sanders amendment,” Vitter said. “We must look forward and not just one time back to ensure the American people that we all know what our Federal Reserve is doing.”
Vitter said the Federal Reserve’s re-start of foreign currency swap lines with the European Central Bank is one reason why Congress needs continuous audit authority.
Balance Sheet
The Fed has used its balance sheet to finance housing, purchasing $1.25 trillion in mortgage-backed securities. Total assets on the central bank’s balance sheet stand at $2.32 trillion, up from $880 billion two years ago. The Fed closed four of its emergency-lending facilities Feb. 1.
Bernanke, in testimony on Feb. 24, told lawmakers the Fed would support a measure authorizing GAO audits of emergency- lending facilities.
“We understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation,” Bernanke said. The Fed chairman said the confidentiality of bank borrowing from the Fed’s discount window “must be maintained.”
Bloomberg LP has sued the central bank to release records of discount-window loans following a request under the Freedom of Information Act. The U.S. Court of Appeals in New York ruled March 19 that the Fed must release the records.
The Federal Reserve Board asked the appeals court this month to reconsider the March 19 ruling. If the court refuses, the Fed can appeal to the U.S. Supreme Court.
Bloomberg also sued the Fed to reveal the securities the Fed purchased from Bear Stearns Cos. to facilitate the investment bank’s merger with JPMorgan Chase & Co. The Fed made that information public March 31.
Stocks Head Higher
Stocks Head Higher, Gilts, Pound Gain on Coalition Speculation
By Rita Nazareth and Michael P. Regan
May 11 (Bloomberg) -- U.S. stocks erased losses and European equities pared declines, while the pound and gilts advanced on speculation British politicians will form a majority government which will be able to cut the nation’s deficit.
The Standard & Poor’s 500 Index rose 0.2 percent to 1,161.79 at 12 p.m. in New York after tumbling as much as 1 percent earlier. The Stoxx Europe 600 Index slipped 0.5 percent, erasing most of a 2.2 percent slide. The British pound rose 0.8 percent to $1.4959, reversing a drop of as much as 0.9 percent. The yield on the 10-year U.K. government bond fell five basis points to 3.86 percent. Treasuries declined, sending the 10-year note’s yield up two basis points to 3.55 percent.
Global equities trimmed earlier declines on speculation U.K. Conservative leader David Cameron is nearing agreement on forming a coalition government with Nick Clegg’s Liberal Democrats. Negotiators for both their parties met today and the British Broadcasting Corp. reported that discussions between Prime Minister Gordon Brown’s Labour Party and the Liberal Democrats, Britain’s third party, had finished.
“The market likes clarity,” said Michael Mullaney, who helps manage $9 billion at Fiduciary Trust Co. in Boston. “There are significant structural issues in Europe from a fiscal standpoint. So, a definition of the U.K. situation would definitely have an important psychological effect on the market.”
Monday, May 10, 2010
Is Sovereign Debt Crisis Contained to Subprime?
Is Sovereign Debt Crisis Contained to Subprime?
Those who believe rates will never rise as long as the Fed remains accommodative, or that inflation will not flare up as long as unemployment remains high, are just as foolish as those who assured us that the mortgage market was sound because national real estate prices could never fall.
As Americans observe the chaos in Greece, most assume that the strength of our currency, the credit worthiness of our government, and the vast expanse of two oceans, will prevent a similar scene from playing out in our streets. I believe these protections to be illusory.
Once again the vast majority fails to see a crisis in the making, even as it stares at them from close range. Just as market observers in 2007 told us that the credit crisis would be confined to the subprime mortgage market, current analysts tell us that sovereign debt problems are confined to Greece, Spain, Portugal, and perhaps Italy. They were wrong then, and I believe that they're wrong now.
During the housing boom, subprime and prime borrowers made many of the same mistakes. Both groups overpaid for their homes, bought with low or no down payments, financed using ARMs instead of fixed rate mortgages, and repeatedly cashed out appreciated home equity through re-financings. The market largely overlooked the glaring similarities, and instead merely focused on FICO scores. Yes, prime borrowers had better credit, but their losses on underwater properties were no less devastating. As the magnitude of home price declines intensified, prime borrowers defaulted in levels that were almost as high as the subprime crowd.
So when mortgage backed securities started to go bad, it wasn't as if the problems emanated in subprime and subsequently "contaminated" the rest of the market. All borrowers were infected with the same disease, but the symptoms merely expressed themselves sooner in subprime. The same is true on a national level, whereby Greece plays the part of the subprime borrower. Though the U.S. is considered to be the highest order of "prime" borrower, based on historic precedent, our debt to GDP levels are at crisis levels, and are not that much lower than Portugal or Spain. When off-budget and contingency liabilities are properly accounted for, one could argue that we are already in worse financial shape than Greece.
Most importantly, like Greece (and homeowners who relied on adjustable rate mortgages), we have a high percentage of short-term debt that is vulnerable to rising rates. The one key difference is that while Greece borrows in euros, a currency it cannot print, America borrows in dollars, which we can print endlessly. In reality however, this is a distinction with very little substantive difference.
What if Greece had not been a member of the euro zone and had instead borrowed in their former currency, the drachma? First, given its past history of fiscal shortfalls, Greece would not have been able to borrow nearly as much as it had (They may well have been forced to borrow in euros anyway). Under those circumstances, creditors would have been more reluctant to lend without the possibility of a German led bailout. Had Greece never adopted the euro as its currency, but nevertheless borrowed in euros, it would now face the same difficult choices, but would not be offered the carrots or sticks provided by other euro zone nations that are worried about the integrity of their currency. The IMF would have been Greece's only possible savior.
Many of our top economists now argue that all would be well in Greece if the country was in charge of its own currency. In such a scenario, Greece would indeed have had no problems printing as many drachmas needed to pay its debts. However, would this really be a "get out of debt free" card for Greece?
The main reason the Greeks are protesting in the streets is that they do not want their benefits reduced or taxes raised to repay foreign creditors. But despite the likely domestic popularity of a drachma-printing policy, would it really get the Greeks off the hook? They would stiff their creditors by repaying them in currency of diminished value. But the same result could be achieved through an honest debt restructuring, which would involve "haircuts" for all creditors. In a restructuring, the pain falls most squarely on those who foolishly lent money to a "subprime" borrower.
But with inflation it's not just foreign creditors who would suffer. Every Greek citizen who has savings in drachma would suffer. Every Greek citizen who works for wages would suffer. Sure nominal benefits are preserved and taxes are not raised, but real purchasing power is destroyed. If the cost of living goes up, the reduction in the value of government benefits is just as real.
Of course, the negative effects on the economy of run-a-way inflation and skyrocketing interest rates are worse than what otherwise might result from an honest restructuring or even out right default. It is just amazing how few economists understand this simple fact.
Just because we can inflate does not mean we can escape the consequences of our actions. One way or another the piper must be paid. Either benefits will be cut or the real value of those benefits will be reduced. In fact, it is precisely because we can inflate our problems away that they now loom so large. With no one forcing us to make the hard choices, we constantly take the easy way out.
When creditors ultimately decide to curtail loans to America, U.S. interest rates will finally spike, and we will be confronted with even more difficult choices than those now facing Greece. Given the short maturity of our national debt, a jump in short-term rates would either result in default or massive austerity. If we choose neither, and opt to print money instead, the run-a-way inflation that will ensue will produce an even greater austerity than the one our leaders lacked the courage to impose. Those who believe rates will never rise as long as the Fed remains accommodative, or that inflation will not flare up as long as unemployment remains high, are just as foolish as those who assured us that the mortgage market was sound because national real estate prices could never fall.
Freddie Finances Scarier.........
Freddie Finances Scarier Than Bad Slasher Flick: Kevin Hassett
Commentary by Kevin Hassett
May 10 (Bloomberg) -- Freddie Mac’s disclosure that it lost $6.7 billion of taxpayer dollars in the first quarter of 2010, and that bigger losses may follow, suggests the Congressional Budget Office may have been kind in estimating that Freddie and Fannie Mae could gobble up $389 billion in U.S. aid by 2019.
The carnage of America’s government-sponsored housing agencies continues. It’s a remake of “A Nightmare on Elm Street,” only Freddy Krueger now goes by Freddie. The hapless victims are played by taxpayers.
The worst financial crisis in generations was set off by a massive government effort, led by the two mortgage giants, to make loans to homebuyers no matter whether they could make the payments. Lenders were willing to lend money to just about all comers, no matter how low their income. Why? Because the lenders knew Fannie and Freddie would purchase the loans from them for a high price before bundling them into securities to sell to investors.
Given that lenders didn’t have to keep skin in the game, they made loans that were as big as possible as fast as possible to people who, in some cases, were as unqualified as possible. That lending frenzy created the housing bubble, leaving us all holding the check.
At least we know that now. Given everything that happened, surely Fannie and Freddie have stopped adding to the problem, right?
Think again. Even after all of the bailouts, those idiotic loans are continuing.
Worst Practices
The two mortgage giants that largely created this mess chug along enthusiastically, not even bothering to change key practices that led to the worst real-estate crisis in U.S. history. Not only have Democrats failed to address Fannie and Freddie in their financial reform, they are standing back and allowing the worst practices to go on.
And while the rest of the economy has turned the corner, the bleeding is getting worse at the government housing agencies.
How did so much of our money get wasted? Peter Wallison, my colleague at the American Enterprise Institute, recapped the plot in gory detail in a November 2008 article.
The housing crisis built up gradually, accelerating to an outright calamity near the end of the last decade. It began when do-gooders figured out that they could subsidize the purchases of low-income housing by requiring Fannie and Freddie to make risky loans to low-income individuals.
Too Creative
Wallison cites the 1994 National Homeownership Strategy developed by President Bill Clinton’s administration that pushed “financing strategies, fueled by the creativity and resources of the private and public sectors, to help homeowners that lack cash to buy a home or to make the payments.”
Over time, with housing prices rising year after year, it looked like a free lunch. Taxpayers increasingly were placed on the hook for questionable loans, with low- and very low-income individuals accounting for a whopping 25 percent of loans purchased by Fannie and Freddie in 2007.
Incredibly, the Obama administration has done nothing to stop Fannie and Freddie from engaging in these dangerous practices. Quite the opposite.
In February, the Federal Housing Finance Agency proposed a rule setting goals for Fannie and Freddie for 2010 and 2011. One goal is that 27 percent of mortgages acquired by Fannie and Freddie “meet the low-income standard.”
Horror Continues
In other words, not only are your tax dollars going to bail out the horrifying loans that Fannie and Freddie encouraged during the real-estate bubble, they are also being used to guarantee new loans to borrowers who would not qualify absent government intervention.
The Democrats have put off dealing with Fannie and Freddie for a simple reason: Reform will require a conversation on how the two organizations contributed to the financial crisis.
Such a discussion is inconsistent with the Democratic story that Republican deregulation created the mess. It’s especially painful for President Barack Obama, who was a strong advocate for the two mortgage giants and helped obstruct efforts to rein them in. As of 2008, Obama trailed only Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, in collecting political donations from Fannie and Freddie’s employees and political action committees.
My guess is that Democrats will continue to avoid doing anything about Fannie and Freddie. The two leaking organizations will be cut into pieces and sent to the bottom of the ocean only after Republicans recapture Congress. Dire financial reports, such as Freddie’s last week, may hasten that transfer of power.
Greek Contagion Myth Masks Real Europe Crisis
Greek Contagion Myth Masks Real Europe Crisis: Caroline Baum
Commentary by Caroline Baum
May 10 (Bloomberg) -- Greece sneezes and Portugal catches a cold. Portugal coughs and Spain falls ill. Spain runs a fever and Italy comes down with the flu.
Contagion, or contagion theory, is sweeping the euro zone, where Greece’s debt crisis is infecting neighboring countries and threatening to make its way across the Atlantic to U.S. shores.
At least that’s what we’re told on a daily basis. European Central Bank council member Axel Weber warned last week of “grave contagion effects” for countries that have adopted the euro. “Greece Fuels Fears of Contagion in the U.S.,” trumpeted a May 6 Wall Street Journal headline.
I hate to pour cold water on that theory, but healthy countries aren’t susceptible to Greece’s disease. The sick ones, already plagued with high debt levels and bloated state budgets, don’t need a carrier. Capital flight from these countries “is not evidence of contagion,” said economist and author Anna Schwartz.
Of course, Schwartz said that in 1998 following the Asian financial crisis. In “International Financial Crises: Myths and Realities” (the Cato Journal, Vol. 17 No. 3), Schwartz punctured the notion that financial crises spread from the initial source to innocent victims. Nations are vulnerable because of their “home grown economic problems,” she said.
Schwartz’s insights are equally valid today. Capital isn’t fleeing sovereign debt markets in Spain and Portugal because Greece can’t pay its bills. Bond yields are rising because of an increased risk those countries may find themselves in the same boat as Greece: unable to meet their debt obligations.
Chronic Defaulter
OK, maybe not quite as leaky a boat. It would be hard to match Greece’s record of spending half the years since its independence in 1829 in default or rescheduling its debt, according to economists Carmen Reinhart and Ken Rogoff, authors of “This Time is Different.”
A single currency, it turns out, isn’t a panacea for everything that ails Europe. The 11 nations that scrapped their sovereign currencies and adopted the euro in 1999 never constituted an optimum currency area as envisioned by economist and Nobel Laureate Robert Mundell, the father of the euro.
“They don’t have a mechanism to deal with crises when they come up,” says Michael Bordo, professor of economics at Rutgers University and author of a book on the history of monetary unions. Europeans knew if they ceded domestic monetary policy to a centralized European Central Bank they would need “labor mobility and/or transfers from healthy states to weaker ones to deal with asymmetric shocks,” he says.
Fiscal Transfers
Europe has neither. Political union is still a dream. Germans are still Germans, and Greeks are still Greeks. The man on the street in Dusseldorf probably doesn’t understand why the German government has to fork over what could be his pension to a country for whom default is a way of life.
Political union isn’t a prerequisite for dealing with a sovereign debt crisis. What’s needed is some kind of a priori agreement on how fiscal transfers are to be carried out, says William White, chairman of the Economic Development and Review Committee at the Organization for Economic Cooperation and Development. In the case of the euro zone, “they were short of a few fiscal elements,” he says.
It’s far from clear the German public would have supported such transfers from strong to weak countries, White says. Especially if it’s the same profligate nations, such as Greece, that keep feeding at the trough.
Wake-Up Call
That said, European leaders have invested too much political capital in a united Europe to turn back now. Germany’s Parliament approved a package of loans to Greece on Friday, part of a 110 billion euro ($142 billion) package from the International Monetary Fund and European Union. Greece approved an austerity plan in exchange for the bailout.
“This should be a wake-up call to design mechanisms to deal with crises and enforce the rules” on debt and deficits, Bordo says.
The 1992 Maastricht Treaty outlined four convergence criteria for joining the European Monetary Union, including a maximum deficit-to-GDP ratio of 3 percent and debt-to-GDP of 60 percent. Last year Greece’s deficit and debt were 13.6 percent and 115 percent, respectively, as a share of the economy. All of the infected countries, and a few that haven’t caught the disease yet, are well in excess of those limits. The U.K., for instance, which is benefiting from capital flight out of Europe’s Club Med countries, ran a deficit last year that was 11.5 percent of GDP.
Investors may flee the U.K. at some point, but it won’t be because it caught anything from Greece.
Incubation Period
There is no question we live in an interconnected world. Subprime mortgage defaults by homeowners in Irvine, California, infected banks in Europe and Asia, thanks to the miracle of securitization.
So yes, European banks that hold Greek debt are vulnerable to losses. The interbank lending market is showing signs of stress. And the austerity measures required in Europe’s peripheral countries may spill over into reduced U.S. exports. That’s not the kind of contagion we keep hearing about.
On the other hand, it would be a mistake to interpret the flight-to-quality into U.S. Treasuries last week as a sign of immunity. The U.S. is already infected with the debt virus. It’s still in its incubation period.
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