Wednesday, May 26, 2010

New College Grads Facing Stark Employment Prospects

An annual right of spring – college graduation – has begun around the nation. Each graduate possesses hopes and dreams and, for many. large debts.

According to the College Board, a quarter of graduates from private colleges leave with more than $30,000 in debt. And more than half of those going to for-profit schools owe even more.

The College Board also says that too many students are borrowing more than they're likely to be able to manage down the road.

Entering the work world – especially this very tough job market – with a tens of thousands of debt is more than just a tough start; it can lead to years of indebtedness that can be difficult to eliminate due to interest payments. Many students won't be able to find the jobs needed just to begin paying off student loans that are due in only six months.

The class of 2010 will produce 1.6 million new college grads who will flood an already crowded job market facing 10 percent unemployment. Prior graduates from the 2008 and 2009 classes are still looking for entry-level jobs.

Those college graduates are just one part of an ever expanding labor force in need of employment, and they are joined by this year's high school grads who will not be attending college, mothers returning from maternity leave after months or even years, and military personnel returning from two wars.

Unfortunately, there aren't nearly enough available jobs for all of these potential workers.

To provide some perspective of the challenge we face as a nation, consider this: the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.

That's not even close to happening.

As it stands, there were already about 1.2 million unemployed recent college grads in America. The average graduate is carrying $20,000 in student loans. Those loans can't be paid off without jobs.

According to the National Association of Colleges and Employers, job offers to graduating seniors declined 21 percent last year, and are expected to decline another 7 percent this year.

Unemployment among people under 25 years old was 19.6 percent in April, the highest level since the Labor Department began tracking the data in 1948.

Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count workers relegated to part-time jobs.

According to Gallup, the under-employment rate has increased to 20%. That number includes not only the unemployed, but also part-time workers who want full-time work.

Of particular concern, a total of 46 percent of the unemployed have been out of work for at least six months, the highest in at least six decades.

The US doesn't only have to make up the eight million, or so, jobs wiped out during the Great Recession; it also needs to keep up with the growing labor market. The economy has to add about 150,000 jobs a month just to absorb the annual increase in population and the entrance of new people into the workforce, such as college grads.

The economy would need to grow by 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point, and even then unemployment would still be nearly 9 percent.

That's highly unlikely. Absent government stimulus and intervention, the economy will be quite challenged to grow at 5 percent, or anything close to it.

The hard reality is that US companies need to add at least 250,000 jobs monthly in order to significantly reduce the unemployment rate from its current 9.9 percent and return it to a more acceptable level of 6 percent.

That's a daunting prospect. And so is this:

Even if the nation started adding 2.15 million private-sector jobs per year starting this past January, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, just to eliminate the current jobs deficit.

That's bad news for the nearly 16 million Americans currently out of work, and for all those new college grads carrying oodles of debt.

Saturday, May 22, 2010

Housing Continues to Deteriorate; Strategic Defaults on the Rise

Currently, about seven million homeowners are behind on their mortgages and their ranks are growing. Many have lost jobs or taken pay cuts and are no longer able to keep up with mortgage payments.

As the housing market has collapsed, millions of Americans are now holding mortgages that are higher than the value of their homes.

However, an interesting development has arisen over the last year or so. People who can afford their mortgages are "strategically defaulting", or making a choice to walk away rather than make payments on an underwater mortgage.

The CEO of Citibank's mortgage unit estimates that one in five borrowers who default on their mortgages are able to pay.

In the past year it's estimated that at least a million Americans who could afford to stay in their homes simply walked away.

For people who made no down payment at all, or who put down just 3%, 5% or even 10%, that seems like a reasonable decision, given the circumstances. Many of these people live on streets, or blocks, with dozens of other foreclosed homes, which only hurts their home values further.

By law, in ten states the bank cannot go after any of borrower's other assets. But their credit ratings will suffer. It's an outcome many are willing to endure.

Delinquencies are defaults are growing, and the numbers are only expected to rise. The Mortgage Bankers Association (MBA) defines delinquency as being at least one payment behind but not yet in foreclosure, which is initiated by the lender after three months of delinquency.

According to CoreLogic, more than 11 million homeowners across the country are underwater. It's estimated that number could double in the next year, which means nearly half of all American mortgage holders will owe more on their homes than those homes are currently worth.

There are federally-backed programs designed to aid struggling and underwater borrowers at risk of becoming delinquent or defaulting on their mortgages. But for whatever reason, banks have been slow to modify the terms of those loans. In particular, they have been unwilling to renegotiate with people who could pay, but won't.

People have seen banks foreclose on their friend's and neighbor's homes without compunction, and so they're making the same cold, calculated decisions in their own self interests.

Increasingly, Americans have come to view walking away from an underwater mortgage as a savvy business decision, the kind that banks and large corporations make all the time.

For example, Morgan Stanley walked away from five San Francisco office buildings they bought at the height of the boom.

And real estate developer Tishman Speyer defaulted on the huge $5.4 billion Stuyvesant Town apartment complex in New York City earlier this year when its value fell by nearly half, making it one of the biggest walkaways in real estate history.

In the most delicious irony of all, the MBA sold its headquarters for about $34 million less than the mortgage on the property. The trade group declined to state if it would pay off the full loan value, an implicit indication that it won't.

Last year, the group's CEO, John Courson, said he believed mortgage borrowers should keep paying their loans even if it no longer seemed to be in their economic interest.

“What about the message they will send to their family and their kids and their friends by defaulting?" Courson asked.

With examples like these in mind, millions of mortgage holders have stopped paying their mortgage, yet have remained in their houses for months at a time – for free – until the bank forecloses and evicts them. Some foreclosures can stretch on for more than a year

The problem doesn't seem to be improving. The MBA says the mortgage delinquency rate rose in the first quarter to 9.38 percent of all loans outstanding, from 8.22 percent in same period last year.

And 37 percent of new foreclosures in the first quarter were prime fixed-rate loans — traditionally the most conservative type of mortgage. Due to high unemployment, all loans appear to be at risk.

Roughly one-in-seven of the 52 million households with mortgages are in delinquency or foreclosure. And unfortunately, those numbers may rise.

In the latest of a string of declines, CoreLogic says home prices fell 0.3 percent in March from February. And the MBA says applications for mortgages to buy homes plummeted 27 percent last week, to the lowest level since 1997.

With all of this in mind, all hopes of any nascent housing recovery seem to be dashed. Even the Federal Reserve agrees.

Last month, the Fed said the housing recovery “appeared to have stalled in recent months despite various forms of government support.”

Where the bottom is remains unknown, but one thing is clear; we are still a long way from recovery.

Thursday, May 20, 2010

IMF Concerned About Japan's Debt; Markets Concerned About Global Debt

The IMF says that Japan may be the next trouble spot in the global economy, in addition to several European nations.

The IMF noted that the hundreds of billions of dollars of stimulus spending were "necessary and effective, but has pushed public debt to unprecedented levels.”

Japan's debt is nearly 230 percent of its GDP, the highest of any industrialised nation. GDP is a measure of a country's total economic output.

As a result, the IMF says the nation with the world’s second largest economy must come up with a credible plan to cut its public debt. This would come from a combination of spending reductions and raising revenues, or taxes.

However, the economic downturn has undercut tax revenues from both individuals and companies. And now Japan is being urged by the IMF to come up with a plan to bolster tax receipts using a consumption tax.

The problem is that the Japanese economy has been experiencing stagnation for 20 years, and the IMF predicts it could grow by an anemic 2% this year and next.

As the economy has stalled, so has consumer spending. Japanese consumers have been saving instead of spending in their deflationary environment. And if consumers aren't spending, a consumption tax won't be effective.

It's the size of sovereign debts that has markets around the world spooked. The Dow plunged 376 points today, and is just hanging to the psychologically critical 10,000 mark. The NASDAQ and the S&P were both down by roughly 4 percent today as well.

Many signs point to a self-perpetuating global downturn in which weakened economies produce less tax revenue, and increasing sovereign debts. The size of those debts spooks markets, and indexes tumble. And the size of many sovereign debts precludes any additional stimulus, so the problems just spiral downward.

This is not a pretty picture, but it is symbolic of the problems associated with debt-driven economies using fiat currencies. Money, and debt, backed by nothing is very dangerous.

Tuesday, May 18, 2010

PIMCO Chief Issues Warning On Global Debt Crisis

"First and foremost, [the Europeans] have to understand how urgent the situation is. The crisis in Greece is morphing very quickly. It went from being a public finance issue in Greece to being now something that's impacting the periphery as a whole. It went from being something that was dealing just with the budget. Now there's a risk that it becomes a banking crisis. And it went from something that could be handled by bailing in the private sectors through new flows, to now concerns about restructurings. So the most critical thing is for the European to understand that when you allow a crisis to fester it morphs, and it morphs into something much more difficult to control." – Mohamed El-Erian, April 29, 2010

Mohamed El-Erian is the CEO of PIMCO, the world's biggest bond fund. On May 7, he wrote an editorial that was published both on the PIMCO website and in Financial Times. It was notable for its many keen insights and observations.

With a pedigree that includes a doctorate in economics from Oxford, a former faculty position at Harvard Business School, and 15 years at the IMF, when Dr. El-Erian speaks, people have a tendency to listen.

In his editorial, Dr. El-Erian noted that current debt problems "are not limited to Europe" and that, "It is only a matter of time" before this issue begins to shape government policies and the market valuations of sovereign debt.

In essence, what he's saying is that, like Greece, governments around the will be forced to make uncomfortable budget cuts that will affect the social fabric of their nations. And how markets assess those spending reductions, and assign risk to government debt, will affect bond yields.

Dr. El-Erian calls the crisis facing industrial countries a "sovereign debt explosion" and says the effects will be both "consequential" and "long-lasting." In his view, most countries in the world will feel "aftershocks" from what is happening in Greece.

Specifically, trade will be affected as international demand slows, putting a drag on any global economic recovery. In Dr. El-Erian's view, this will also complicate the ability of the private sector to step in and takeover from governments that have used deficit spending to stimulate their economies and prop up demand.

Countries that rely heavily on exporting to the eurozone will be particularly affected. Yet, some countries, such as the US, are poised to see foreign capital flows increase as investors seek to diminish risk and volatility.

In a normal world, investors would be running like hell from the US and it's persistent deficits and debt. Despite an unsustainable long term debt, and deficits reaching 10% of GDP this year and 11% next year, investors will nonetheless follow their usual instincts and past patterns of behavior, flocking to US dollars and assets.

Because the dollar is still the world's reserve currency, and because of the historic position of the US in the global economy, the herd will continue to revert to their knee-jerk behavior — for the time being, at least.

Dr. El - Erian notes that Greece is not a unique problem, but is representative of massive sovereign debts around the world. Because of this, he warns that we should also expect a "generalised and volatile" increase in risk around the world. Higher interest rates on government debt will not attract investors, who will instead seek "liquidity over returns and safe government bonds over equities."

This means we can expect stock markets to continue their volatility and downward trends.

Of equal concern, Dr. El -Erian says the European banking system is at risk due to uncertainties about each institution’s exposures to sovereign debt, as well as their links to one another.

The close links between US and European banks cannot be overlooked either.

So, where does all this leave us?

"The Greek crisis has already morphed into a regional (eurozone) shock," wrote El-Erian. "It now stands on the verge of morphing into a more global phenomenon."

The previous day, May 6th, as world markets were tumbling, Dr. El-Erian had this powerful warning for the US:

"We are not Greece. We have more time. But what the Greek crisis tells you is debt and deficits matter," El-Erian said. "The structure of your deficits matter and the US doesn't have much flexibility."

"Don't underestimate how quickly this can happen," he added. "There are structural headwinds out there and we better get our act together before those structural headwinds become overwhelming."

The US faces long term, structural deficits that are the result of an aging population that vastly outnumbers its working population. Younger workers are paying the Social Security and Medicare costs of older Americans. The government has little flexibility here.

In fact, most of the Federal Budget is non-discretionary, made up of Social Security, Medicare, interest on the debt (which isn't negotiable), and — believe it or not — and agricultural subsidies. These things are all mandated by law. Add in military and war costs, and you're up to two-thirds of the budget. Defense spending is, however, discretionary.

So, other than military spending — which most politicians are loathe to cut — only 16% of the Federal Budget is discretionary, meaning we're just tinkering at the edges.

There is little flexibility, and cutting military spending or any of the mandatory programs would be politically unpopular. Most politicians aren't known for their courage, or their willingness to make tough, unpopular choices.

And that's why our deficit and debt problems are so daunting,

That said, we've been warned.

Sunday, May 16, 2010

Bank of England Governor Expresses Fears About US & European Debts

Mervyn King, Governor of the Bank of England, says he believes that the US shares many of the same fiscal problems currently plaguing Europe.

The blunt assessment, made at a press conference this week, came as a surprise since King is generally quite guarded in his public comments.

As a rule, central bankers aren't plain-speaking or straight talking. Instead, they are careful not to rattle markets. And most are careful not to offend US policy-makers or to put them on the defensive.

That's why King's comments were so stirring.

King questioned how the US will shrink its fiscal deficit and enormous public debt over the next few years. The BOE Governor also expressed concerns about the debt problems the world over.

"It’s very important that governments — both here and elsewhere — get to grips with this problem, have a clear approach and a very clear and credible approach to reducing the size of those deficits over – in our case, the lifetime of this parliament – in order to convince markets that they should be willing to continue to finance the very large sums of money that will be needed to be raised from financial markets over the next few years at reasonable interest rates," said King.

In other words, the ability of governments to finance their debts will be predicated on their commitment to cutting both deficits and debts.

"We’ve seen the market response in the past two weeks, where major investors around the world are asking themselves questions about the interest rate at which they are prepared to finance trillions of pounds of money that will need to be raised on financial markets in the next two to three years, to finance government requirements around the world."

With that in mind, King said that it is critical for governments to take action immediately, proving to world markets that they are committed to fiscal responsibility. In King's estimation, the problems in Greece should serve as a warning to governments around the world.

"I think the important thing now is that Greece has been dealt with a major IMF and European Union package… But those measures provide only a window of opportunity. They do not affect the total amount of debt in themselves which countries around the world have to repay. The markets, which some of our European partners like to describe as speculators causing difficulty, are the very same markets where the public sector is looking to provide trillions of pounds of support to finance public debt around the major countries in the world over the next few years."

As we've already seen, reassuring world markets is critical to counties in need of continually refinancing their debts. And the thing that will most reassure markets is fiscal restraint that reduces both deficit spending and long term debts.

"Within the international community, I think there is a very clear understanding that the package of financial support which was made available at the weekend is not an underlying solution to the problem," said King. "It provides a window of opportunity which gives governments the chance to put their house in order; and it gives the international economic community a chance to talk about what I think – and have always said for some considerable time – to be one of the major issues facing us, which is the need to rebalance demand around the world economy."

King was referring to the fact that the global economy is massively unbalanced; China and other Asian countries are entirely reliant on exports to fuel and grow their economies, while the US is totally dependent on their cheap goods.

To rebalance the global economy, the one-dimensional export economies of Asia need to shift to domestic-led growth. The Chinese will need to spend more and save less, while Americans will need to do just the opposite; save more and spend less.

That would be quite a change for both nations.

Saturday, May 15, 2010

Three Expert Views on the Debt Crisis

Last week, Charlie Rose interviewed three famed investors: Byron Wien, vice chairman of Blackstone advisory group; former deputy treasury secretary Roger Altman, who is also the founder and chairman of Evercore partners; and Barton Biggs, who runs Traxis Partners and has worked on Wall Street for more than four decades.

These three distinguished and informed finance veterans gave their perspective on what the Greek debt crisis means to the world, and what it portends for the US.

The following is a partial transcript of the interview, highlighting the most fascinating and elucidating portions. The emphasis is mine:

BYRON WIEN: The big issue is what happened in Greece looked like it wasn’t going to be resolved – or it could be resolved temporarily but not permanently – because in order for Greece to be solvent on a continuing basis, they have to make certain budget adjustments. And the pictures on the front page of people rioting over austerity programs, it looks like Greece is going to have a tough time accomplishing that.

ROGER ALTMAN: Markets are under pressure, as Barton said, all around the world, and they’re under pressure because, a.) the global financial crises obviously is not over, b.) the fundamental structure of Europe as an economic and financial entity is being exposed as extremely weak, and, c.) the factor that caused all this – too much leverage – is still out extant, is still there, and is still causing that pressure.

CHARLIE ROSE: OK, let me just make sure I as a layman understand the connection here. Clearly it was excess leverage and risk taking after the subprime crises that led to the global economic meltdown.

Are you saying that there’s some connection between the subprime crisis per say or are you simply saying the same kind of factor that led to that crises have led to the debt crises which puts Greece in the place that it is?

ROGER ALTMAN: It’s the second. The world has seen greater and greater frequency of financial crises over the past 20 or 30 years. They are occurring with more and more rapidity. And all of them have one thing in common -- leverage.

So what we’re seeing, among other things here, is that the sovereigns – these nations in Greece, Spain, Portugal, and so forth – are too leveraged. Their debt in relation to their economy is too high, and there are concerns about their ability to service that debt, will they default, and so forth. And I think the jury is out on that.

CHARLIE ROSE: As to whether Greece will default?

ROGER ALTMAN: As to whether any of these smaller nations in Europe will default – and I think the markets are reacting to that prospect – it’s entirely possible there will be defaults. There have been many defaults throughout history, from Argentina to Russia and so many others. The idea of default is not an alien idea, and we may see that.

CHARLIE ROSE: And if in fact... do you think that’s likely to happen – Greece will default on this debt – and that whatever rescue that the European Union and everybody else says they’re prepared to do, in the end Greece will not be able to deliver on the austerity because of the political pressure?

BARTON BIGGS: It’s inevitable. There’s no way that when we run the numbers, there’s no way they can earn their way or cut their way out of this issue. So they’re going to have to restructure their debt.

And you’re the expert on this kind of thing -- and so is Portugal and maybe so is Spain. And the haircut could be maybe 40 percent. Isn’t that right?

BYRON WIEN: There’s a parallel here with the subprime crisis. At the beginning when it just appeared as if the subprime loans were going to get into trouble, people said that’s only 10 or 15 percent of the overall mortgage market. It can be contained.

And Greece is an economy the size of the state of Michigan. So when that went wrong, everybody said well if the European Union, Germany band together and solve that problem maybe it won’t infect other things.

I think the change in consciousness that’s taken place over the last few days is the recognition that what’s going on in Greece could affect the other southern tier countries, Portugal, Spain, Italy, and Ireland.

CHARLIE ROSE: And suppose that happens, the southern tier have countries reflect a similar kind of financial crises. Will it come to the United States?

ROGER ALTMAN: Well, the United States, as you and I discussed before, is going to correct itself either the easy way or the hard way. The easy way is that our leaders get together and proactively put together a package to reduce the deficits and this disastrous path of debt that we’re on.

The hard way is that financial markets – as we’re seeing now in Europe, but in our case the United States – financial markets reject that path. I don’t think that’s imminent, I don’t think we’ll see that over the very short term. But I think over the next couple years, if we don’t proactively address it, that will happen to us.

And we’ll experience the same type of ugly and punitive solution because it’s forced on us by markets that we saw, for example, in 1979 when the dollar crashed and the U.S. government experienced that.

CHARLIE ROSE: Explain to me the link what’s happening there, and what’s happening here, other than you have these nations with huge debt problems, albeit each one is different – Spain and Portugal are different.

BARTON BIGGS: The sovereign debt crises. And this is the first time in a number of years that we’ve had a true sovereign debt crises. And what Roger’s pointing out is the connation from Greece and Portugal can spread to Spain and the United States.

CHARLIE ROSE: But is it contagious because somebody who is concerned about what’s happening in Greece also becomes concerned about Spain and Portugal, and therefore the markets react to that, saying if it’s Greece today it’s Spain tomorrow?

BYRON WIEN: Some numbers are important here. All those countries represent 35 percent of the euro zone. The strong countries – the Netherlands, France and Germany – represent 65 percent. The strong countries are doing well and the weak countries aren’t.

So the sudden realization is that the 35 percent can drag down the 65 percent. Until the last few days that wasn’t recognized or wasn’t in the markets, but now it is.

The other thing that’s relevant to your question, Charlie, is this: The United States has a 12 percent budget deficit, as a percentage of gross domestic product. The United Kingdom has about 13 percent and Greece has 13 percent. And all three of us have significant national debt in relation to the GDP.

The difference is that the United States and United Kingdom can borrow money even with these problems. Greece cannot. Greece doesn’t have the borrowing power that we do. And the worry is that we’ll run into -- over time we’ll begin to run into the same problems Greece is. I don’t think that’s a possibility or not a near term possibility, but the numbers are very similar.

CHARLIE ROSE: And so what should the president be doing, Roger, of the United States?

ROGER ALTMAN: Well of course he’s put together the deficit commission and it’s going to report by December 1st. We’ll see what it comes up with.

I’m actually not optimistic that the commission will reach consensus, but I am optimistic that it will put forward a blue print for a package of spending restraint and revenue increases that would address this.

And then in 2011 the president may take... and I think he will make an effort to put together at least the first step in that regard. I happen to think that will be a Social Security agreement rather than addressing the whole thing in one step.

But I think the president’s going to in 2011 try to demonstrate his seriousness about this in order to stave off what otherwise, as I said, could be the type of ugly and punitive impact on the United States which could below up his whole presidency.

BYRON WIEN: Roger, we’re running $1.6 trillion in budget deficit this year and it’s going to be over $1 trillion next year and the year after – maybe for a few years. Are we willing to cut the social programs, Medicare, Social Security, defense? That’s what you have to do. You really have to attack the major portions of the budget deficit.

You can cut out foreign aid, the National Endowment for the Arts, earmarks -- you won’t get anywhere if you do that. You’ve got to really go at some of the critical programs.

BARTON BIGGS: We don’t want to be too pessimistic. There are other ways we can get out of debt and the world can get out of this dilemma. And the United States financial statistics looked very similar to this in 1947. And how did we get out of it? We grew our way out. We had substantial growth in both real GDP and nominal GDP.

And so one way we get out of it is by controlling the deficits but by also growing the economy and getting some inflation. And we’re going to have some inflation.

CHARLIE ROSE: Increase on the revenue side?

ROGER ALTMAN: But Barton, there’s one big difference.


ROGER ALTMAN: We had this much debt in relation to the size of our economy in 1947 because we had financed an enormous war, the arsenal of democracy. It was by definition temporary, thank god.

We’ve gotten into this problem for an entirely different reason. And if you put aside World War II, we’ve never been on a path to have debt in relation to the size of our economy of this amount since record keeping started in 1792 – ever.

Now we’re on the path there, and the question is how long will the markets allow us to stay on that path? I think some intermediate period of time, but not indefinitely. And this is the biggest risk to President Obama’s entire presidency.

BYRON WIEN: The United States is also at a very competitive position today than it was in 1947. World War II had devastated Europe and Asia. The United States had an intact manufacturing capability. It maintained industrial leadership from 1945 until 1980.

At that point, Europe was back on its feet. Japan was producing automobiles and consumer electronics products we wanted to buy. And we began to lose our competitive position.

Today, China and India and other countries are a much more formidable competitive force than any country in the world was at that point in time.

BARTON BIGGS: Byron, that’s our gloom and doom speech.

ROGER ALTMAN: You’re way too pessimistic.

BYRON WIEN: I’m optimistic, Barton. I have the highest growth forecast for 2010 of almost anybody out there. I think the U.S. economy is going to do very well this year.

CHARLIE ROSE: What does that mean, "very well"?

BYRON WIEN: Five percent, four to five percent, because historically it has sprung back from severe recessions. The recession was down – peak to trough – 3.9 percent. Usually you grow six to eight percent after that. I don’t think we’ll do that well, but I think we’ll do four to five, and most people are two to three, and the first quarter was 3.2.

CHARLIE ROSE: What do you think, Barton?

BARTON BIGGS: I agree with that. And I agree with the idea that our long term growth is going to be more like two to three percent because consumer spending is just not going to increase the way it did in the past when consumers were reducing the savings rates very substantially.

And so we’re going to have a longer period of slow growth, and so Europe, and Japan already have it. But there are other powerful dynamic economic posters in the world called India and China and Indonesia and Turkey and places like that. Byron is looking at me skeptically.

CHARLIE ROSE: How long have you two guys known each other?

BYRON WIEN: We’ve worked together for almost 20 years.

CHARLIE ROSE: At Morgan Stanley.

ROGER ALTMAN: He’s a pessimist.

BYRON WIEN: I’m not a pessimist.

CHARLIE ROSE: So this is the kind of meeting you would be in the conference room of Morgan Stanley when you talked about the future.

BYRON WIEN: It drove Morgan Stanley crazy because we were two strategists and often we had different opinions.

BARTON BIGGS: He never understood the glory of tax cuts. He was never a supply-sider.

ROGER ALTMAN: I think the question for today is, you know, are we seeing the early stages of global sovereign debt crises? And I think the answer is we are. And it’s --

CHARLIE ROSE: It’s self-evident, isn’t it?

ROGER ALTMAN: Some would argue it’s going to be contained.

CHARLIE ROSE: In Greece and that’s it?

ROGER ALTMAN: Greece, Spain and Portugal. And others think it may spread. I’m in the latter camp. I think it’s not going to be limited to just Greece, Spain, and Portugal.

CHARLIE ROSE: And what could make your wrong? In other words, it could be contained. What would have to happen for it to be contained? What set of initiatives and actions?

ROGER ALTMAN: Well, first I think the European authorities have been way too slow responding to Greece and have allowed this market disquiet to fester and forced upon themselves a much bigger rescue package for Greece than they would have had to put up had they acted decisively a month ago.

I think part of the problem is the European Central Bank is being exposed as much weaker and has far fewer powers than our central bank and that’s a big problem for Europe.

But you’re dealing with market psychology, Charlie, and once market psychology shifts – and it has shifted – these things are hard to contain. So if tomorrow we woke up and we found that the European Union and the European Central Bank had developed a much stronger package for all of these southern tier countries, that might be the end of it. But I don’t think that’s going to happen.

But I think market sentiment has changed, and we are in the beginning of a period of great anxiety over sovereign debt and I don’t think it’s going to end quickly.

CHARLIE ROSE: Mr. Trichet said today of the European Union, a Greek default is out of the question, and although he said they haven’t discussed it, he wouldn’t rule out that the ECB would buy government bonds.

BARTON BIGGS: That’s amazing. And that’s the thing. If they did that tomorrow and if they really did quantitative easing and bought government bonds and basically propped up both Portugal and Greece, I think they could avert this.

BYRON WIEN: That would be a strong action you could wake up and find.

BARTON BIGGS: They would cut the discount rate, and so on, in Europe.

BYRON WIEN: The problem probably is not immediate. I think the European Union and the International Monetary Fund will take action to alleviate this problem.

The problem is further on down the road. The problem is whether Greece can do the kinds of things that gets its financial house in order, and whether Spain and Italy can follow. That’s next year’s problem.

The European Union isn’t ready now for a financial calamity and they can do something about it. If over the next year, the countries take remedial action, then we can defer it indefinitely.

But if they don’t, then by next year you’ll have the country spun out of the union, they’ll have their currencies, they’ll be able to devalue their currencies and restructure their debt. And Europe will be a very different place.

ROGER ALTMAN: In other words the European Union would break up from a monetary point of view.

CHARLIE ROSE: So the euro is dead?

BYRON WIEN: No. I think there still would be a euro. My own view is there still would be a euro for the Netherlands, France, and Germany. They would still have common currency.

BARTON BIGGS: But the financial chaos that would create, by everybody else dropping out --

BYRON WIEN: But, you see, Germany is the biggest loser here. And Germany isn’t ready for that.

CHARLIE ROSE: It has the strongest economy too.

BYRON WIEN: Yes, it has the strongest economy and has the most subset in outstanding degrees.

BARTON BIGGS: Germany is going to be a huge winner out of it because the euro is – if we go the way we’re going – because the euro is being devalued against everything else. And Germany has the strongest economy, and the strongest exporting industries, and this is like a huge price cut for all Germany’s exports.

BYRON WIEN: Yes, but the fact is if the euro breaks up and these countries impose significant austerity, their markets will be smaller. That’s the other side of it.

I agree with you, devaluing the currency helps trade. But you have to have somebody to sell to, and the people you sell to have to have buying power.

Tuesday, May 11, 2010

Greek Debt Crisis = European Debt Crisis = Global Debt Crisis

The Greek debt crisis has put the Mediterranean nation front and center on the world stage over the past few weeks. Greece hasn't gotten this much attention since the 2004 Olympics.

However, Greece has a relatively small GDP ($339 billion) and is just a small part of the world economy (34th in the world). But its debt problem is a troubling reminder to other countries around the world facing their own burdensome debts.

As panic set in throughout Europe and around the globe, the EU pledged $140 billion in loans to help Greece pay its debts. Then it upped the amount to $645 billion, and then nearly $1 trillion — with assistance from the IMF — in a preemptive move to help the other troubled European nations as well.

However, the fear is that it still won't be enough. All of those loans will eventually have to be paid back in full, plus interest. In other words, Greece's debt problem has not been solved, but merely pushed off into the future. And the same will be true of Portugal, Italy, Ireland and Spain when they eventually seek their own bailouts.

How Greece gets itself out of this mess is the issue at hand. It has a huge, well-payed government workforce, and it is not a major exporter. In fact, Greece is one of the poorer nations in Europe. It will not be able to expand its economy and grow its way out of this debt problem.

Even after Greece institutes deep austerity measures — cutting the pay and benefits of all government workers — four years from now Greece's debt-to-GDP ratio still will have ballooned to 150 percent of GDP.

Europe's primary concern is to make sure that Greece doesn't default. French and German banks, along with many others, own Greek debt and would be greatly affected by a default. Such an outcome could would result in huge losses for these banks, potentially affecting their ability to pay off their debts, thus creating a debt contagion.

The wider concern about the European debt crisis is that it could effect the credit markets there. A number of indicators were already pointing to a tightening of credit at European banks last week.

During the height of last week's stock market selloff, banks tried to aggressively sell a large number of corporate bonds. But there weren't many buyers at the time, creating a massive oversupply.

Yet, the bank's bigger concern was all the government bonds on their books, not to mention a rapidly falling euro.

Fear can drive markets, as much as — or more than — anything tangible or fundamental. And right now, markets are spooked.

The concerns about a debt contagion stem from the interconnectedness of the European banking system, and in turn its connection to ours in the U.S.

U.S. and European banks regularly borrow from each other, to the tune of billions of dollars. If one institution starts to experience stress, those close links could put many other large institutions in both the U.S. and Europe at risk.

As a result, just the fear of a credit crunch could lead Europe back into recession. And if the crisis gets out of hand, banks could be forced to restrict lending, ultimately killing off any nascent recovery.

At it's heart, the financial crisis of late 2008 was a debt crisis. To fend it off, central banks around the world, such as the Federal Reserve and the European Central Bank, dropped interest rates and lent vast sums of money to at-risk financial institutions.

The U.S. and other countries initiated massive stimulus spending programs and tax cuts to stave off the crisis. It seemed to work, except for one thing; it created even greater debts that were pushed off into the future.

The huge debt burdens of governments around the world are becoming increasingly apparent, and the day of reckoning is at hand. The world economic system appears to be at risk.

The Baby Boom that occurred after WWII wasn't just a U.S. phenomenon; it happened all over the world. And now that population is graying and at — or nearing — retirement age. Many countries, such as the U.S., have promised more benefits than their tax bases can support, contributing to high government debts.

At the same time, many industrialized nations are also grappling with huge private debts from mortgages and other consumer loans. The Organization for Economic Cooperation and Development reported that U.S. household debt reached 138 percent of disposable income in 2007.

However, we were not alone in our personal debt woes: Britain - 186 percent; Canada - 138 percent; Japan - 128 percent, and Germany - 102 percent.

Considering these personal debt levels, its no wonder consumers all over the developed world have been pulling back, and slowing their nation's economies in the process. The IMF forecasts that developed countries will grow by about 2.4 percent in 2010 and 2011.

The huge budget deficits in developed nations will require deep spending cuts, as well as tax hikes. Aside from being politically unpopular, these steps will weaken any economic recovery.

Ultimately, these debts have to be dealt with. They won't go away on their own. Large, mounting debts lead to higher interest rates. When those rates eventually rise, the value of older government bonds, issued at lower interest rates, will drop. That will result in huge losses for banks around the world, who hold large amounts of government bonds. All financial institutions, and all other investors, will be deeply affected. The world financial system could seize up once again.

Most developed countries, representing about half the world economy, are caught in a web of debt. Greece is not alone. It is just the most glaring example at the moment, and it is the proverbial canary in the coal mine.

The amount of a nation's debt isn't as revealing as is its debt-to-GDP ratio. Comparing a country's debt to its GDP (what it produces) is useful in determining the likelihood that it will be able to repay its debt.

The debtor nations of greatest concern are the ones with the biggest external debts. External debt is a measure of a nation's foreign liabilities — capital plus interest — that the government, corporations and individuals of that nation must eventually pay to entities outside their home country.

This is the list of the world's biggest debtor nations, reflecting external debts, according to the World Bank (EZ denotes members of the eurozone):

1. Ireland (EZ) - 1,312% 2. United Kingdom - 426% 3. Switzerland - 382% 4. Netherlands (EZ) - 377% 5. Belgium (EZ) - 329% 6. Denmark - 316% 7. Sweden - 264% 8. Austria (EZ) - 256% 9. France (EZ) - 248% 10. Portugal (EZ) - 236% 11. Hong Kong - 223% 12. Finland (EZ) - 220% 13. Norway - 203% 14. Spain (EZ) - 186% 15. Germany (EZ) - 183% 16. Greece (EZ) - 171% 17. Italy (EZ) - 147% 18. Australia - 124% 19. Hungary - 122% 20. United States - 97%

Notice that Greece is only #16 on this list. There are much bigger concerns. The top-10 are all European countries, and 17 of the top-20 are also European. Note that there are also 11 members of the 16-nation eurozone on the list.

The European debt problem is absolutely massive, and it is widespread. It is also a threat to the entire global economy and financial system.

Ultimately, if debtors — governments, corporations, and consumers — can't repay their loans, it could lead to more bank failures, further credit contraction and a loss of deposits. That's the least of it; the euro, the eurozone, and even the European Union are at stake.

The process of de-leveraging, or getting out of debt, will be a painful one. But some extreme measures need to be taken to avert an acute crisis, like the one plaguing Greece. We've already seen the reaction of Greek citizens to the combination of tax hikes and cuts in government services.

The same prescriptions are coming to America. It's time for Americans to start preparing themselves for that inevitable eventuality.

If we've learned anything from all of this — and it really was quite self-evident to begin with — it's that you can't cure a debt problem by creating even more debt.

Thursday, May 06, 2010

"Nothing Less Than the Future of Europe" at Stake

Moody's warned today that the Greek debt crisis could spread to Portugal, Italy, Spain, Ireland, and the UK.

The credit ratings agency says the risk to other countries hinges on the success of the EU and IMF rescue packages for Greece. Market confidence in those packages, and their ultimate effect, is critical to Greece's future, as well as, perhaps, that of Europe.

Moody's says British, Spanish and Irish banks were more exposed to the credit crunch and have weakened their countries' finances significantly over the past year.

Like Greece, the banking systems of Portugal and Italy were not hit too hard by the global financial crisis. But their huge public debt load remains a threat.

Yesterday, Moody's put Portugal on watch for a possible downgrade. Just last week, Standard & Poor’s downgraded the debt of both Greece and Portugal.

Greece is less than two weeks away from potentially defaulting on its debt. The Mediterranean nation is due to make debt payments on May 19. Other countries owed money by Greece could be thrown into turmoil should Greece default.

In order to secure the multi-billion dollar bailouts from the EU and IMF, the Greek parliament is today set to force draconian austerity measures on already furious workers rioting across the nation.

Three bank workers, one of them pregnant, were killed yesterday during protests by up to 100,000 Greeks against the spending cuts.

The conditions for the loans are government cutbacks that will slash salaries and pensions for civil servants, in addition to raising consumer taxes.

However, markets around the world fear these measures still won't be enough, resulting in widespread stock market declines. Fears that the debt crisis will spread have also caused the euro to fall to its lowest level in more than a year.

Despite the rioting and protests, Prime Minister George Papandreou pledged to stick with the austerity plan, saying, "The alternative would be bankruptcy."

Without the eurozone and IMF rescue package — under which Athens will receive loans at interest rates of about 5 percent — the country will be unable to refinance its debt.

Investors are so dubious about Greece that its borrowing costs on the international market have soared to unmanageable levels. Interest rates have climbed above 10 percent — four times those of Germany's.

German Chancellor Angela Merkel urged parliament to quickly pass her country's share of the bailout, warning that, "Nothing less than the future of Europe" was at stake.

Wednesday, May 05, 2010

Break Up The Big Banks Now!

The assets of the four biggest banks equal 50% of GDP. The top three equal 44% of GDP. That's way too much concentration of power and wealth.


1. Big Banks are dangerous to our democracy. They have drowned out 95% of Americans, turned government into a feeding trough for the financial elite, and turned economic growth into debt.

2. Big Banking is so dangerously large that an inordinate amount of America's wealth is tied up serving a moneyed elite.

3. Big Banking is the biggest lobby and insidiously lobbies against the majority to make dangerous practices legal. Big Banking controls more than 40% of GDP as profit. There is little competition, allowing for outsized power. The Big Banks high fees and rates are used to create cycles of debt.

4. Big Banks dangerously invest in more Big Banking and do very little lending to small and medium businesses — the real engine for jobs and a safe and prosperous economy. Breaking up the Big Banks and closing the feeding trough means opening up the market to many more small and medium-sized banks, more small and medium-sized businesses and more American jobs.

The interest rates and fees charged by the Big Banks amount to legalized servitude sanctioned by Congress. If Congress won't reign in the abuses of the Big Banks, the American people must.

What's the formula for change? The only way towards a sustainable economy with low unemployment is to break up the Big Banks and to end their reckless, dangerous practices.

The financial industry has grown so big that their profits now eat up 40% of all profits. Consumers must rebel against the corruption that exists between the Big Banks and our government. We must insist on consumer emancipation.

Sign the petitions to break up the big banks!

Mixed Economic Data For April

The economic data for April was a mixed bag.

Though gross domestic product expanded at a 3.2 percent pace in the first quarter (according to the Commerce Department's first estimate), that was below the 3.4 percent rate economists polled by Thomson Reuters had forecast. And it was significantly less than the 5.6 percent growth in the fourth quarter of 2009.

The GDP increase was fueled in part by an increase in consumer spending. The Commerce Department said retail sales rose 1.6 percent in March, the largest increase in months, following slight gains in January and February.

And consumer confidence rose in April to the highest level since the financial industry meltdown a year and a half ago.

The Conference Board said the Consumer Confidence Index rose to 57.9 in April, up from 52.3 in March. The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The Index is now at its highest reading since September 2008 when it stood at 61.4. Economists surveyed by Thomson Reuters were expecting a reading of 53.5.

However, April's reading is still far from what's considered healthy. A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth.

The index has been fitfully recovering from its all-time low of 25.3 in February 2009.

A contrary report from Reuters and the University of Michigan showed that consumer sentiment declined to 72.2 in April, from March's 73.6. Yet, that was still better than the reading of 71 that economists had forecast.

There is reason to be concerned about the prospects for continued consumer spending, which accounts for 70% of all US economic activity; revolving debt, which is almost entirely credit card debt, fell to $858.1 billion in February. That's a far cry from the high of $975.7 billion in September of 2008.

Tapped out consumers are focusing on relieving themselves of debt, not incurring more of it.

While the GDP was up for the third straight quarter, it was down from the fourth quarter's 5.6 percent, a rate that was inflated by government stimulus spending and companies restocking their depleted inventories.

For the economy to show healthy growth, it would have to grow at a faster pace than it did the first three months of the year. Growth would need to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point.

The hard reality is that US companies need to add at least 250,000 jobs monthly in order to reduce the unemployment rate from its current 9.7 percent.

Absent government stimulus and intervention, the economy will be quite challenged to grow at 5 percent, or anything close to it.

Nationally, one in four homeowners owes more on their mortgage than the current value of the house. And, according to Gallup, the underemployment rate has increased to 20%. That includes the unemployed, plus part-time workers who want full-time work.

Those realities should put a downward pressure on consumer spending, and ultimately GDP growth as well. It should remind us that this recession is not over.