The Year of the Political Jackass
By David Paul KuhnIt was a year for the political jackass. Headlines were filled with politicians' private improprieties exposed. The infidelities, most oddly with Mark Sanford. The corruption, most infamously with Rod Blagojevich. But politicians' privately behaving badly, while news, is not new. It was politicians' public behavior in 2009 that is notable for reaching such new lows. Worse still is that, unlike in years past, hyper-partisan rancor is increasingly rewarded.
Republican Rep. Joe Wilson capped the indecorous year, yelling "you lie!" at President Obama during a September address to Congress. Republican leadership urged mea culpa. Wilson immediately called the White House and apologized. Yet Wilson also became an instant celebrity among hardcore conservatives. His campaign coffers bulge with new donations (as did his opponent's).
Wilson is not alone. Earlier this month, Senate Majority Leader Harry Reid compared opposition to Democratic health care legislation to opposition to freeing blacks from slavery and women's suffrage. And Reid is meant to represent his party in the more civil upper chamber. The Democratic leader refused to apologize.
This summer's heated health care debate featured talk of "death panels" (Facebook Palin, Sarah). Republican Sen. Chuck Grassley accused Democrats of pushing a health care plan that wanted to "decide when to pull the plug on grandma."
Rep. Michele Bachmann, a heroine of conservatives, has said, "I want people in Minnesota armed and dangerous on this issue of the energy tax." She proceeded to reference Thomas Jefferson's thoughts on revolution. The Republican has also insinuated that the 2010 U.S. census could lead to the internment of American citizens.
Democratic Rep. Debbie Wasserman Schultz said last month that Republicans were giving women the "back-of-the-hand treatment" on health care. She later said two conservative female lawmakers only serve to "repulse women."
Finally, there is Rep. Alan Grayson. Grayson has elevated jackass into a high art. The first term Florida Democrat tossed his signature volley on the House floor in late September, "The Republican health care plan is this: Die quickly." Grayson quickly became a liberal hero. He has since made a career as provocateur.
Grayson has said he has "trouble listening to what [Vice President Dick Cheney] says sometimes because of the blood that drips from his teeth while he's talking." Last week, in response to Cheney characterizing Obama as a "radical," Grayson said Cheney should "STFU." (Translation: Shut The F*** Up.)
Washington has witnessed more acrimonious periods. The debates over slavery led to congressmen carrying guns and brawls within Congress. But Steven Smith, an expert on Congress at Washington University, agreed that Congress has not seen so undignified a year for at least four decades. "It's gotten to the point where it's self destructive," Smith said.
The public has noticed. Three in four Americans believe the United States has become too politically divided, according to recent USA Network poll. A majority, 55 percent, believe those divisions have worsened this decade. And about two-thirds of Americans said Wilson and Grayson's provocations, combined with the angry outbursts at the town hall meetings in August, are not isolated incidents exaggerated by the media but indicative of a larger problem.
This is a celebrity age that confuses renown with infamy. And in politics, like reality television, that moral gray area is compounded by incentives.
South Carolina Republican Sen. Jim DeMint recently spoke of the millions of dollars Wilson's outburst raised. "Why didn't I say that?'" DeMint regretted at a tea party rally in Washington.
Pols like Grayson would have hardly been noticed by the old media world. His remarks have earned only one mention on NBC's "Nightly News" and another on "Meet the Press." But on MSNBC, Grayson is now a regular primetime guest. It's exposure politicians crave. And the old media ultimately cannot look away from the traffic accident. The New York Times eventually profiled Grayson as the "latest incarnation" of the political "wing nut."
Polarization has, of course, developed into the dominant business model on cable news—a trend personified by Glenn Beck's rapid rise on Fox News this year. But now Beck's brand of commentary increasingly defines our political leaders.
Politicians are becoming cable news pundits. And the most popular politicians on cable news are the ones most likely to make news. With so much airtime to fill, at least the wing nut can offer the cheap thrill that dependably makes news. It's like the actor who "accidently" loses a sex video in order to woo media coverage. Vulgarity is now news, in Hollywood and Washington. And in both towns, a degree of vulgarity usually pays off.
Crass also breeds crass. GOP Sen. Tom Coburn recently flipped Grayson's charge and said the Democratic health care bill would cause seniors to "die sooner." And Coburn is a doctor.
Last week, it was telling how Grayson told Cheney to "STFU." "On the Internet there's an acronym that's used to apply to situations like this," he said.
It feels like the online political universe. The virulence of the political blogosphere has seeped into our politician's discourse. It's the fragmentation and depersonalization of partisans. The causes are indeed manifold. As I've written, we now have a partisan industrial complex invested in our divisions.
It's the consequence that reached new extremes this year. And even the more clownish extremes evoke a trend of more serious breaches. The statesmen have largely left the stage.
"There has to be a certain decorum and civility," George H.W. Bush said in this week's Parade magazine. "And that was just smashed," Bush continued, as he recalled Wilson telling the president "you lie."
"I thought," Bush added, "'How low have we gotten here?'"
David Paul Kuhn is the Chief Political Correspondent for RealClearPolitics and the author of The Neglected Voter. He can be reached at david@realclearpolitics.com and his writing followed via RSS
Jim Rogers on his book a gift to my children
Jim Rogers Lessons on Investing and Life Yahoo Tech Ticker 10 Dec 2009
Jim Rogers president of Rogers Holdings is George Soros former partner and co-founder of the Quantum Fund, and a truly legendary international investor who helped generate a 4,200% total return over a 10-year period .Jim Rogers is always bullish on Asia Commodities Agricultural Products gold and silver
Commentary by Kevin Hassett
Bloomberg) -- A Republican takeover of the House may be the only thing between the U.S. and the abyss.
The world economy shuddered last week as a rating company downgrade of Greek debt set off fears of default. Investors decided to beware of Greeks bearing bonds, and markets stumbled.
While the economic data are showing signs of a recovery, there is a genuine risk that the book on this financial crisis has yet to be completed. We may not even have reached the climax.
Governments around the world have propped up their failing financial institutions with borrowed money. We used to have overleveraged banks; we replaced them with overleveraged governments.
Panics start small and spread. If Greece goes down, almost every Western government will be at risk.
The sad fact is that Greece is hardly exceptional when it comes to fiscal insanity. If the current Greek budget outlook proves to be accurate, then its deficit over this year and next will average a whopping 10.9 percent of gross domestic product. Small wonder that investors headed for the exits. A deficit that high could easily turn into a fiasco.
As bad as that picture is, it’s worse in the U.S. Our deficit this year, according to the latest estimate from the Congressional Budget Office, will be 11.2 percent of gross domestic product.
‘Catastrophic Budget Failure’
Syracuse University economist Len Burman, the modest and sober budget expert who was a top official in President Bill Clinton’s Treasury Department, told the Washington Post that according to a model he has developed to study the current situation, a “catastrophic budget failure” might happen.
Burman added, “I try not to get too depressed, because if I really thought it was going to play out the way this model works, I would just move to a cabin in Montana and stockpile gold and guns.”
The worst need not happen, of course. For the U.S., a clear and reliable indication that our government takes the situation seriously, and plans to address our terrible fiscal plight with tough policy moves, might assuage markets.
Here is what the Democrats have done instead.
Health experts have for years been advocating the adoption of so-called game changers, such as reducing physician reimbursements, that could significantly reduce health-care spending. Under current law, Medicare and Medicaid are on a terrifying path to insolvency, having promised tens of trillions more in benefits than we can afford. The plan was to use these game changers to fix the government programs.
Game Unchanged
Instead, President Barack Obama and his Democratic colleagues have decided to bundle the game changers with a massive expansion of health spending. While they crow about the budget neutrality of the emerging health bill, they have essentially passed on the opportunity to fix the already broken system.
A bill that contained only the game changers would have been fiscally responsible. A bill that spends all the savings on new initiatives moves poor Mr. Burman one step closer to a bunker in Montana.
It is hard to imagine what other steps we might take in the future to reduce health spending. Obamacare loads us onto a runaway train.
Outside of health care, Democrats have been little more responsible stewards than their Republican predecessors. Last week, the House passed a budget that included a whopping 5,224 earmarks. The bill included funds for such high-priority projects as the Aquatic Adventures Science Education Foundation in San Diego, a water-taxi service for a Connecticut beach town and new bike racks in Washington’s Georgetown neighborhood.
Take a Walk
World capital markets are looking for us to signal that we are serious. In response, we give them new museum exhibits, scenic running trails and decorative sidewalks.
While the total fiscal damage from the earmarks is relatively slight in the scale of things -- last week’s binge cost taxpayers $3.9 billion -- the spending spree signals a clear lack of appreciation of this seriousness of the situation.
And the cumulative damage is eye-popping. When Nancy Pelosi took over as speaker of the House in 2007, U.S. government spending was projected by the CBO to be $2.9 trillion for 2009. Instead, it was about $3.7 trillion. That bad news sticks, with spending ratcheted up as far as the eye can see. First with a Republican and now with a Democrat in the White House, congressional Democrats have increased spending and shown no inclination to stop, even as deficits have skyrocketed.
More to Come
Last week’s House budget vote suggests that the current spending trend will continue. If so, there are two likely endgames.
The first is a takeover of at least one branch of Congress by Republicans. Divided government created a political dynamic that delivered budget sanity when Clinton was president, and it might do so again. Given the failure of both Republicans and Democrats to govern sensibly as the dominant party, divided government may be our only hope.
In the second scenario, Democrats continue to rule as they currently are. Anyone who wants to understand better where that will lead should call up the Greeks.
Jobs Lost in Great Recession May Be Gone Forever
Commentary by Caroline Baum
Something tells me my views wouldn’t have been well received. I would have told President Barack Obama he faces significant obstacles in his effort to create jobs before the voters go to the polls in November 2010.
I’m not talking about the legality of “mobilizing” unused funds from the Treasury’s Troubled Asset Relief Program, as Obama put it in a speech yesterday at Washington’s Brookings Institution; or the inherent contradiction in “government job creation,” as if government can create jobs without commanding resources the private sector could have used to provide something the public wants.
The real question facing the nation, and one that Obama’s summits and speeches aren’t addressing, is this: What if the job losses this time around aren’t temporary, the “ebb” part of the ebb and flow of the business cycle? What if employers are hacking away at their permanent workforce?
There is support in the data for the idea that many of the lost jobs aren’t coming back. In November, a record 55.1 percent of job losses were categorized as permanent, according to the Bureau of Labor Statistics. The average duration of unemployment reached a post-World War II high of 28.5 weeks. And 38.3 percent of the unemployed have been out of work for 27 weeks or more, also a record.
Retooling Required
While the labor market may be witnessing the beginning of a cyclical improvement, “the structural outlook is daunting,” said Neal Soss, chief economist at Credit Suisse.
The economy shed 11,000 jobs last month, the smallest decline since the recession began in December 2007. The net revision to previous months was positive, a sign that labor market conditions are improving. (The direction of the revisions, based on additional survey data, is generally suggestive of the trend.)
The extent of the improvement may be similar to the jobless recoveries following the 1990-1991 and 2001 recessions. In the second case, it took three years after the end of the recession for the level of employment to exceed its previous business cycle peak.
Before that -- the recessions of 1971-1973 and 1982, for example -- a rapid pace of temporary layoffs was followed by an equally rapid pace of rehiring early in the recovery.
Today’s labor market may have become less flexible, Soss said. Employee skills aren’t readily transferable. An assembly line auto worker may not have the skill set suited to software programming or sales.
Ma Bell Meets
That doesn’t mean the U.S. economy won’t create new jobs in unimagined new industries some day. When Alexander Graham Bell invented the telephone in 1876, none of his contemporaries could have envisioned wireless technology allowing mobile-phone users instant access to the sounds and quotes of Beavis and Butthead.
In another version of his we-inherited-this-mess speech, Obama laid out some pre-existing ideas for job creation -- infrastructure spending, small-business tax credits for hiring and enough green investment to make the average unemployed person red in the face -- and some new ones. For example, the elimination of the capital gains tax on small business and new credit lines will facilitate access to credit and make investment more lucrative.
Legacy of Debt
The president paid lip service to “fiscal responsibility,” reiterating his pledge to halve the deficit by the end of his first term. How his grand vision for health-care expansion, billed as reform, will achieve that is anybody’s guess.
The deficit isn’t as benign as some economists claim. Debt, the cumulative result of deficits, is closely allied with job growth.
In their book, “This Time is Different: Eight Centuries of Financial Folly,” economists Carmen Reinhart and Ken Rogoff document the protracted aftermath of financial crises in terms of their depth, duration and diffusion across the economy and industries.
“The true legacy of financial crises is more government debt,” Reinhart said in a presentation at the Federal Reserve Bank of Philadelphia’s Policy Forum on Dec. 4.
High government debt is associated with slower growth, she said. So “if we are concerned about growth, we should be concerned about debt.”
The same could be said about jobs. Economic growth is the best source of job growth. If growth is curtailed by soaring government debt, job creation will be sub-par as well.
The government can’t keep shoveling out money to “create jobs,” concoct some fictitious number of jobs that were created or saved and expect the public to buy it. Like the $787 billion stimulus, spending money to save money is not a winning strategy.
By Rosabeth Moss Kanter
Golf champion Tiger Woods no longer represents global consulting and technology services firm Accenture, as of December 13. Accenture is the first of Woods' corporate sponsors to pull out of the relationship completely. A day earlier, Gillette announced a suspension of Woods' marketing appearances for an unspecified period.
For anyone missing two weeks of headlines, here's a recap. Golf champion Woods crashed his car near his Florida home after what appeared to be a major league (oops, wrong sport) fight with his wife over alleged infidelities. At first Woods denied any marital misconduct, using the first line of defense of many public figures caught in a sand trap, which was to lie about it. Then other women surfaced with firm evidence of Woods' affairs, for a total of 13, and Woods told the world that he had made mistakes. On December 11, he announced he is taking a mega-mulligan — a leave of absence from golf to repair his marriage.
Though Accenture doesn't sell anything to consumers, it put itself in the public eye with its "Go ahead, be a Tiger" ad campaign. Working for Accenture since 2004, Woods seemed a plausible long-term choice. His consistently stellar athletic achievements and mixed racial heritage symbolize the best of a global economy. Now his departure could mark a seismic shift in corporate branding and marketing approaches.
Some analysts see Accenture's announcement as purely pragmatic, not moral or ethical. Woods' indefinite leave of absence from golf would introduce too many uncertainties into Accenture's ad campaigns, one commentator told AP. Moreover, Woods is rapidly losing cache. A poll reported by Bloomberg found that Woods has already dropped from 6th to 24th in popularity among consumers.
But I see the values dimension front and center. Accenture has made a strong commitment to values-based corporate citizenship. Its aspirations require disengagement from a tainted celebrity.
During the past decade, ethical misconduct of many kinds has caused the decline of the cult of the celebrity CEO and the fall of many a celebrity politician. Now we are watching the decline and fall of the just plain celebrity. This is not just about the type of indiscretion — at least, some sports fans would say, Woods didn't take steroids. Instead, the significance of the Woods affair is the challenge it poses to a major marketing convention: use of celebrities to sell products and services instead of featuring the product or service's value for users (and the values that guide its production).
In Accenture's case, I know about its outstanding reputation and work for clients from former or future Accenture employees passing through my classrooms. (I recently gave a lecture to an Accenture group.) But I was puzzled about the little knowledge gleaned about that good work from ads in which Tiger Woods stands alone swinging a golf club. For one thing, Accenture professionals practice in teams, not as individuals, and promote teamwork in the organizations they serve.
Unlike Accenture, Nike makes a product that Woods and other athletes actually use — shoes. Green-values-oriented Nike is sticking with Woods for the moment, appearing to be rehabilitation-minded and comeback-oriented in other instances too. This fall, Apple, Excelon, and other companies dropped their memberships in the U.S. Chamber of Commerce in disagreement with what they saw as the Chamber's foot-dragging on climate change policy. Nike kept its membership while resigning from the Chamber board in order to work for change from within, executives said. But the Chamber incident, too, is evidence that companies increasingly see that their values must be reflected consistently in every decision they make, every marketing campaign they run, and every partnership they form.
I have no insider information about what Gillette will do next, just a guess. From my in-depth research on its corporate parent Procter & Gamble (P&G) and conversations with chairman and CEO Bob McDonald, I predict that Tiger Woods will not reappear. P&G takes its values very seriously. McDonald has said publicly that representing the company extends to ethical private conduct off the job, not just compliance during work hours.
P&G brand guardians should be glad P&G invented Mr. Clean. A cartoon spokesperson doesn't have a personal life involving ethical dilemmas. Mr. Clean eliminates messes rather than getting into them. And Mr. Clean speaks to consumers about what his product does for them, rather than how many tournaments he wins. That kind of communication about value and values could be the post-Tiger tiger to catch.
Person of the Year 2009
Person of the Year 2009
The story of the year was a weak economy that could have been much, much weaker. How the mild-mannered man who runs the Federal Reserve prevented an economic catastrophe
'Too big to fail is one of the biggest problems we face in this country.
The Fed chairman sat down with TIME managing editor Richard Stengel, Time Inc. editor-in-chief John Huey, assistant managing editor Michael Duffy and senior correspondent Michael Grunwald on Dec. 8 for a conversation about everything from the state of the economy to the contents of his wallet. Some excerpts:
TIME: Explain for general-interest readers what it is that you've done during the past year that has impinged on their lives, for better or for worse.
Ben Bernanke: Virtually every large financial firm in the world was in significant danger of going bankrupt. And we knew — and I knew — based on my experience as a policymaker, I knew that if the global financial system were to collapse, in the sense that many of the largest firms were to fail, and the financial sector essentially stopped functioning, I knew that the implications of that for the global economy would be catastrophic. We would be facing, potentially, another depression of the severity and length of the Depression in the 1930s. And that this was not at all hypothetical. (Watch the video "Why TIME Chose Ben Bernanke.")
There is irony here, that here's this man who spends his life distinguishing himself studying economic history — and then one day you wake up and realize that you're at the center of economic history in a really unusual chapter.
Well, I certainly didn't anticipate these events when I came to Washington in 2002. No question about it. And when I became chairman in 2006, I hoped that my main objectives would be improving the management, communication and monitoring policy. We were certainly aware of the risks of financial crisis, but one as large and as dangerous as this one, I certainly did not anticipate. I wish I had, but I didn't. (See pictures of Ben Bernanke's life from childhood to chairmanship.)
This year, you've stepped out a little more than past Fed chairmen. Are you still convinced that being more communicative about the Fed and the things it does is the right approach?
Yes, I am. In the past, Federal Reserve chairmen have not generally gone directly to the public. But I felt, not only was it an issue of understanding what the Fed was doing, but I believed that a lot of the fear and uncertainty that was apparent in the surveys was the result of the fact that people didn't understand what was happening in the economy or happening to our financial system. And I thought it would be helpful, as the chairman of the Federal Reserve, to go out and talk directly to the public — try to explain what we were doing, why we were doing it, what was likely to happen in the future. And I think it may have helped some. It's true that the Federal Reserve faces a lot of political pressure and is unpopular in many circles. The Federal Reserve's job is to do the right thing, to take the long-run interest of the economy to heart, and that sometimes means being unpopular. But we have to do the right thing.
The money the Federal Government takes in [and] what we spend on entitlements — it's basically the same. Everything else we have to borrow for. There are a lot of people saying that it's not sustainable, that one of the only solutions is some kind of tax — a sales tax, a value-added tax. Would you be in favor of any of those alternatives?
The way I put this before Congress is that the one law I strongly advocate is the law of arithmetic. That law of arithmetic says that if you are a low-tax person, then ... you are responsible for finding ways of saving on expenditure so that you don't have enormous imbalances between revenues and spending. And by the same law of arithmetic, if you are somebody who believes that government spending is important, and you are for bigger and more spending and bigger programs, then it's incumbent upon you to figure out where the revenues are going to come from to meet that spending. So again, I think that's Congress's main responsibility. I have spoken about deficits, and I think deficits are important because they address broad economic and financial stability. We need to talk about that. But in terms of specifics about how to get to fiscal balance, that's the elected officials' responsibility. (See pictures of the Federal Reserve Bank's history.)
You said that banks were convalescent still. Can you talk to us a little more about what that means?
The banks have been stabilized. They've raised a good deal of capital, so they're in much better shape than they were. They are lending, but they are not lending enough to support a healthy recovery. One important reason for that is that given their losses, given what they've been through, they're being very conservative in the face of what is still a very weak economy. As bank supervisors, we have a difficult challenge. We have told the banks very clearly that we want them to make loans to creditworthy borrowers. It's in the interest of the banks, it's in the interest of the economy, and, of course, it's in the interest of the borrowers for those loans to get made. But the problem is that we got into trouble in the first place by banks making loans that couldn't be repaid, so we don't want banks to make bad loans. Therefore, we are trying to work with banks to make sure that they are able to make as many good loans as possible, that they have enough capital, that they have enough short-term funding and that the examiners and the regulators who work with the banks are not unduly restricting the loans that they make. We want to work with the banks to make sure that they balance the appropriate prudence and caution against the need to make good loans for the economy and for their own profits.
Do bankers make too much money?
I think that bankers ought to recognize that the government and the taxpayer saved the financial system from utter collapse last year. And in recognizing that, I would think that bankers ought to look in the mirror and decide that perhaps there should be some more restraint in how much they pay themselves, given what the government and the taxpayer did to protect the system. (See pictures of Ben Bernanke's office.)
Goldman Sachs and Morgan Stanley paid the money back, but they became bank holding companies, so they are regulated in some way by the Fed. Right?
Yes. So in the longer term, I think, if we had these tools, [we could] get rid of too big to fail, which I think is an enormous problem. I want to be very, very clear: too big to fail is one of the biggest problems we face in this country, and we must take action to eliminate too big to fail.
Were there days where you woke up and you thought, What am I not thinking of that we could be doing?
I think one of the lessons of the Depression — and this is something that Franklin Roosevelt demonstrated — was that when orthodoxy fails, then you need to try new things. And he was very willing to try unorthodox approaches when the orthodox approach had shown that it was not adequate.
By Elizabeth Stanton
Dec. 16 (Bloomberg) -- U.S. stocks erased most of their advance, the dollar strengthened against the yen and yields on 10-year Treasury notes rose to a four-month high on concern the Federal Reserve is preparing investors for higher interest rates next year.
The Standard & Poor’s 500 Index added 0.1 percent to 1,109.18 at 4 p.m. in New York, paring a gain of as much as 0.8 percent. The dollar rose 0.2 percent to 89.78 yen. The yield on 10-year notes touched 3.60 percent, which would be the highest closing level since August. Sugar futures surged to prices last seen in 1981.
Metal producers, energy companies and banks in the S&P 500 rose more than 0.4 percent, the steepest gains among 10 industries. The Fed repeated its pledge to keep interest rates “exceptionally low” for an “extended period” and the economy is strengthening. Policy makers also restated that “low rates of resource utilization, subdued inflation trends, and stable inflation expectations” are needed for interest rates to remain at a record low.
“The fear is that the Fed may wait too long before they begin raising rates,” said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, which manages $2.8 billion. In the S&P 500, “when you see materials, financials and energy leading, it means the market fears higher prices and inflation. Market participants are going to the sectors that will perform well in that environment.”
Stronger Economy
While repeating its pledge to keep interest rates “exceptionally low” for “an extended period,” the Fed said the economy is strengthening and that most of its special liquidity facilities will expire on Feb. 1, 2010.
“Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit,” the Federal Open Market Committee said in a statement after meeting in Washington. “Businesses are still cutting back on fixed investment” and “remain reluctant to add to payrolls.” Deterioration in the labor market is “abating.”
Commodity companies and financial institutions led gains in the U.S. stock market as investors bet on higher inflation. CF Industries Holdings Inc., a fertilizer maker, jumped 4.9 percent and U.S. Steel Corp. advanced 2.9 percent in New York trading, helping lead gains by commodity companies. Range Resources Corp., an oil and gas explorer, advanced 4.3 percent. JPMorgan Chase & Co. rallied 1.2 percent.
Construction, Prices
Earlier, the S&P 500 rallied as much as 0.8 percent after government data on home construction and consumer prices signaled the economic recovery is strengthening. The benchmark index for U.S. equities has rebounded 64 percent from a 12-year low in March as manufacturing and consumer spending increased and the U.S. government lent, spent or guaranteed more than $11 trillion to end a four-quarter contraction in the economy.
Intel Corp. dropped 2.1 percent. The U.S. Federal Trade Commission accused the world’s largest computer-chip maker of illegally using its dominant market position for a decade to stifle competition and bolster its monopoly. Advanced Micro Devices Inc. and Nvidia Corp., which also make semiconductors, surged 3.7 percent and 8.1 percent, respectively.
U.S. homebuilders gained after housing starts rose 8.9 percent to an annual rate of 574,000 in November, according to the Commerce Department. D.R. Horton Inc. increased 4.9 percent and Lennar Corp. gained 4.7 percent.
Sugar futures rose for a fourth time in five sessions, reaching the highest price since 1981 in New York, on speculation demand will climb while supplies drop. Output will rise less than previously forecast this year in Brazil, the world’s biggest producer, after rain in major cane-growing regions cut yields, the Agriculture Ministry said today.
Raw-sugar futures for March delivery rose 4.5 percent to 25.94 cents a pound in New York. Earlier, the most-active contract reached 26.15 cents, the highest since February 1981.
By Craig Torres
Dec. 16 (Bloomberg) -- The Federal Reserve repeated its pledge to keep interest rates “exceptionally low” for “an extended period” and said the economy is strengthening.
“Deterioration in the labor market is abating,” the Federal Open Market Committee said in a statement today after meeting in Washington. “Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.”
Policy makers led by Chairman Ben S. Bernanke, who faces a confirmation vote for a second term by the Senate Banking Committee tomorrow, met after a week of reports suggesting growth is picking up. With inflation forecast to be “subdued for some time,” investors maintained bets the Fed won’t tighten policy until August to bring down a jobless rate near a 26-year high.
“The economy has stabilized, the recession is over,” said Mickey Levy, chief economist at Bank of America in New York. “The Fed is not at the point where it is willing to say the recovery is sustainable.”
Two-year Treasury notes were little changed at 4:25 p.m. in New York, with yields at 0.84 percent. The dollar strengthened 0.2 percent to 89.79 yen from 89.61 yen late yesterday.
Benchmark Rate Unchanged
Officials kept their benchmark overnight lending rate between banks in a range of zero to 0.25 percent, where it has been for a year. Policy makers restated that low interest rates are contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” The decision was unanimous.
The consumer price index, minus food and energy, rose 1.7 percent for the 12 months ending November, unchanged from October, the Labor Department reported today.
The Fed also said it will continue purchases of agency mortgage-backed securities totaling $1.25 trillion and about $175 billion of agency debt through the first quarter of next year.
“Financial market conditions have become more supportive of economic growth,” today’s FOMC statement said.
With improvements in the functioning of markets, the FOMC and the Fed’s Board of Governors reiterated that “most of the Federal Reserve’s special liquidity facilities will expire on Feb. 1 2010,” including programs to backstop money-market mutual funds and commercial paper.
Swap Arrangements
“The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010,” the statement said, referring to auctions of loans to commercial banks. The Fed also said it’s working with other central banks to close temporary liquidity swap arrangements by Feb. 1.
Reports last week suggested the expansion that started in the third quarter is accelerating. Retail sales climbed 1.3 percent in November, twice as much as anticipated in a Bloomberg News survey of economists. Inventories rose in October for the first time since August 2008, and exports in the same month increased to the highest levels in 11 months.
The numbers prompted economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. to raise their forecasts for fourth quarter growth by a full percentage point.
JPMorgan lifted its estimate to a 4.5 percent annual rate, and Goldman economists increased their estimate to 4 percent. Gross domestic product grew 2.8 percent in the third quarter after shrinking for each of the previous four quarters.
‘Improving Trajectory’
“We are on a gradually improving trajectory for the economy as a whole, as well as the broad health of the financial market, which is what the Fed is hoping to see and that seems to be coming to fruition,” said Chris Molumphy, who oversees more than $180 billion as chief investment officer for fixed income at San Mateo, California-based Franklin Templeton.
Employers cut payrolls by 11,000 jobs in November, the fewest in 23 months, and the unemployment rate fell to 10 percent from 10.2 percent. The economy has lost 7.2 million jobs since the recession began in December 2007.
Bernanke said in a Dec. 3 speech that the economy still faces “formidable headwinds” in the form of tight credit and a weak labor market.
Each of the last three recessions has seen a slow recovery in employment, though the jobless rate is higher now than at the end of the previous two slumps.
The unemployment rate continued to rise past the November 2001 trough in economic activity, peaking at 6.3 percent in June of 2003. The prior recession ended in March of 1991, and unemployment continued to rise until peaking in June 1992 at 7.8 percent.
Consumer Spending
Consumer spending, which fell the most since 1980 during the recession, rose to $9.25 trillion on an annual basis in the third quarter. Purchases were still below the pre-recession peak of $9.36 trillion in the fourth quarter of 2007.
By contrast, consumption grew every quarter of the March to November 2001 recession. In the 1990 slump, which began in the third quarter of that year, consumption surpassed the pre- recession peak in the third quarter of 1991. The downturn ended in the first quarter of that year.
General Electric Co. is ready to go “back on offense” next year after slimming its portfolio and maneuvering through the worst of the finance arm’s challenges, Chief Executive Officer Jeffrey Immelt said during his annual investor meeting in New York yesterday.
Sales Improve
Caterpillar Inc., the world’s largest maker of bulldozers and excavators, aims to bring back some laid-off workers next year as sales improve, Chief Executive Officer Jim Owens said in a Bloomberg TV interview on Dec. 11. The company cut about 18,700 full-time jobs since Dec. 2008 as the global recession eroded demand.
Fed officials said last month the economy will grow 2.5 to 3.5 percent next year, fast enough to bring the unemployment rate down only to 9.3 to 9.7 percent in the fourth quarter, according to their central tendency estimates.
Factories in the U.S. made more goods in November than anticipated, extending a rebound in manufacturing that will give the world’s largest economy a lift into 2010. Production in November was still below the average level of the past two years.
Bernanke, a 56-year-old former Princeton University professor, has focused on restoring liquidity and credit in the U.S. financial system, expanding the central bank’s balance sheet to $2.18 trillion in the process.
The Standard and Poor’s 500 Index is up about 23 percent this year. The Fed’s mortgage purchases helped push rates on a 30-year fixed-rate loan to 4.71 in the week ending Dec. 3, the lowest since mortgage buyer Freddie Mac of McLean, Virginia began keeping records in 1971.
By Peter Schiff
Although Barack Obama has refrained, at least for now, from delivering triumphant speeches in a naval flight suit, there is nevertheless a strong tone of accomplishment emanating from the President and his deputies. Over the weekend, top White House economic adviser Lawrence Summers even pronounced that the recession is now over. Without hedging his bets, Summers declared that thanks to the Obama Administration's wise stewardship, economic stimuli, and emergency bailouts, another Great Depression, set up by the prior Administration, had been narrowly averted. Summers saw no impediments to the return of sustainable growth. He may as well have delivered these remarks from the deck of an aircraft carrier.
I hate to shoot down these high-flying expectations, but the economy is not improving. All that has changed is that we are now more indebted to foreign creditors, with even less to show for it. Washington's current policies have once again deferred the fundamental, market-driven reforms needed to redirect us onto a sustainable path. Instead, through aggressive monetary and fiscal stimuli, we are trying to re-inflate a balloon that is full of holes. This was the Bush Administration's exact response to the 2002 recession. It's shocking how few observers note the repeating pattern, especially the fact that each crash is worse than the last.
Obama's claim of success largely derives from the slowing tally of job losses, the seemingly renewed strength in the financial system, the pickup in home sales and home prices, and the positive GDP figures. But these 'achievements' fall apart under close examination.
First, a closer look at the jobs numbers shows that employment improved in sectors that benefited most directly from monetary or fiscal stimulus: government, healthcare, financial services, education and retail sales. Meanwhile, sectors such as manufacturing continued to shed jobs at an alarming rate. These dynamics actually exacerbate our economic imbalances. Recent trade deficit figures (in which the deficit-reduction trend of early 2009 has sharply reversed) show how this employment growth is preventing needed rebalancing. Essentially, the Administration is nurturing firms that cannot survive without subsidies and support.
Once stimulus is removed, the "saved" jobs will be among the first to go. If the President has not figured this out yet, I am sure Fed Chairman Bernanke has. As a result, the market should discount as pure bluff any claims from the Fed about an eventual "exit strategy" from current stimuli. Such an "exit" would bring about Bernanke's greatest fear — spiking unemployment.
Second, major investment and commercial banks are not back on their feet, but remain fundamentally insolvent. Their current business model of risk-free speculation depends upon the maintenance of government backstops, the continued availability of cheap money from the Fed, and the use of accounting gimmicks that allow them to conceal losses behind phony assumptions.
Third, while it is true that home prices have stopped falling, this represents failure, not victory. True success would be a drop in home prices to a level that homebuyers could actually afford. Instead, we have maintained artificially high prices with tax credits, subsidized mortgage rates, low down payments, and foreclosure relief. With 96% of new mortgages now insured by federal agencies, market forces have been completely removed from the housing equation. With so many government programs specifically designed to maintain artificially high home prices, devastating long-term consequences for our economy are inevitable.
Finally, it is true that the GDP yardstick shows an economy returning to growth. However, as I have often repeated, this measure has deep flaws that render it almost useless for judging the soundness of an economy. Currently, the figures are merely reporting increasing indebtedness as growth. Using GDP as the main financial indicator is equivalent to judging a man's success by the cost of his house, car, and wristwatch. Rather than gauging income, these figures merely indicate a level of spending and have nothing to do with earning power.
Paul Volcker, the only independent voice in the Administration, has not been deceived by his colleagues' sunny claims. He recently noted that our economy still evidences "too much consumption, too much spending relative to our capacity to invest and export" and that the problem is "involved with the financial crisis but in a way [is] more difficult than the financial crisis because it reflects the basic structure of the economy." Yet, President Obama has chosen not to address these concerns.
As Summers and Obama like to point out, the vast majority of economists take it on faith that, with the right finesse, the stimulus can be withdrawn without pushing the economy back into recession. But based on the distortive effects of stimuli and bailouts, our economy has adapted to a climate where cheap credit is not only plentiful but critical.
Eventually, the cheap credit will dry up. Not because the Fed decides it should, but because our foreign creditors stop lending. When that happens, this Administration will look as clueless about economics as the last one was about the pitfalls of nation-building.
But for now, the chattering classes believe strong government action has delivered us from calamity. For them, at least, it's "mission accomplished!"
There Are Money Substitutes
There is Money and Then There Are Money Substitutes
[This article is excerpted from chapter 17 of Human Action (available in print and audio). An MP3 audio file of this article, read by Jeff Riggenbach, is available for free download.]
Claims to a definite amount of money, payable and redeemable on demand, against a debtor about whose solvency and willingness to pay there does not prevail the slightest doubt, render to the individual all the services money can render, provided that all parties with whom he could possibly transact business are perfectly familiar with these essential qualities of the claims concerned: daily maturity and undoubted solvency and willingness to pay on the part of the debtor.
We may call such claims money-substitutes, as they can fully replace money in an individual's or a firm's cash holding. The technical and legal features of the money-substitutes do not concern catallactics. A money-substitute can be embodied either in a banknote or in a demand deposit with a bank subject to check ("checkbook money" or deposit currency), provided the bank is prepared to exchange the note or the deposit daily free of charge against money proper.
Token coins are also money-substitutes, provided the owner is in a position to exchange them at need against money free of expense and without delay. To achieve this it is not required that the government be bound by law to redeem them. What counts is the fact that these tokens can be really converted free of expense and without delay. If the total amount of token coins issued is kept within reasonable limits, no special provisions on the part of the government are necessary to keep their exchange value at par with their face value. The demand of the public for small change gives everybody the opportunity to exchange them easily against pieces of money. The main thing is that every owner of a money-substitute is perfectly certain that it can, at every instant and free of expense, be exchanged against money.
If the debtor — the government or a bank — keeps against the whole amount of money-substitutes a reserve of money proper, we call the money-substitute a money-certificate. The individual money-certificate is — not necessarily in a legal sense, but always in the catallactic sense — a representative of a corresponding amount of money kept in the reserve.
The issuing of money-certificates does not increase the quantity of things suitable to satisfy the demand for money for cash holding. Changes in the quantity of money-certificates therefore do not alter the supply of money and the money relation. They do not play any role in the determination of the purchasing power of money.
If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of substitutes which exceeds the reserve fiduciary media. As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium. A part of the total amount of money-substitutes issued is usually covered by a money reserve held. Thus a part of the total amount of money-substitutes issued is money-certificates, the rest fiduciary media. But this fact can only be recognized by those familiar with the bank's balance sheets. The individual banknote, deposit, or token coin does not indicate its catallactic character.
The issue of money-certificates does not increase the funds which the bank can employ in the conduct of its lending business. A bank which does not issue fiduciary media can only grant commodity credit, i.e., it can only lend its own funds and the amount of money which its customers have entrusted to it. The issue of fiduciary media enlarges the bank's funds available for lending beyond these limits. It can now not only grant commodity credit, but also circulation credit, i.e., credit granted out of the issue of fiduciary media.
While the quantity of money-certificates is indifferent, the quantity of fiduciary media is not. The fiduciary media affect the market phenomena in the same way as money does. Changes in their quantity influence the determination of money's purchasing power and of prices and — temporarily — also of the rate of interest.
Earlier economists applied a different terminology. Many were prepared to call the money-substitutes simply money, as they are fit to render the services money renders. However, this terminology is not expedient. The first purpose of a scientific terminology is to facilitate the analysis of the problems involved. The task of the catallactic theory of money — as differentiated from the legal theory and from the technical disciplines of bank management and accountancy — is the study of the problems of the determination of prices and interest rates. This task requires a sharp distinction between money-certificates and fiduciary media.
The term credit expansion has often been misinterpreted. It is important to realize that commodity credit cannot be expanded. The only vehicle of credit expansion is circulation credit. But the granting of circulation credit does not always mean credit expansion. If the amount of fiduciary media previously issued has consummated all its effects upon the market — if prices, wage rates, and interest rates have been adjusted to the total supply of money proper plus fiduciary media (supply of money in the broader sense) — granting of circulation credit without a further increase in the quantity of fiduciary media is no longer credit expansion. Credit expansion is present only if credit is granted by the issue of an additional amount of fiduciary media, not if banks lend anew fiduciary media paid back to them by the old debtors.
The Light of Freedom
The Light of Freedom Burns Brightly in Poland
In my childhood, Poland was a part of the "Eastern Bloc," roped into the Soviet Union's repressive orbit. For decades, Soviet troops were stationed in Poland, and the Kremlin directed important political decisions over and above the Polish domestic leadership. The official Polish ideology and governing philosophy was communism.
Today Poland, like the rest of Europe and the West, has a mixed economy. The government plays a very big role in economic life. Most Poles, I was told during a recent visit to the country, are in fact socialists. The communist past is largely looked down upon, but the goal of most Poles is not a laissez-faire society, but a society modeled after the mixed economies of Western Europe — that is, social democracies.
However, there were a few encouraging signs for supporters of laissez-faire and limited government more generally.
Most importantly, Poland is home to some very committed and energetic free-market organizations and individuals. My recent trip to Warsaw, for example, was hosted and sponsored by the Polish Ludwig von Mises Institute. The Polish LvMI, which is based in Warsaw, conducted an excellent four-day seminar on the current financial crisis. Many young Polish scholars presented erudite papers analyzing the recent financial meltdown. More than 60 people attended the seminar, mostly college students or graduate students but some business people as well.
While I was at the Mises conference I also met the director of the Polish-American Foundation for Economic Research and Education. The Foundation would be hosting a visit later the same month by Sheldon Richman, editor of the Freeman. Clearly, there remain pockets of support for economic liberty in Poland, despite many decades of collectivist oppression.
Shortly after my arrival in Warsaw, I asked my Polish host, the president of the Polish Mises Institute, what life was like in the country prior to the end of communism. "It was exactly like George Orwell's book, 1984," he answered. "Freedom was called slavery and slavery was called freedom." Life was very depressing every single day, he said.
At another time, I asked a younger Polish woman if she had any recollections of the communist times. She said she remembered how quickly her family would rush to the grocery store if word got out that the store had a new shipment of bread.
Another young Pole I met during the conference volunteers to teach Polish high school students some very basic economics. His commitment to freedom was perhaps the most impressive I saw.
"I am the first person in my family for generations not to be repressed by the communists," he told me. His grandfather had fought against the Nazis in Poland during World War II, but under Russian rule he was imprisoned on the charge of conspiring with the Germans. Fighting for individual liberty and economic freedom was clearly a deeply personal matter to this young man.
At another point during the conference, a "New Left" economist debated a free-market economist. At the end of this spirited and enlightening debate, the leftist professor stated quite clearly that "free market prices are indeed necessary for a rational economy." My jaw literally dropped. How many American university professors understand that and would be willing to say it today?
In the heart of Warsaw is a very tall building. The eye immediately finds it when scanning the disjointed skyline. This towering hulk was a "gift" from Joseph Stalin to the Polish people at the end of World War II. Every Pole I spoke with described it as "the gift we could not refuse." It is massive, dirty and surrounded by statues. One statue is of a person holding a book with the name of Marx clearly visible on the cover.
The trend in politics in America and Western Europe is presently toward greater government control over healthcare, education, banking, finance, industry, housing, agriculture, energy, and transportation. In short, the trend is toward more coercion and less freedom. Respect for economic freedom, free trade, and private property all seem to be in rapid retreat.
A young Polish lady asked me, "Where are the Americans I've always heard of? Where are the Americans that believe in individualism and economic freedom?"
"I think they are still there," I answered. "Some may now just be waking up."
The human desire for freedom has always run up against those who believe "too much" freedom is a bad thing and that the "common good" — as defined by some elite — outweighs the rights of the individual. This was Hitler's mantra. It was the mantra of the communists. It is the underlying belief of those working to expand government control in America today.
At a time like this, it is good to know that in a far away place, a place with a still-recent history of collectivist oppression, the human desire for liberty still burns bright.
Rise and Fall in Dubai
Rise and Fall in Dubai: An Austrian Perspective
All Is Well
It was January 2008 when I first set foot in Dubai. It was a land full of grandiose, landmark projects. Few cities in the world could match the sheer number of high-rise buildings and skyscrapers being built in the emirate (more than 80 units over 150 meters high are completed or under construction as of this writing).
Shopping malls were cropping up everywhere, and the biggest one in the world, Dubai Mall, was then under construction. Retail and the service sector were booming, not just from the significant increase of population in the last several years but also on account of the boost provided by tourism. Needless to say, hotels were flooded with tourists; occupancy rates were over 80%.[1]
Lastly, the real-estate and construction sectors were just spectacular. Stories of investors profiting over 20% in one day by buying and selling off-plan properties were commonplace.
With such a quickly growing economy, the job market could not handle the demand. Expatriates were encouraged to fly to Dubai, having virtual assurance of employment. After all, since the whole world was in the midst of great financial crises and growing unemployment, there was nothing more sensible than to try your luck in the only seemingly immune city in the world.
Early Signs
After a few days settled in the city, one could already notice the signs that something was out of place.
If you wanted to rent a flat, it was quite easy. Just give the real-estate agent one check equal to a whole year of rent. As absurd as it sounds, the common practice in the rental market was 12 months upfront. A very skilled negotiator could manage to settle in two checks instead. But that was not all. After visiting the potential property, you had to make up your mind in a couple of hours because of the possibility of someone else being quicker and outbidding you. There were just too many buyers in the market.
This upfront cash disbursement could not be met by many just-landed expatriates. Thank God we had the banks to provide just the right financing for those eager to rent a place to live. Many expats couldn't afford to pay 12 months in advance. Credit made it affordable to almost everyone.
Once the place to live was found, you had to get yourself a car, otherwise you risked being trapped in an hour-long queue to get a taxi outside a shopping mall. There were just too many visitors.
Auto sales were also booming and there were plenty of car dealerships. It was a simple task to purchase a car; easy and cheap financing was always there. You needed to decide quickly because, again, someone else could buy the last piece with just the color you wanted. If the price seemed a bit high, well, too bad for you, because there were too many people interested in it.
Living and transportation matters aside, one had to start working. However, with such an increase in demand and higher workload, you needed to hire more staff. After contacting a recruiting firm, screening CVs, and interviewing a few people, a candidate could be selected. Well, maybe not, he'd already been picked by another company. Not a problem. You could go with the second best option.
The new employee would start working as agreed. All seemed well until, after a couple of days on the job, a surprise resignation letter would be waiting on your desk. He had been offered a bit more by another firm. Such a process had to be repeated a couple of times, but eventually a new employee would be hired.
Most likely the same employee would then get frustrated a couple of months later, because his recently joined peer was hired with a 25% higher wage to do the same job.
The same auction-like procedure could be noticed in the cases of office space and the so-called labor camps for blue-collar workers.
In such a scenario, many companies experienced a lot of trouble in managing and planning their operations. How is a manager expected to plan his business if the expected demand, according to market data, is to increase twofold in six months and threefold in a year? Long-term planning in Dubai was 12 months maximum. No one could risk maintaining a plan unaltered in such a drastically changing environment.
Anyone who worked in Dubai during the boom period will identify himself with the examples described above. These are just a few of a myriad of personal stories that lead to the same conclusion: something was not right.
It was a market of extremes. Demand was so high that two-sided competition[2] was virtually nonexistent. It was like an auction, a one-sided competition of buyers.[3] Whenever such two-sided competition is not present, market forces cannot weed out weak competitors, such as badly managed companies.
Consumers had practically no say in the market back then, since if one refrained from buying from a given seller, a hundred others were queuing behind him to guarantee zero inventories. This hindered the process that forces companies to become more efficient and deliver on their promises.
Whenever the bidding processes, the laws of supply and demand, become so unbalanced, one ought to at least reflect on the matter. The question that few raised was whether all this demand was justified and sustainable.
The Bubble Gets Bigger
The House Price Index[4] rose 78% from Q1 2007 to Q1 2008, encouraging even more potential investors to embark on this buying frenzy.
Their appetite for new developments and projects was endless. One could flip through a newspaper and read articles about new project-release events where all units were sold within hours. During one event there was even tumult. Everyone wanted to ensure that an off-plan property could be purchased immediately.
A neighbor who had just purchased a villa recounted to me that his real-estate agent called him three days later to say that she had a potential buyer who would buy the property at a 20% markup. After so much trouble in finally finding a place, he had to decline the offer by replying to the agent, "I actually want to live in this house."
The market sentiment was that prices could just go up. Dubai's economy was sound and strong, according to analysts. The construction sector was booming and attracting more foreign investors each day.
In September 2008 everything was still unshakable, and even celebrities like tennis pro Boris Becker and Indian actor Shah Rukh were announcing projects worth billions of dollars, and the House Price Index reached its peak at a 116% increase[5] since Q1 2007.
Despite visibly high vacancy rates in many areas, new residential and commercial projects were appearing every day with promises of even more residential and commercial space.
One had to drive through the city of Dubai to try to grasp how such a thing could happen. If there were so many empty flats and offices, why were developers still building more and more before the oversupply could actually subside?
It seems that the main motive of buying was quick profit. Flipping real-estate property was becoming a sport. Obviously, such patterns bear much resemblance with the US housing debacle.
In October 2008, Cityscape Dubai, the seventh edition of the already-famous real-estate-investment and -development event, opened its doors to the public.
Meraas Development, a then-new, Dubai-based company, unveiled its grand design for Jumeirah Gardens, a $95 billion city within a city.
Visitors were able to see the status of the Arabian Canal, a $50 billion, 120-square-kilometer city to be built in 15 years, for up to 2.5 million people.
And lastly, Nakheel, the developer responsible for the Palm Islands project, in an official announcement at the dawn of Cityscape, told the press it would construct a "tower more than a kilometer high," which would be unrivaled the world over, eclipsing the Burj Dubai tower.[6]
With such megaprojects in the pipeline, Dubai aimed to be the home of roughly 5 million people by 2020. Population stood at 1.6 million by the beginning of 2008.
Symbolically, the Dubai boom reached its height on November 30, 2008, at the launch of the landmark hotel, Atlantis, located at the tip of Palm Jumeirah, the first of the Palm projects. The $20 million celebration extravaganza drew top music, movie, and sport celebrities, and a record-breaking $3 million in fireworks.
Pricking the Bubble
It is always difficult to identify which precise event caused the chain reaction that led market participants to face reality.
In hindsight, it could be argued that Nakheel's announcement of its decision to lay off 500 employees in order to cope with "short-term business plans and accommodate to the current global environment" was one such triggering event. This occurred a few days after the launching of the Atlantis hotel.
On the following day, the Trump Tower luxury project on Palm Jumeirah was suspended, raising even more concerns that the party was indeed over.
These events paved the way for massive speculation among all parties involved in the construction boom. Suddenly, panic was dominating the market. Everyone was trying to figure out how they could be affected and which measures they should take.
Further projects were either put on hold, suspended, or delayed. Additional redundancies ensued.
Cash, which had flowed freely in the sector, suddenly froze. Developers blocked payments, which had a crippling impact on the whole supply chain.
Several companies were required to operate in a kind of standby mode, barely being able to cover fixed expenses such as payroll.
The House Price Index depicted an even grimmer picture. By the end of 2008 it had already declined 8% over the previous quarter. It plummeted 41% in the first quarter of the following year, dropping a further 9% by July. Due to the impact of the Burj Dubai development, the price index rose 7% during the Q3 2009. If the Burj is left out of the index, an actual additional decline of roughly 10% can be observed.
During 2009, the sentiment in the business community was one of solitude. Without proper information from government and master developers, no one was able to guess where the economy was heading and adjust their operations accordingly.
What took many international investors by surprise was long expected by the local market. Dubai World, the holding company of Nakheel, finally came forward and declared it needed a standstill on its debt obligations until May 30, 2010.
As Mises put it almost a century ago, "every boom must one day come to an end."[7]
Causes
The narrative and events above vividly depict all the effects, but not clearly the underlying causes, behind the emirate's boom.
With a currency pegged to the dollar, the United Arab Emirates' Central Bank pursued the same harmful monetary policies as its American counterpart, the Federal Reserve.
Interest rates in the United Arab Emirates were kept artificially low for too long, following the Fed in every move. Reckless lending standards obviously helped to give a boost to the damaging credit expansion.
In addition to the aggressive lending by international institutions to Dubai's enterprises, the UAE Central Bank and the banks operating in the country also played a crucial role in fueling the construction bubble.
The Central Bank balance sheet[8] spiked in 2007, reaching a staggering 177% increase over the previous year.
Although the monetary authority trimmed down the money pumping in 2008, decreasing its balance sheet 32% at the end of that year (still double its size in December 2006), the damage had already been done.
Money supply measured by M3 had an annual growth rate of 29.4% in the period from 2006 to 2008.
With further scrutiny of the UAE's key indicators, we can verify the extent of the malinvestments encouraged by the banks operating in the United Arab Emirates. The aggregate balance sheet of banks operating in the country grew 31.4% annually in the same timeframe above.
After the UAE Central Bank's massive monetary pumping into the economy in 2007, we may infer that the next great damage was orchestrated by the private banks in 2008.
Loans extended to the construction sector grew 41.7% annually from 2006 to 2008. In 2008 alone such loans increased a whopping 80.7% over the previous year. With all this funding, new projects were being launched constantly. Nevertheless, with all this supply, where was all the demand coming from?
In this regard, banks also ensured there would be enough demand available through the usual means, credit.
In 2006, mortgages to residents climbed 80.1%. During 2007, the increase was 82.1%. Finally, 2008 ended with $18.9 billion worth of additional loans, 122.8% growth over a year.
It can hardly be argued that this demand was real. The United Arab Emirates' population stood at 4.76 million by the end of 2008, an approximate increase of 277 thousand in comparison to the year before.
Taking into consideration that a disproportionately large part of the population are blue-collar workers (mainly from the Indian subcontinent), of whom the vast majority reside in labor camps, one may conclude that mortgages were concentrated in very few hands, suggesting the demand was indeed due to investment rather than ownership.
If there had been no credit expansion, people would not have been able to buy on this massive scale. Without the potential buyers, developers would not have been able to launch so many projects. Likewise, if credit hadn't been readily available for developers, they also wouldn't have been able to fund so many projects. So did credit to consumers lead to more credit to contractors, or was it the other way around?
Instead of trying to solve this conundrum, it suffices to conclude that credit expansion exerted a drastic force in promoting unviable projects.
Production and saving cannot keep up with the pace of credit expansion, because production takes time and labor. The creation of additional money out of thin air does not add to the available amount of goods and services in the economy. If more credit is extended to construction companies, it does not mean there will be enough steel, cement, etc. — certainly not at prices that make the developments profitable. As soon as each company starts bidding for the same resource, it will tend to increase in price, rendering some projects unviable.
Resources are scarce. Printing more money can never alter this fact.
With extremely low nominal interest rates and negative real interest rates (inflation is estimated at over 10% for 2007 and 2008), the rational behavior was to borrow and invest wherever it is possible. A booming real-estate market seemed to be the obvious choice most of the time.
Under these conditions, everyone becomes a brilliant businessman. Entrepreneurial errors seem seldom while credit is abundant.
Psychology clearly plays a role in stimulating a bubble, but only monetary inflation enables it. It is difficult not to succumb to the temptation of profiting astronomic amounts in a short period of time. Resistance is even more difficult if the means to engage in the bubble are easily available at the nearest bank.
In the case of the housing sector, people failed to understand that demand for real estate is only sustainable if the ultimate reason for purchasing a property is to actually reside in it.
Former Fed chairman Alan Greenspan would suggest that "irrational exuberance"[9] has the power to escalate asset prices. He could certainly claim exuberance, but there is nothing irrational in investing in higher-yield projects instead of watching your idle savings lose their purchasing power because of inflation.
In addition to the damage caused by the UAE Central Bank and banks operating locally, state-owned and private ventures from the Sheikh were able to cheaply borrow enormous amounts from financial institutions abroad, fueling the malinvestments even further. Dubai World's standstill request on its immediate debt obligations only made the emirate's underlying complications come to surface.
Dubai's false boom, its unreal prosperity, was based on the illusion of cheap money. It was based on the illusion that credit expansion generates wealth — that money is wealth. Following the Austrian Theory of the Business Cycle, one could clearly see that the emirate's boom had to come to an end.
Further Developments
On the wave of Dubai's opulence, the neighboring emirates also wanted to diversify their economies, embarking in extravagant real-estate projects, many of which were extremely questionable ideas from the outset.
In Ajman, several projects have been canceled as developers have run out of cash, leaving many investors with deposits paid on projects that may never be built.
Led by Dubai, the construction frenzy in the UAE naturally attracted loads of foreign investors looking to diversify. In a world still trapped in a major crisis wherein investment opportunities were scarce, Dubai seemed rather appealing.
Although credit expansion did indeed play a fundamental role, actual saved resources were also drawn into the UAE market, further fueling the malinvestments.
A significant portion of those savings will unfortunately be lost, since many investment decisions were carried out anticipating a continuation of the economic scenario of the boom period.
What remains to be seen is the extent of the total damage in the economy. It is still too early to predict the depth of Dubai's necessary recession, the needed adjustment for its scores of malinvestments. Dubai's government companies and local and foreign private developers embarked on many projects that could only be economically viable under the boom conditions of 2008.[10]
There are two ways to finance a project, through one's own capital (personal savings) or through borrowing. If the developer uses his own capital, and the project turns sour, he can either consume his own capital and complete the development in spite of the losses he will incur or cancel the development altogether and take the current pain, avoiding an even greater loss after completion.
However, when a company borrows to fund projects that prove unviable, there is another party involved in the mess.
Numerous developers are trapped in a situation where ongoing projects are turning red, and customers who purchased for investment purposes are defaulting in fear of not being able to profit from a resale or in true inability to meet the payments. This is all the worse if such a developer is leveraged, like Nakheel.
Analyzing from the perspective of a buyer, pulling out is just the sensible attitude. However, if you have bought an apartment to live in, it matters very little if the expected value of the property declines. In the end, you want to live in it.
However, it's quite another story if you have purchased it as an investment, obviously expecting to sell dear, but are caught off guard with a sudden slump in the expected sale value. Should you fulfill the commitment and face an unknown loss, or take the hit now and cancel the contract outright? In the case of developers it might be even more problematic if the buyer is residing abroad and decides to breach the contract. What is the likelihood of UAE jurisdiction being enforced internationally?
Dubai World's acknowledgment of its financial ordeal is the first step in healing the problems caused by the boom. Once projects finally start being canceled, as some will inevitably have to be, a chain reaction begins that will lead some contractors, subcontractors, and other parties related to the sector to the verge of bankruptcy.
As hurtful as it sounds, many companies need to go out of business so the economy can readjust and leave only the real, profitable companies intact.
The office-space vacancy rate in prime locations is estimated at around 40%. Other sources' estimates arrive at a total 74% occupancy rate in residential and commercial space. Due to the lack of accurate statistics in the market, it is a complex job to reach a precise figure. Ongoing and planned constructions are set to increase real-estate supply even further in 2010. Even if these ongoing developments end up being suspended, the current oversupply combined with declining economic activity will exert a substantial downward pressure on real-estate prices, and there is nothing government or any other entity can do to repeal the law of supply and demand.[11]
Nevertheless, the length and depth of the recession also depends on the monetary policies that the UAE Central Bank will pursue. If it tries to prop up companies that cannot prosper, this readjustment process will just extend itself or even be completely neutralized.
Another piece of the puzzle is the exposure of banks to bad loans.
When someone borrows and doesn't fulfill his commitment in his own country, he might get into trouble. However, in Dubai, expatriates can just leave and never repay their debt: banks in the UAE have very few ways of attempting to recover such bad loans. The abandoned cars in Dubai's airport illustrate this point. In fact, local laws end up encouraging flight from the country since one faces incarceration if one fails to honor issued checks on debt.
In addition to the debt issue, the recession and readjustment of business may result in downsizing, meaning redundancies. Since 90% of the workforce comes from abroad, chances are that the laid-off employee is a foreigner. According to UAE law, if a foreign worker loses his job, he has to find a new position or leave the country within 30 days.
Therefore, a recession in Dubai can also cause a decrease in population, which could have broad effects in the retail sector too, although to a lesser extent. This scenario is very unlikely to occur in the developed countries facing recession, such as the United States or Spain.
Abu Dhabi and International Investors
There are many lessons to learn from Dubai. Every investor should know by now that he must do his homework and only invest when he's fully aware of the reality of the underlying investment. Many just relied on the Dubai government's backing of debt and if that failed, well, the UAE government in Abu Dhabi would just step in. Now that the former has failed and the latter's extent of help is yet unknown, investors are left scratching their heads to figure out an exit plan. It will be a fresh wake-up call that profit and risk always go hand in hand.
Unlike Dubai, Abu Dhabi derives more than half of its GDP from oil revenues. It owns substantial income-generating assets as well as an impressive sovereign-wealth fund. The means to rescue Dubai are certainly there. However, Abu Dhabi is reluctant to write a blank check and assume all of Dubai's debt, and rightly so. The recent extra $10 billion granted by the capital to help honor Nakheel's maturing bond may have calmed some investors. Nonetheless, the underlying malinvestments are still there. Instead of owing foreigners, Dubai now has an extra debt with Abu Dhabi (though the conditions of this emergency loan are still unclear).
In 2008, the last boom year for Dubai, the emirate's GDP is estimated to have reached $80 billion, while Abu Dhabi's was $142 billion, according to government statistics. It is claimed that Dubai's government debt is well over $80 billion. While the debt-to-GDP ratio truly deserves attention, most important of all is the ability to service the debt. Dubai's assets have declined considerably in value and its ongoing operations' capacity to generate enough income to pay off its debt is severely impaired. As with any investment decision, the UAE is carefully thinking through Dubai's rescue.
Reckless lending by international banks to Dubai Inc. was a major stimulus to the emirate's debacle. When everything was going fine, few questions were raised. Now, after the derailing of the economy, many are left unanswered.
The UAE has never experienced such a crisis before. It is the first severe economic downturn since the federation was formed in the early 1970s. Bankruptcy laws are underdeveloped, partly because they were never really needed. The importance of solid institutions is now clear and UAE's judicial system will be tested to its full extent.
Private companies operating in Dubai may have to seek legal action against developers, which in many cases might be state-owned or -linked enterprises. The success of Dubai in attracting foreign capital will also depend on how Dubai courts act and are perceived by the international community.
Conclusion
The similarities of the real-estate bubble in Dubai with those in other countries like the United States and Spain are enormous.
Only savings can allow for sustainable economic growth. Through inflation, credit flows excessively and distorts the production structure, allocating resources to projects that should have never existed in the first place and paving the way for the ensuing recession, that is, the adjustment of all the malinvestments. Entrepreneurs can and will make mistakes even in the absence of inflation. But it is only through undue monetary expansion that the distortion occurs on a massive scale throughout the economy.
By midyear 2009, whoever flew to Dubai with Emirates Airlines could also have been misled into thinking that credit was not a problem, as one of the airline's video promos before landing read, "Forget the credit crunch … shop."
Unfortunately, Dubai Inc. took its own words too seriously.
Microsoft and antitrust
The end, sort of
Microsoft settles a long-running antitrust case with Europe's competition commissioner
“TO HECK with Janet Reno”, said Steve Ballmer, now Microsoft’s boss, after America’s attorney-general dared to go after the software firm in 1997 for abusing its Windows monopoly to smother Netscape, a now defunct browser firm. These words marked the beginning of what was to become probably the most spectacular antitrust case in the computer industry so far. The dispute later spread to Europe.
On Wednesday December 16th the case at last came to an end. Neelie Kroes, Europe’s competition commissioner, announced that she had reached a settlement with the software giant. Starting next March, in Europe at least, all versions of Windows will come with a “choice screen” rather than just an already-installed version of Microsoft’s Internet Explorer. This will list 12 web browsers, including Microsoft’s and those provided by competitors. Computer users will be able to pick their favourite.
This settlement goes much further than an inconsequential deal that Microsoft struck in America in the early part of this decade. But it still invites questions over whether Europe’s case was worth the trouble.
Predictably, Microsoft executives do not believe it was. Even without antitrust action the browser market would now be competitive, they argue, pointing to the increasing market share of Firefox, an open-source browser. It is also no surprise that Microsoft’s critics are happy, although they argue that the firm still needs close scrutiny to ensure that the settlement is implemented effectively.
Yet the real value of the case does not lie in the specific remedies. Without the legal action, Microsoft may have resorted to dirty tricks to block Firefox’s progress. The firm probably would also have taken longer to ditch its aggressive corporate unilateralism. But the case has firmly established antitrust as a competitive weapon in the “platform wars” between big technology companies. Without extensive lobbying by rivals, the case would never gone as far as it has.
Microsoft, too, has learned to play this game. It is said that it was one of the driving forces behind encouraging the European Commission to look closely at the takeover of Sun, a hardware-maker, by Oracle, another software giant. Despite the antitrust scrutiny the Commission now seems inclined to approve the merger after concessions from Oracle. A decision is expected early next year.
Microsoft will certainly also try to torpedo another merger. In November Google announced that it would buy AdMob, a mobile advertising start-up, for a whopping $750m—apparently outbidding Apple at the last moment. Microsoft wants to stop Google, which already rules much of online advertising, from dominating mobile advertising too. Microsoft, after being on the receiving end of antitrust action for a long time, has now taken up the weapon to use against its rivals.
A reformer dies
Yegor Gaidar
A reformer dies
Yegor Gaidar, the father of Russia’s economic reforms, has died aged 53
FEW people make such a difference. In 1991 Yegor Gaidar took responsibility for one of the worst messes in the history of economics, in the largest country in the world. The Soviet planned economy had collapsed amid grotesque shortages of everything from food to matches. Queuing for essential goods took many hours. Hard currency reserves had vanished, international trade had all but stopped. Few Russians had the faintest idea of how capitalism worked—and nobody knew if it could be made to work in Russia.
Unfazed, Mr Gaidar seized the moment, first as deputy prime minister in charge of economic reform, then, briefly, as finance minister, and finally as acting prime minister. His most momentous decision was to liberalise all prices on New Year’s Day 1992. It was astonishingly risky. A generation’s savings would be rendered visibly worthless (though their real value had been destroyed by the demonetisation of the economy in the late Soviet era). The only hope was that real prices would bring real money, allowing supply and demand to meet each other. In the first week of January, Mr Gaidar and his tiny team of reformers watched with increasing exuberance as impromptu street markets multiplied in Russia’s towns and cities. Instead of hoarding consumer goods and raw materials, people started trying to sell them. In his few months in power, Mr Gaidar and his team demolished the Soviet economy and laid the foundations of capitalism in Russia.
“Shock therapy” was right but unpopular. By December 1992 Mr Gaidar had lost his job at the hands of the Duma, Russia’s Soviet-era parliament. Too much shock, not enough therapy, people complained. In the years that followed, life expectancy plunged further, public services frayed and output plummetted. But much of that was the grim legacy of Soviet misrule. Other things began to work much better. Given the disaster that he inherited, Mr Gaidar’s record still looks pretty good.
His biggest shortcomings were outside his control, such as the inflationary monetary policy of the Russian central bank. The outside world cared more about repayment of Soviet debts than helping the friendliest and most reformist Russian leadership in history. His successor, Viktor Chernomyrdin, at first stalled reform and only slowly restarted it. Mr Gaidar waspishly called that “the most expensive economics education in history”.
The scion of a distinguished Soviet family, he lacked the common touch. His use of high-flown economic jargon in television interviews made him a subject of mockery. Yet in person he was likeable and strikingly unpompous.
Despite his intellectual fascination with capitalism, he was no practitioner. He preferred measuring money to making it. “Others went off to make their riches with the oligarchs, but Gaidar stuck to his commitment to understand and do his best to improve the Russian economy,” says Jeffrey Sachs, a former adviser. Other prominent Russians liked their offices lavish, with spectacular fittings in onyx and mahogany, patrolled by gorgeous secretaries and formidable goons. They regarded Mr Gaidar with bemusement. His spartan office contained only piles of papers, stacked on Soviet-era furniture. Good food was his main indulgence, as his girth indicated.
Mr Gaidar’s dislike of Vladimir Putin’s ex-KGB regime intensified over the years. When he fell ill during a trip to Ireland in 2006 he claimed he had been poisoned, though he remained coy about whom he blamed. He feared a “Weimar Russia” in which economic collapse would provide an opening for xenophobic, authoritarian and imperialistic politicians. What he wanted was to root Russia in the West, where it belonged.
The Selling of Health Care Reform
Harry Reid will likely surrender to the demands of Senator Joe Lieberman.
JOHN FUND
Look for Senate Democrats to move towards a final floor vote on health care next week, just before Christmas. The logjam began to break up on Sunday night after White House Chief of Staff Rahm Emanuel visited Majority Leader Harry Reid and urged him to deliver a bill and quickly, even if it meant surrendering to the demands of Senator Joe Lieberman. Mr. Emanuel summed up his philosophy on health care earlier this year when he said: "The only non-negotiable principle here is success."
Liberal Democrats will have to accede to the chief Lieberman demands: dropping plans to expand Medicare or establish a government-run insurance program. But it appears liberals will fall into line like loyal soldiers. Senator Paul Kirk, the appointed senator filling Ted Kennedy's Senate seat, said last night: "If some of the things I wanted in the bill aren't in the bill, the pluses offer so many more benefits."
All eyes will turn next to Nebraska Senator Ben Nelson to provide the critical 60th vote to break a Senate filibuster and allow a floor vote. Mr. Nelson's major concern is that the bill doesn't do enough to prevent taxpayer money from going to insurance plans that cover abortions. Majority Leader Reid is scrambling to accommodate him.
Mr. Nelson also has other concerns that Mr. Reid and the White House will likely try to assuage. InsideHealthPolicy.com reported last month that the Nebraska senator "is keen on seeing construction of a new physician owned hospital in Bellevue, Nebraska completed." Current versions of the health care bill include federal mandates that could jeopardize the completion of many physician-owned hospitals.
The hospital is located south of Omaha, adjacent to Offutt Air Force Base, which is another major issue for Senator Nelson. Offutt's operations pump over $2 billion a year into Nebraska's economy and account for more than 10,000 jobs, but earlier this year the base was denied two new commands in an Air Force reorganization program, despite scoring well on graded Air Force evaluations. In June, Mr. Nelson called the process by which Offutt lost out "a charade" and no doubt would welcome assurances that Offutt will not be on the chopping block when the federal base-closing commission likely reconvenes in 2013.
Senator Reid and the Obama administration will do all they can to lock up Senator Nelson's vote. White House Communications Director Dan Pfeiffer says the stakes are enormous, telling reporters bluntly that the White House sees no "second chance" if a bill doesn't pass before Christmas. "Congress won't come back to health care next year: It will be all jobs," he said. "The next president will not stake political capital on this. If Clinton and Obama can't get it done, no one else will try."
Democracy Under Arrest
'Universal' human- rights law never seems to apply to the likes of Kim Jong Il.
JOHN BOLTON
'Universal jurisdiction" sounds like a term plucked from obscure international law journals, but it has pernicious and profoundly antidemocratic consequences in the real world. A British arrest warrant, issued over the weekend in London for former Israeli foreign minister Tzipi Livni, shows precisely why.
The warrant charged Ms. Livni—the current leader of the Knesset opposition—with war crimes allegedly committed by Israeli forces during Operation Cast Lead in the Gaza Strip last winter. Ms. Livni and other Israeli leaders have always staunchly defended their operation against Hamas, and the arrest warrant was withdrawn Monday when it became clear Ms. Livni would not be in Britain as previously scheduled. But the fallout from this misguided warrant will linger long after it fades from the headlines.
Universal jurisdiction originated centuries ago to deal with hostes humani generis ("the enemies of all mankind") such as pirates or slavers, who were not under any state's control but legitimately concerned them all. It has grown explosively in recent years, as self-styled human-rights advocates have pushed to criminalize national actions that they find offensive.
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Today's version of universal jurisdiction masquerades as a legal concept, but is in fact a form of political morality. It empowers prosecutions in states with little or even no connection to alleged offenses such as war crimes and gross abuses of human rights. And in many countries, as in Britain, the ability of private citizens to trigger the criminal process only adds to the danger of politicized prosecutions.
When leaders of constitutional, representative governments are targets, there is simply no argument for applying universal jurisdiction. Ms. Livni and her colleagues won free and fair Israeli elections, and were in fact defeated in subsequent free and fair elections. Israel's laws have been adopted by democratically elected Knesset members and enforced by an independent judiciary. If crimes under Israeli law have been committed, they can be prosecuted by Israel's courts. Same goes for the United States.
Augusto Pinochet's 1999 arrest in Britain on a Spanish warrant for offenses committed while overthrowing Chile's Salvadore Allende first brought universal jurisdiction global prominence. But Pinochet's arrest was followed by Belgium's toying with the idea of arresting Donald Rumsfeld for having the temerity to visit NATO headquarters in Brussels. Now Ms. Livni and other Israeli officials involved in recent regional conflicts are subject to potential arrest and trial if they travel beyond Israel's borders.
It is no accident that arrest warrants never seem to be issued for the likes of Kim Jong Il or Mahmoud Ahmadinejad, since the real targets of universal jurisdiction these days are Western nations. Ultimately, what it targets is the very ideas of sovereign accountability and political independence. These goals largely motivated the 1998 Rome Statute that created the International Criminal Court, itself a step toward constraining states' abilities to police their own affairs, and an institution that the Obama administration yearns to join.
Transferring accountability for decisions from democratic politics to the criminal justice system understandably intimidates policy makers from making perfectly justifiable choices, such as defending against terrorist threats. Moreover, "command responsibility" has been transmogrified from liability for failing to stop known criminal activity, to liability when officials "should have known" their subordinates were committing crimes. This further ups the ante and explains why former foreign ministers like Ms. Livni or Henry Kissinger are at risk.
This deterrent impact is exactly what universal jurisdiction advocates seek—both to affect decisions at the highest national levels, and to discourage mid- and low-level officials from implementing disfavored policies. Some foreign critics hope to prosecute former President George W. Bush for enhanced interrogation techniques and the Guantanamo Bay detention facility. While they likely won't get to the former president, they'll be at least somewhat content prosecuting the attorneys who wrote the underlying legal justifications. Incredibly, the Obama administration has yet to definitively reject the possibility of allowing such prosecutions overseas.
Universal jurisdiction against officials of authoritarian regimes sounds appealing. But in these cases, the real goal should be replacing such regimes with representative governments that undertake sovereign accountability for prior transgressions.
Nonetheless, human-rights activists who view their morality as higher than that of elected governments are satisfied by nothing less than prosecution. That is precisely why contemporary universal jurisdiction is so profoundly antidemocratic.
Undoubtedly, leaders of constitutional democracies make mistakes about whom they do and do not prosecute. But to substitute the judgments of self-designated international Platonic Guardians for representative governments and independent judiciaries is perilous at best, and authoritarian at worst. It's the time to unambiguously reject universal jurisdiction before its infection spreads even further.
Mr. Bolton, a senior fellow at the American Enterprise Institute, is the author of "Surrender Is Not an Option: Defending America at the United Nations and Abroad" (Simon & Schuster, 2007).
1 comment:
A nice read.
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