global finance

GMAC receives $5B in bailout funds

2008-12-29T17:33:00.000-08:00

WASHINGTON (AP) -- The government says it will provide $5 billion to the GMAC Financial Services, the funding arm of General Motors Corp., from the $700 billion bank rescue program.

The Treasury Department also says it will lend up to $1 billion to General Motors so that it can participate in a debt for equity swap with GMAC, which is seeking to raise additional capital. The loan is in addition to the financial assistance the government announced Dec. 19 for GM and Chrysler LLC.

Last week, the Federal Reserve approved GMAC's application to become a bank-holding company, which enabled it to receive money from the financial rescue fund.
From: http://finance.yahoo.com/news/GMAC-receives-5B-in-bailout-apf-13931546.html

Fed grants GMAC ability to seek bailout funds

2008-12-24T17:27:00.000-08:00

WASHINGTON – The Federal Reserve gave an early Christmas present to General Motors' finance arm, allowing the ailing provider of auto loans to qualify for the government's $700 billion rescue fund.

The Fed announced late Wednesday that it had approved GMAC Financial Services' request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed. The plan also significantly reduces the ownership stakes of GM and Cerberus Capital Management, LP., in GMAC.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. The Fed cited "emergency conditions" in justifying its decision.

Before the Fed's decision, GMAC was facing a crucial deadline Friday to complete a deal with its bondholders that would allow it to exchange debt for equity. GMAC was struggling to convince investors to provide the capital that it desperately needed to win approval to become a bank holding company. The U.S. central bank acted before the debt deal deadline, which GMAC says still stands and will expire on Friday.

The Fed's move to provide government aid to one of the nation's biggest suppliers of auto loans was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept ballooning, the program expanded to include insurers, credit card companies, and the automakers themselves. Just last week, President George W. Bush ordered an emergency bailout of the industry, offering $17.4 billion in rescue loans, and citing imminent danger to the national economy.

"To make the auto package complete they had to do something with the financing," said David Cole, chairman of the Center for Automotive Research. "It's really tied to the whole survival of the industry."

"GMAC was basically frozen," he said. The Fed's move "has a huge impact on dealers and consumers. ... The Fed wanted to avoid a disaster in the automotive sector very, very badly for the cascading factor it would have on the overall economy."

In a statement, GMAC praised the Fed's action.

"This is a very significant positive step for the company, and it marks a key turning point in our 89-year history," said spokeswoman Gina Proia. "GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers."

She said the change in status would provide the company with "improved access to funding."

GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital LLC division. If forced to file for bankruptcy, funding would have been cut off to roughly 85 percent of GM's North American dealers.

The company is 51 percent owned by Cerberus. General Motors Corp. owns the remaining 49 percent. But because those companies' businesses are mainly outside banking, they must cut their ownership so that GMAC qualifies as bank holding company.

GM has committed to reducing its ownership in GMAC to less than 10 percent. Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.

The Fed's decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8 percent earlier Wednesday.

The Fed said the plan will "benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases."

Earlier this week, analysts suggested that the government was working behind the scenes to save GMAC, as the company struggled to get bondholders to convert 75 percent of their debt into equity of the company, a prerequisite for becoming a bank holding company.

Meanwhile, the future of Chrysler Financial, Chrysler's financing arm, is also uncertain. Earlier this month, the company that provides financing for 75 percent of Chrysler dealers said it could be forced to temporarily suspend funding for showroom inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.

Ford Motor Credit Co., which expects to report its first year of losses in 2008, has applied for an asset-backed securities loan facility administered by the Federal Reserve. It has already drawn on 25 percent, or $4 billion under the commercial paper funding facility.

Ford Motor Credit spokeswoman Brenda Hines said the company has no intentions of going through the process to become a bank holding company.

"We just don't think it's necessary from our standpoint," she said.

The decision to change the status of GMAC to a bank holding company follows the Fed's action on Monday granting the request of CIT Group to become a bank holding company so that it could qualify for federal rescue funds.

The Fed also has granted bank holding status to Goldman Sach's Group Inc., Morgan Stanley and American Express Co., all of which have changed their status in an effort to get access to more support after the financial crisis erupted with force in September.

Congress approved the bailout program on Oct. 3 with the original intent of buying up troubled mortgage assets.

That part of the program has never been implemented. Instead, Treasury Secretary Henry Paulson switched course. He began an effort to use $250 billion of the $700 billion fund to make direct purchases of bank stock, to inject more funds into financial institutions and fight the most severe financial crisis in seven decades.

But the effort has come under attack from critics who say that the Bush administration is not overseeing the program sufficiently to make sure that the banks actually increase their lending.

Many lawmakers are also upset that the program has already obligated half of the $700 billion total without making a serious effort to help troubled homeowners avoid a rising tide of mortgage foreclosures.
from: http://news.yahoo.com

Wall Street expects jobless claims to rise

2008-12-11T01:44:00.000-08:00

WASHINGTON – Wall Street expects the government to report that new claims for unemployment benefits increased last week as companies ramped-up layoffs amid the recession.

The jobless claims report comes a day after the federal government said the monthly budget deficit reached a record in November, in part because of increased spending on programs such as unemployment insurance and food stamps.

The number of new claims for jobless benefits is projected to increase to a seasonally adjusted 525,000, up from 509,000 the previous week, according to Wall Street economists surveyed by Thomson Reuters.

Claims late last month reached 543,000, their highest level in 16 years. Economists said the drop to 509,000 was partly due to volatility from the Thanksgiving holiday week.

Last week's report showed the number of people continuing to claim unemployment benefits reached nearly 4.09 million, the highest level since December 1982. Economists expect that number rose to 4.1 million.

Even when the larger work force is factored in, the proportion of workers who are continuing to receive jobless benefits matches a level last reached in September 1992, when the economy was recovering from a recession.

"The underlying trend in claims is still strongly upwards," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note.

A number of large U.S. employers announced layoffs this week, including Dow Chemical Co., 3M Co., Anheuser-Busch InBev, National Public Radio and the National Football League.

The layoffs come as the federal budget deficit continues to spiral.

In just the first two months of the budget year that started Oct. 1, the deficit totaled $401.6 billion, nearly matching the record gap of $455 billion posted for all of last year, according to Treasury Department data released Wednesday. If the deficit does top $1 trillion for the current budget year, it also would be a post-World War II high when measured as a percentage of the economy.

The increased red ink stems from both lower tax revenue and increased spending that is a result of the recessionary economy. The government is receiving less in business and personal income taxes while spending more on programs such as unemployment insurance and food stamps.

Then there's the $700 billion bank rescue program. The Treasury report showed that the government spent $76.5 billion from the program in November and $191.5 billion over the past two months.

The department said the gap between the government's revenue collections and what it paid out last month totaled $164.4 billion, the largest deficit ever recorded for the month of November. The deficit was $98.2 billion in November 2007.

An annual deficit of $1 trillion would equal 6.7 percent of the gross domestic product, the economy's total output in a single year. That would surpass the previous postwar record in GDP terms of 6 percent sent in 1983 when Ronald Reagan was president.

And some economists think the annual deficit will be even higher. David Rosenberg, North American economist at Merrill Lynch, projected that it could reach $1.5 trillion, depending on how large an economic stimulus package is approved next year.

The Treasury Department plans to use $250 billion of the $700 billion program to make direct purchases of bank stock, providing the nation's financial institutions with an infusion of cash in the hopes that they will resume more normal lending practices.

Some analysts argue that the deficit is effectively lower than Treasury's figures because the government has received stakes in the banks in return for the capital. The government could get some or all of the money back when it sells those ownership stakes in the future.

The Congressional Budget Office said last week that accounting for the value of those stakes would reduce the combined deficit for October and November to $267 billion, rather than the $401.6 billion reported by Treasury.
from: http://news.yahoo.com

World markets mostly down as dismal data weighed

2008-12-11T01:28:00.000-08:00

SHANGHAI, China – World markets were mostly lower in choppy trading Thursday, as investors mulled dismal economic data from China and a hefty, recession-fighting interest rate cut by South Korea's central bank.

Highlighting signs that the world's fourth biggest economy is weakening much faster than expected, China said Wednesday that its exports fell in November for the first time in seven years, prompting some investors to cash in on recent gains.

"This signals that China's economic growth is going to slow down noticeably," said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong.

Japan's benchmark Nikkei 225 stock average closed up 0.7 percent, or 60.31 points, at 8,720.55 and Hong Kong's Hang Seng edged up 0.2 percent to 15,613.90. South Korea's Kospi gained 0.8 percent to 1,154.43.

But markets in Australia, China, Singapore and India fell while major European bourses opened lower. Britain's FTSE-100 was down 1 percent at 4,325.92, Germany's DAX slipped 1.8 percent to 4,718.05 and France's CAC-40 fell 1.5 percent to 3,270.14.

The Nikkei rebounded in afternoon trading on renewed optimism over the approval late Wednesday by the U.S. House of Representatives of a $14 billion bailout plan for ailing automakers.

A collapse of the U.S. auto industry would be catastrophic for exporting countries like Japan that rely heavily on American consumer spending, and investors were reassured despite the certainty of strong opposition from Republican senators.

Japanese automakers extended gains, with Honda Motor Co. jumping 7.9 percent and Toyota Motor Corp. advancing 4.8 percent.

South Korean stocks rose after the central bank carried out its biggest interest rate cut ever, slashing a key rate by a full percentage point to a record low of 3 percent.

But gains overnight on Wall Street, where the Dow Jones industrial average rose 0.8 percent to 8,761.42, failed to lift regional sentiment overall.

Stock futures pointed to a weaker session in the U.S. on Thursday. Dow futures fell 49 points, or 0.6 percent, to 8,712 and S&P 500 futures were down 1.8 points, or 0.2 percent, to 894.

In China, the benchmark Shanghai Composite Index fell 2.3 percent, or 47.44 points, to 2,031.68 after Chinese leaders ended a top level economic policy meeting without announcing any fresh initiatives to spur growth.

Banks and steelmakers were lower, as was Shanghai market heavyweight PetroChina, which slipped 1.5 percent to 11.42 yuan.

"Everyone knows that 2009 is likely to be the most difficult year ever for developing China," said Peng Yunliang of Shanghai Securities. "People are truly worried."

Major carriers China Southern Airlines and China Eastern Airlines jumped 9.9 percent to 3.66 yuan and 4.28 yuan, respectively, after the airlines announced details of plans for government cash infusions.

Oil prices edged higher on hope for a significant OPEC production cut next week. Light, sweet crude for January delivery was up 59 cents to $44.11 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore.

In currencies, the dollar was trading at 92.45 yen from 92.85 yen. The euro stood at $1.3151 from $1.3008.
from: http://news.yahoo.com

Retail sales post big drop in November

2008-12-11T01:24:00.000-08:00

NEW YORK (Reuters) – U.S. retail sales excluding autos posted their biggest monthly drop in five years November, as consumers, spooked by a deepening recession, pared spending for a third straight month, a private report released on Thursday showed.

The decline accelerated in November despite a sales spurt over the crucial "Black Friday" weekend -- the three days after the Thanksgiving holiday in late November -- according to SpendingPulse, the retail data service of MasterCard Advisors, a subsidiary of MasterCard Inc.

Consumer spending excluding autos fell 3.8 percent last month on a seasonally adjusted basis, steeper than the 1.5 percent decline in October, SpendingPulse said.

The November figure was the largest one-month drop in SpendingPulse history, which began in 2003, surpassing the prior record fall of 2.4 percent set two months ago.

The report was the latest evidence that U.S. retailers are facing one of the worst holiday retail seasons in recent memory. The year-end shopping period accounts for the bulk of the annual business of many retailers.

"We are talking about a consumer who is wary of spending," said Kamalesh Rao, SpendingPulse's director of economic research.

Consumers, who account for more than two-thirds of the U.S. economy, have been battered by worsening job conditions, dwindling 401(k) retirement funds and a persistent credit crunch.

The spending decline was again led by a drop in gasoline sales, as pump prices have fallen well below $2 a gallon since rising above $4 in July, according to Rao.

Retail sales excluding cars and gasoline fell 1.3 percent in November compared with a 0.9 percent drop in October.

Once red-hot categories like electronics, furniture and luxury goods have turned cold, registering double-digit sales drops from year ago, Rao said.

"People are a lot more price sensitive. When they buy, they buy less expensive things," Rao said.

SpendingPulse's "core" measure on consumer spending, which strips out cars, gasoline and building materials, declined 1.3 percent compared with a 1.6 percent fall in October.

While it is too early to predict when spending will pick up, the worst of the downturn may have occurred, Rao said.

"Spending may have bottomed out in October. We are not seeing more a pullback," he said.

The SpendingPulse data is derived from the aggregate sales in the MasterCard U.S. payment network, coupled with estimates on all other payment methods including cash and check.

(Reporting by Richard Leong; Editing by Leslie Adler)
http://news.yahoo.com

World markets mostly down ahead of US jobs report

2008-12-05T02:04:00.000-08:00

SHANGHAI, China (AP) -- World markets were mostly lower Friday as caution ahead of a key reading on the U.S. jobs market overshadowed big rate cuts by central banks in Europe. Oil traded near four-year lows.

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Japan's Nikkei 225 average ended the week with a whimper, closing down 6.73 points, or 0.1 percent, at 7,917.51 as investors wavered between hunting for bargains and staying cautious ahead of the U.S. employment report later Friday.

Major European bourses opened lower with Britain's FTSE-100 down 1.5 percent at 4,103.15, Germany's DAX off 2.6 percent at 4,445.32 and France's CAC-40 down 2.7 percent at 3,078.74.

Elsewhere in Asia, Hong Kong's Hang Seng index advanced 2.5 percent to 13,846.09 and South Korea's Kospi climbed 2.1 percent to 1,028.13 but markets in Australia, Taiwan, Indonesia, New Zealand, the Philippines and Malaysia retreated.

Big interest-rate cuts by the European Central Bank and Bank of England failed to give much of a lift to sentiment and investors also contended with a raft of weak data on the world's largest economy.

"There is no major funding going into the market, so it is losing momentum," said Linus Yip, a strategist at First Shanghai Securities in Hong Kong, where turnover was light. "Major investors are still staying on the sidelines," he said.

On Wall Street Thursday, the Dow Jones industrial average slid 215.45 points, or 2.5 percent, to 8,376.24.

The number of Americans claiming unemployment benefits last week reached its highest level in 26 years, while factory orders plunged a bigger-than-expected 5.1 percent in October. The U.S. Labor Department unemployment report due Friday was expected to show the jobless rate rose to 6.8 percent in November as companies slashed 320,000 jobs.

Wall Street futures pointed to falls in the U.S. on Friday with Dow futures down 10 points, or 0.1 percent, at 8391 and S&P500 futures down 2.5 points, or 0.3 percent, at 845.

Japan's benchmark index ended down 7 percent for the week, dogged by uncertainty over prospects for U.S. automakers to win an expanded $34 billion rescue package, analysts said.

Toyota Motor Corp. lost 1.9 percent and Honda Motor Corp. shed 1.9 percent following news it was pulling out of Formula One to save costs.

"Investors will be keeping a particularly close eye on what happens in the U.S. housing and auto sectors," said Tsuyoshi Segawa, a strategist at Shinko Securities in Tokyo.

Chinese shares rebounded from early weakness, with the benchmark Shanghai Composite Index rising 0.9 percent to to 2,018.66. The Shenzhen Composite Index rose 2.3 percent.

Property developers were among the biggest gainers, as China Vanke jumped 5.5 percent and Poly Real Estate climbed 4.9 percent.

Investors are looking to a top-level planning meeting next week for fresh policies to help boost China's economy, analysts said. Although the Shanghai benchmark is up 6.7 percent for the week, it is still 60 percent below the peak it hit in October 2007.

"Buying sentiment is gradually recovering, because we know some funds and insitutional investors are taking an active part in trading," said Zhang Xiuqi, an analyst for Guotai Junan Securities, in Shanghai.

"It's a good sign. As you know, the new year is on its way," Zhang said.

Australia's All Ordinaries index slipped 1.2 percent as resource shares fell on expectations of falling demand. Mining giant BHP Biliton tumbled 4.9 percent and Woodside Petroleum was down 2.1 percent.

Light, sweet crude for January delivery was up 27 cents at $43.94 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract fell overnight $3.12 to settle at $43.67, the lowest since January 2005.

Associated Press business writer Tomoko Hosaka in Tokyo contributed to this report.
From: http://biz.yahoo.com

Oil at 4-year lows below $44 on dire economic news

2008-12-05T01:51:00.000-08:00

SINGAPORE – Oil prices were steady near four-year lows below $44 a barrel Friday in Asia as more bad U.S. economic news soured the outlook for global growth and demand for crude.

Light, sweet crude for January delivery was up 26 cents to $43.93 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract fell overnight $3.12 to settle at $43.67, the lowest since January 2005.

"The damage to the economy by the financial turmoil is much bigger than the market initially thought," said Tetsu Emori, commodity markets fund manager at ASTMAZ Futures Co. in Tokyo. "The economic data now is much worse than what we expected a few months ago."

Oil prices have fallen about 70 percent since peaking at $147.27 in July.

Dismal economic data continued Thursday in the U.S., pointing toward a sharp contraction of gross domestic product in the fourth quarter and weakening demand for crude products, such as gasoline.

The government said the number of people continuing to claim unemployment benefits last week reached 4.09 million, the highest level since December 1982, while the proportion of workers receiving benefits matched a level reached 16 years ago, in September 1992.

Factory orders plunged a bigger-than-expected 5.1 percent in October caused by big cutbacks in demand for steel, autos, computers and heavy machinery. It was the largest decrease since an 8.5 percent fall in July 2000.

On Thursday, AT&T said it was slashing 12,000 jobs, or about 4 percent of its work force. Chemicals company DuPont said it will cut 2,500 jobs and media conglomerate Viacom Inc. said it will eliminate about 850 jobs.

Investors will be eyeing the Labor Department's November unemployment report on Friday, which economists expect will show that the jobless rate rose to 6.8 percent and that companies cut another 320,000 jobs.

"It could take a while before the economy and oil prices really hit bottom," Emori said. "Oil seems headed below $40."

In other Nymex trading, gasoline futures rose 1.05 cent to 98 cents. Heating oil was steady at $1.51 a gallon while natural gas for January delivery slid 8.8 cents to 5.93 per 1,000 cubic feet.

In London, January Brent crude rose 10 cents to $42.38 on the ICE Futures exchange.
From: http://news.yahoo.com

US, China promise $20 billion to finance trade

2008-12-05T01:48:00.000-08:00

BEIJING – The United States and China will provide $20 billion in loans to finance trade by developing countries amid a global crisis that has battered credit markets, U.S. Treasury Secretary Henry Paulson announced Friday as the two sides wrapped up high-level economic talks.

Leaders of major economies who met in Washington last month to discuss a response to the global financial crisis, pledged to make sure developing economies got access to the financing needed to keep trade flowing.

The U.S. and Chinese government import-export banks will provide the $20 billion in financing to creditworthy importers in developing economies, Paulson said. He gave no other details.
from: http://news.yahoo.com

Oil Price History and Analysis (Updating)

2008-11-26T09:58:00.000-08:00

Introduction

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply.

The U.S. petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $24.98 per barrel adjusted for inflation to 2007 dollars. In the absence of price controls the U.S. price would have tracked the world price averaging $27.00. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.04 in 2007 prices. That means that only fifty percent of the time from 1947 to 2007 have oil prices exceeded $19.04 per barrel. (See note in box on right.)

Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity OPEC abandoned its price band in 2005 and was powerless to stem a surge in oil prices which was reminiscent of the late 1970s.

Crude Oil Prices 1947 - May, 2008
Crude Oil Prices 1947-2007
Click on graph for larger view
*World Price - The only very long term price series that exists is the U.S. average wellhead or first purchase price of crude. When discussing long-term price behavior this presents a problem since the U.S. imposed price controls on domestic production from late 1973 to January 1981. In order to present a consistent series and also reflect the difference between international prices and U.S. prices we created a world oil price series that was consistent with the U.S. wellhead price adjusting the wellhead price by adding the difference between the refiners acquisition price of imported crude and the refiners average acquisition price of domestic crude.
The Very Long Term View

The very long term view is much the same. Since 1869 US crude oil prices adjusted for inflation have averaged $21.05 per barrel in 2006 dollars compared to $21.66 for world oil prices.

Fifty percent of the time prices U.S. and world prices were below the median oil price of $16.71 per barrel.

If long term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $16.71 per barrel half of the time. The very long term data and the post World War II data suggest a "normal" price far below the current price.

Crude Oil Prices 1869-2007
Crude Oil Prices 1867-2007
Click on graph for larger view

The results are dramatically different if only post-1970 data are used. In that case U.S. crude oil prices average $29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for that time period is $26.50 per barrel.

If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission and is a period when the Seven Sisters were no longer able to dominate oil production and prices. It is an era of far more influence by OPEC oil producers than they had in the past. As we will see in the details below influence over oil prices is not equivalent to control.

Crude Oil Prices 1970-2007
Crude Oil Prices 1970-2007
Click on graph for larger view
Post World War II

Pre Embargo Period

Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. The price oil rose from $2.50 in 1948 to about $3.00 in 1957. When viewed in 2006 dollars an entirely different story emerges with crude oil prices fluctuating between $17 - $18 during the same period. The apparent 20% price increase just kept up with inflation.

From 1958 to 1970 prices were stable at about $3.00 per barrel, but in real terms the price of crude oil declined from above $17 to below $14 per barrel. The decline in the price of crude when adjusted for inflation was amplified for the international producer in 1971 and 1972 by the weakness of the US dollar.

OPEC was formed in 1960 with five founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Two of the representatives at the initial meetings had studied the the Texas Railroad Commission's methods of influencing price through limitations on production. By the end of 1971 six other nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through 1972 member countries experienced steady decline in the purchasing power of a barrel of oil.

Throughout the post war period exporting countries found increasing demand for their crude oil but a 40% decline in the purchasing power of a barrel of oil. In March 1971, the balance of power shifted. That month the Texas Railroad Commission set proration at 100 percent for the first time. This meant that Texas producers were no longer limited in the amount of oil that they could produce. More importantly, it meant that the power to control crude oil prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another way to say it is that there was no more spare capacity and therefore no tool to put an upper limit on prices. A little over two years later OPEC would, through the unintended consequence of war, get a glimpse at the extent of its power to influence prices.

World Events and Crude Oil Prices 1947-1973
World Events and Crude Oil Prices 1947-1973
Click on graph for larger view
Middle East, OPEC and Oil Prices 1947-1973
Middle East, OPEC and Oil Prices 1947-1973
Click on graph for larger view
Middle East Supply Interruptions

Yom Kippur War - Arab Oil Embargo

In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel. While Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production.

If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC it was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply shortages became all too apparent when prices increased 400 percent in six short months.

From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. When adjusted for inflation the price over that period of time world oil prices were in a period of moderate decline.

U.S. and World Events and Oil Prices 1973-1981
Middle East, OPEC and Crude Oil Prices 1947-1973
Click on graph for larger view

OPEC Oil Production 1973-2007
OPEC Production and Crude Oil Prices 1973-Present
Click on graph for larger view

Crises in Iran and Iraq

Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November, 1978 and June, 1979. At one point production almost halted.

While the Iranian revolution was the proximate cause of what would be the highest prices in post-WWII history, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution production was up to 4 million barrels per day.

Iran weakened by the revolution was invaded by Iraq in September, 1980. By November the combined production of both countries was only a million barrels per day and 6.5 million barrels per day less than a year before. As a consequence worldwide crude oil production was 10 percent lower than in 1979.

The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double increasing from from $14 in 1978 to $35 per barrel in 1981.

Twenty-six years later Iran's production is only two-thirds of the level reached under the government of Reza Pahlavi, the former Shah of Iran.

Iraq's production remains about 1.5 million barrels below its peak before the Iraq-Iran War.

Iran Oil production 1973-2007

Middle East, OPEC and Crude Oil Prices 1947-1973
Click on graph for larger view

Iraq Oil production 1973-2007

Middle East, OPEC and Crude Oil Prices 1947-1973
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US Oil Price Controls - Bad Policy?

The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer.

Did the policy achieve its goal? In the short term, the recession induced by the 1973-1974 crude oil price rise was less because U.S. consumers faced lower prices than the rest of the world. However, it had other effects as well.

In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less.

US Oil Price Controls 1973-1981
US Price Controls 1973-1981 Refiners Aquisition Cost of Crude Oil
Click on graph for larger view
OPEC's Failure to Control Crude Oil Prices

OPEC has seldom been effective at controlling prices. While often referred to as a cartel, OPEC does not satisfy the definition. One of the primary requirements is a mechanism to enforce member quotas. The old joke went something like this. What is the difference between OPEC and the Texas Railroad Commission? OPEC doesn't have any Texas Rangers! The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.

With enough spare capacity at times to be able to increase production sufficiently to offset the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by threatening to increase production enough to crash prices. In reality even this was not an OPEC enforcement mechanism unless OPEC's goals coincided with those of Saudi Arabia.

During the 1979-1980 period of rapidly increasing prices, Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that high prices would lead to a reduction in demand. His warnings fell on deaf ears.

Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to remove insulation from their homes or to replace energy efficient plants and equipment -- much of the reaction to the oil price increase of the end of the decade was permanent and would never respond to lower prices with increased consumption of oil.

Higher prices also resulted in increased exploration and production outside of OPEC. From 1980 to 1986 non-OPEC production increased 10 million barrels per day. OPEC was faced with lower demand and higher supply from outside the organization.

From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC produced beyond their quotas. During most of this period Saudi Arabia acted as the swing producer cutting its production in an attempt to stem the free fall in prices. In August of 1985, the Saudis tired of this role. They linked their oil price to the spot market for crude and by early 1986 increased production from 2 MMBPD to 5 MMBPD. Crude oil prices plummeted below $10 per barrel by mid-1986. Despite the fall in prices Saudi revenue remained about the same with higher volumes compensating for lower prices.

A December 1986 OPEC price accord set to target $18 per barrel bit it was already breaking down by January of 1987and prices remained weak.

The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world and particularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwait than they did Persian Iran. The proximity to the world's largest oil producer helped to shape the reaction.

Following what became known as the Gulf War to liberate Kuwait crude oil prices entered a period of steady decline until in 1994 inflation adjusted prices attained their lowest level since 1973.

The price cycle then turned up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. Declining Russian production contributed to the price recovery. Between 1990 and 1996 Russian production declined over 5 million barrels per day.

World Events and Crude Oil Prices 1981-1998
World Events and Crude Oil Prices 1981-1998
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U.S. Petroleum Consumption
U.S. Petroleum Consumption
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Non-OPEC Production & Crude Oil Prices
Non-OPEC Production & Crude Oil Prices
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OPEC Production & Crude Oil Prices
OPEC Production & Crude Oil Prices
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Russian Crude Oil Production
Russian Crude Oil Production
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OPEC continued to have mixed success in controlling prices. There were mistakes in timing of quota changes as well as the usual problems in maintaining production discipline among its member countries.

The price increases came to a rapid end in 1997 and 1998 when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998 Asian Pacific oil consumption declined for the first time since 1982. The combination of lower consumption and higher OPEC production sent prices into a downward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July. Price continued down through December 1998.

Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April. As usual not all of the quotas were observed but between early 1998 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.

With minimal Y2K problems and growing US and world economies the price continued to rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price increases. Prices finally started down following another quota increase of 500,000 effective November 1, 2000.

World Events and Crude Oil Prices 1997-2003
World Events and Crude Oil Prices 1997-2003
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OPEC Production 1990-2007
OPEC Production 1990-2005
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Russian production increases dominated non-OPEC production growth from 2000 forward and was responsible for most of the non-OPEC increase since the turn of the century.

Once again it appeared that OPEC overshot the mark. In 2001, a weakened US economy and increases in non-OPEC production put downward pressure on prices. In response OPEC once again entered into a series of reductions in member quotas cutting 3.5 million barrels by September 1, 2001. In the absence of the September 11, 2001 terrorist attack this would have been sufficient to moderate or even reverse the trend.

In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark West Texas Intermediate were down 35 percent by the middle of November. Under normal circumstances a drop in price of this magnitude would have resulted an another round of quota reductions but given the political climate OPEC delayed additional cuts until January 2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continued to rise and U.S. inventories reached a 20-year low later in the year.

By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA causing Venezuelan production to plummet. In the wake of the strike Venezuela was never able to restore capacity to its previous level and is still about 900,000 barrels per day below its peak capacity of 3.5 million barrels per day. OPEC increased quotas by 2.8 million barrels per day in January and February, 2003.

On March 19, 2003, just as some Venezuelan production was beginning to return, military action commenced in Iraq. Meanwhile, inventories remained low in the U.S. and other OECD countries. With an improving economy U.S. demand was increasing and Asian demand for crude oil was growing at a rapid pace.

The loss of production capacity in Iraq and Venezuela combined with increased OPEC production to meet growing international demand led to the erosion of excess oil production capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare capacity to produce oil was under a million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from most OPEC producers.

In a world that consumes over 80 million barrels per day of petroleum products that added a significant risk premium to crude oil price and is largely responsible for prices in excess of $40-$50 per barrel.

Other major factors contributing to the current level of prices include a weak dollar and the continued rapid growth in Asian economies and their petroleum consumption. The 2005 hurricanes and U.S. refinery problems associated with the conversion from MTBE as an additive to ethanol have contributed to higher prices.

World Events and Crude Oil Prices 2001-2007
World Events and Crude Oil Prices 2001-2005
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Russian Crude Oil Production
Russian Crude Oil Production
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Venezuelan Oil Production
Russian Crude Oil Production
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Excess Crude Oil Production Capacity
Excess Crude Oil Production Capacity
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One of the most important factors supporting a high price is the level of petroleum inventories in the U.S. and other consuming countries. Until spare capacity became an issue inventory levels provided an excellent tool for short-term price forecasts. Although not well publicized OPEC has for several years depended on a policy that amounts to world inventory management. Its primary reason for cutting back on production in November, 2006 and again in February, 2007 was concern about growing OECD inventories. Their focus is on total petroleum inventories including crude oil and petroleum products, which are a better indicator of prices that oil inventories alone.
World Events and Crude Oil Prices 2004-2007
Impact of Prices on Industry Segments

Drilling and Exploration

Boom and Bust

The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry's confidence in its own future.

At the end of the Arab Oil Embargo in 1974 rig count was below 1500. It rose steadily with regulated crude oil prices to over 2000 in 1979. From 1978 to the beginning of 1981 domestic crude oil prices exploded from a combination of the the rapid growth in world energy prices and deregulation of domestic prices. At that time high prices and forecasts of crude oil prices in excess of $100 per barrel fueled a drilling frenzy. By 1982 the number of rotary rigs running had more than doubled.

It is important to note that the peak in drilling occurred over a year after oil prices had entered a steep decline which continued until the 1986 price collapse. The one year lag between crude prices and rig count disappeared in the 1986 price collapse. For the next few years the economy of the towns and cities in the oil patch was characterized by bankruptcy, bank failures and high unemployment.
U.S. Rotary Rig Count 1974-2005
Crude Oil and Natural Gas Drilling
U.S. Rotary Rig Count 1974-1997 Crude Oil and Natural Gas Drilling
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After the Collapse

Several trends established were established in the wake of the collapse in crude prices. The lag of over a year for drilling to respond to crude prices is now reduced to a matter of months. (Note that the graph on the right is limited to rigs involved in exploration for crude oil as compared to the previous graph which also included rigs involved in gas exploration.) Like any other industry that goes through hard times the oil business emerged smarter, leaner and more conservative. Industry participants, bankers and investors were far more aware of the risk of price movements. Companies long familiar with accessing geologic, production and management risk added price risk to their decision criteria.

Technological improvements were incorporated:

* Increased use of 3-D seismic data reduced drilling risk.
* Directional and horizontal drilling led to improved production in many reservoirs.
* Financial instruments were used to limit exposure to price movements.
* Increased use of CO2 floods and improved recovery methods to improve production in existing wells.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent until a recent resurgence. U.S. Rotary Rig Count
Exploration for Oil
U.S. Rotary Rig Count Exploration for Oil
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U.S. Rotary Rig Count
Percent Exploring for Crude Oil
U.S. Rotary Rig Count Percent Exploring for Crude Oil
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Well Completions - A measure of success?

Rig count does not tell the whole story of oil and gas exploration and development. It is certainly a good measure of activity, but it is not a measure of success.

After a well is drilled it is either classified as an oil well, natural gas well or dry hole. The percentage of wells completed as oil or gas wells is frequently used as a measure of success. In fact, this percentage is often referred to as the success rate.

Immediately after World War II 65 percent of the wells drilled were completed as oil or gas wells. This percentage declined to about 57 percent by the end of the 1960s. It rose steadily during the 1970s to reach 70 percent at the end of that decade. This was followed by a plateau or modest decline through most of the 1980s.

Beginning in 1990 shortly after the harsh lessons of the price collapse completion rates increased dramatically to 77 percent. What was the reason for the dramatic increase? For that matter, what was the cause of the steady drop in the 1950s and 1960s or the reversal in the 1970s?

Since the percentage completion rates are much lower for the more risky exploratory wells, a shift in emphasis away from development would result in lower overall completion rates. This, however, was not the case. An examination of completion rates for development and exploratory wells shows the same general pattern. The decline was price related as we will explain later.

Some would argue that the periods of decline were a result of the fact that every year there is less oil to find. If the industry does not develop better technology and expertise every year, oil and gas completion rates should decline. However, this does will not explain the periods of increase.

The increases of the seventies were more related to price than technology. When a well is drilled, the fact that oil or gas is found does not mean that the well will be completed as a producing well. The determining factor is economics. If the well can produce enough oil or gas to cover the additional cost of completion and the ongoing production costs it will be put into production. Otherwise, its a dry hole even if crude oil or natural gas is found. The conclusion is that if real prices are increasing we can expect a higher percentage of successful wells. Conversely if prices are declining the opposite is true.

The increases of the 1990s, however, cannot be explained by higher prices. These increases are the result of improved technology and the shift to a higher percentage of natural gas drilling activity. The increased use of and improvements to 3-D seismic data and analysis combined with horizontal and and directional drilling improve prospects for successful completions. The fact that natural gas is easier to see in the seismic data adds to that success rate.

Most dramatic is the improvement in the the percentage exploratory wells completed. In the 1990s completion rates for exploratory wells have soared from 25 to 45 percent.
Oil and Gas Well Completion Rates
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Oil and Gas Well Completion Rates
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Oil and Gas Well Completion Rates
Development

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U.S. Oil and Gas Well Completion Rates
Exploration

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Workover Rigs - Maintenance

Workover rig count is a measure of the industry's investment in the maintenance of oil and gas wells. The Baker-Hughes workover rig count includes rigs involved in pulling production tubing, sucker rods and pumps from a well that is 1,500 feet or more in depth.

Workover rig count is another measure of the health of the oil and gas industry. A disproportionate percentage of workovers are associated with oil wells. Workover rigs are used to pull tubing for repair or replacement of rods, pumps and tubular goods which are subject to wear and corrosion.

A low level of workover activity is particularly worrisome because it is indicative of deferred maintenance. The situation is similar to the aging apartment building that no longer justifies major renovations and is milked as long as it produces a positive cash flow. When operators are in a weak cash position workovers are delayed as long as possible. Workover activity impacts manufacturers of tubing, rods and pumps. Service companies coating pipe and other tubular goods are heavily affected.

From: http://www.wtrg.com

Oil price and the $700B bailout by Steve Austin

2008-11-26T09:43:00.000-08:00

As the US house of representatives voted to increase the dollar supply by $700B, many are wondering what effect this will have on energy prices.
History is full of tragic examples where helicopter money triggered rampant inflation and widespread economic hardship. Let's take a look at some of these examples in the light of today:
# Crushed by World War One's debt, the Weimar republic kept printing money and giving it directly to consumers and businesses to buy votes and help them cope with ever increasing prices.
Weimar Inflation
Within a few years the Mark had devaluated so much that a postage stamp cost fifty billion Mark and everyone's life savings had been wiped out. Mark bills were worth less than the paper they were printed on. As the famous picture above illustrates, in the face of galloping energy prices, it had become cheaper to heat one's house by burning money than coal. Although one US dollar is still worth more than the paper it is printed on, as of 2008 one US penny contains 2 cents worth of metal.
# Although oil prices seem high today, they are kept artificially low because many oil-producing nations such as Saudi Arabia peg their currencies to the US dollar. When the dollar is devaluated, these countries currencies and national economies are threatened by inflation and this is an incentive for them to let their currencies float and appreciate. In 2006 Kuwait unpegged its currency from the US dollar and as other oil-producing nations follow suit, expect energy prices to rise.
# Currently oil is bought and sold on the world market in dollars, so everyone needs to first buy dollars in order to buy oil. We have reported on a trend for oil-producing countries to sell oil in Euros instead of Dollars. As more oil-producing nations fear the dollar is becoming "funny money" and demand payment in Euros, the world's need for Dollars will be greatly reduced. This is basic supply/demand economics.
# Simply put, the average American household is already too much in debt and this scares banks from len.
from: http://www.oil-price.net

The Medco group sounded out the possibility of the merger with Pertamina

2008-11-13T01:17:00.000-08:00

The Medco group sounded out the possibility of the merger with Pertamina of pushing the State Owned Company (BUMN) oil and the gas became the company of the world class. This matter was sent by the founder of the Medco Group, Arifin Panigoro in the public's lecture in the Institute of Teknologi Bandung (ITB), on Friday (31/10). "We must push Pertamina to the company of the world class like BUMN oil and gas from the other country in Asia," he said. According to him synergy of the two companies will push Pertamina entered among them 10 big BUMN oil and gas in Asia. At this time, said he, there was the trend in the world that the top player in the petroleum field was the company belonging to the country or the company that his share most were had by the country. BUMN oil and gas from various countries that became the world player including Petro China and CNOOC (China), SK Korea, Indian Oil (India), Nippon Oil (Japan), and PTT (Thailand). "Apparently the spirit" of the "Article 33 UUD 1945 was followed also by other countries so as BUMN him advanced," he said.
Therefore, Pertamina very opportune became the company of oil and gas of the world class that only did not become the top player in Indonesia but also carried out the exploration and the oil and gas service in various countries. Arifin said, with increasingly the decline in the oil reserve in Indonesia, the oil and gas company in the country still could not rely on this matter, but must carry out the expansion to the other country. "I saw the potential" for the "service perminyakan in the world was very big." That that was carried out by Medco in various countries in the Middle East, while bringing the Indonesian name, he said. He saw five countries with the biggest oil reserve in the world that is Saudi Arabia, Iran, Iraq, Kuwait, and the Union of the Arabian Emirate, that his reserve reached 716 billion barrel was the big potential. "Because of that must be looked for by the form" of the "co-operation mensinergikan the Pertamina strength and Medco so as to Indonesian Incorporated in the field perminyakan," he said. Acknowledged by Arifin, his side carried out the sounding out with the Management Pertamina at this time that he thought had the same point of view made Pertamina trap the world.

Sofyan Djalil asked for BUMN

2008-11-13T01:15:00.000-08:00

State Minister for State Enterprises Sofyan Djalil asked for BUMN that will carry out first share bargaining (IPO) to put all the problems in order. "I have sent the letter to all of BUMN that would five public that his activity is normalised first, to be related to stipends was completed," said Sofyan in the Economic Outlook seminar gap 2009, in Jakarta, on Thursday (13/11). Was related to the technical problem, said Sofyan, BUMN that will understand better slowly. However, they might not also do seemed to want to do IPO next year because the condition was unstable. "Seen by us the market previously, but that was important permission could," he said. It was further that Sofyan confirmed IPO BUMN will be postponed because his market was difficult. In the condition for the crisis keuanga global like at this time, the share prospective buyer it was estimated almost was not available. IPO did not need to be thought about, his market still is difficult very much, he said.

Descend Again, Oil 55 US Dollar

2008-11-13T01:12:00.000-08:00

The price of crude oil in the Asian market, on Thursday (13/11), descended to the range 55 US dollar per barrel together with the news of the negative that was accepted the related market the weakening of economics that could reduce the request of world energy. Kind crude oil light sweet the sending in December in the trade in electronics New York Mercantile Exchange in Singapore descended 81 penny to the position 55,35 US dollar barrel after could decline to 55,03 US dollar. "There was the fear of the request reduction in 2009," mentioned the energy analyst of Purvin & Gertz, Victor Shum, in Singapore. He said, the market sentiment at this time really bearish. "Apparently did not have the method of stopping this condition," he said.

Pertamina was ready Free 60 percent Natuna D Alpha

2008-11-13T00:48:00.000-08:00

PT Pertamina (the Share) said was ready to let 60 percent ownership go (participating interest/PI) in the Natuna D Alpha Bloc. Director Hulu Pertamina, Karen Agustiawan, in Jakarta, on Thursday (13/11) said, the portion 60 percent PI will be divided to several other companies. "Although only had 40 percent, Pertamina will continue to become the majority in Natuna D Alpha," he said. According to him, his side will invite 7-8 big companies dari beforehand 20 companies that stated his interest. "Invited by us they this Friday (14/11)," said Karen. Beforehand, the company that has stated his interest, in part ExxonMobil, Shell, Total, StatOil, and Petrochina in the upstream, was lower including Petronas, PTT Thailand, and PetroVietnam. The managing director Pertamina Ari Soemarno said, his side will choose the partner who gave the biggest profit. The Natuna D Alpha development project needed the cost was enough besar remembered the content CO2 that was high enough.

The market economy

2008-10-27T18:05:00.000-07:00

The market economy
In the market economy that the production activity that was done by each producer not to be used personally, but to be sold to the market. The economy of the pure market was one organisation kind of economics where not having the government interference to decide the level size of the production in various economic activities. The number and the thing kind that will be produced in the economy fully were determined by situations that were valid in the market, or according to the term that often was used in the analysis of economics, was determined by the mechanism of the market. In the economy of the market, factor-factor the production and the wealth were controlled by private enterprise that was had by the individual or private enterprise's bodies. In this system then really was open the freedom and the competition.

Subsystem economy

2008-10-25T18:27:00.000-07:00

Subsystem economy is an economic organization that every family product by itself for things are needed. They also have to have own capital tools, which used to get things they are needed. The production technology is very simple that cause low productivity, it cause that the production just infest for basic necessary in every family. In almost case, foodstuff is the most important which produced in subsystem economy. In subsystem economy the activity be set up by the habit.

Stocks dive on belief global recession is at hand

2008-10-24T07:54:00.000-07:00

By TIM PARADIS
NEW YORK – Wall Street joined world stock markets in a precipitous plunge Friday, with the Dow Jones industrials dropping more than 400 points in early trading and all the major indexes falling more than 4 percent. The growing belief that the world will suffer a punishing economic recession has investors furiously dumping stocks.

The massive decline was caused by increasingly grim news from overseas. In Japan, shares of Sony sank more than 14 percent after it slashed its earnings forecast for the fiscal year. In Germany, Daimler's stock dropped 11.4 percent in morning trading after it reported lower third-quarter earnings and abandoned its 2008 profit and revenue guidance.

Japan's Nikkei stock average fell a staggering 9.60 percent. In Europe, Germany's benchmark DAX index was down 8 percent, France's CAC40 dropped 8.1 percent while Britain's FTSE 100 sank 8.5 percent after the government said its gross domestic product fell 0.5 percent in the third quarter, putting the country on the brink of recession.

The dour outlook convinced investors that the world economy is headed for a long and severe downturn despite a raft of government rescue efforts aimed at pulling the financial system from the brink. It also indicated that the tremors caused by the global credit crisis may have only begun to be felt in their true scope and magnitude.

"There's a lot of panic out there today," said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. "People have been saying that we're in a recession. This is the realization."

Fearing more carnage in world equity markets, big hedge funds and other institutional investors have been pulling out their money en masse in a bid to reduce risk and raise cash — a process known as deleveraging that only intensifies the selling. Meanwhile, individual investors that have seen their holdings decimated in recent weeks have been yanking money out of mutual funds, adding to the downward pressure on markets.

"I think it would be natural to make an assumption that there are some funds in trouble and that we may see some funds shut down," Fullman said.

Investors appeared briefly comforted after a real estate trade group said sales of existing homes rose by the largest amount in more than five years in September. The National Association of Realtors said Friday that sales of existing homes rose by 5.5 percent in September compared to August, the biggest jump since a 5.6 percent increase in July 2003. Prices continued to fall, however. The median sales price has dropped to $191,600, down by 9 percent from a year ago.

But that upbeat data was overwhelmed by the market's increasing gloom and anxiety.

In midmorning trading, the Dow fell 430.81, or 4.96 percent, to 8,260.44 after falling 500 soon after the opening bell.

Broader stock indicators also tumbled. The S&P 500 index fell 43.09, or 4.75 percent, to 865.02, and the Nasdaq composite index fell 66.99, or 4.18 percent, to 1,536.92.

The Russell 2000 index of smaller companies fell 21.72, or 4.43 percent, to 468.20.

On the New York Stock Exchange, 177 issues advanced while 2,693 declined. Volume came to 271.7 million shares.

Investors had been bracing for a rocky start after futures contracts for the Dow and the S&P 500 fell so low they triggered "circuit breakers," which froze selling until the market's 9:30 a.m. EDT open. That slide raised the possibility that circuit breakers intended to prevent panic selling could be triggered during the regular session — something that hasn't happened since 1997.

The thresholds that would trigger a halt in trading are set at a decline of 10 percent, 20 percent and 30 percent in the Dow, based on where that index was at the beginning of the current quarter; that would mean declines of 1,100 points, 2,200 points and 3,300 points, respectively.

If the Dow Jones industrial average falls 1,100 points before 2 p.m., the market will shut down for an hour. If the threshold is breached between 2 p.m. and 2:30 p.m., the halt will last 30 minutes. Trading would stop again if the Dow falls by 2,200 points. If the Dow falls by 3,300 points at any time, trading would be halted for the day.

Still, the final hour of trading is a crucial period as well, with many inventors trying to square away their positions at the last minute. In the past few weeks, some of the market's worst volatility has come in the last 30 minutes of the session.

Gary Townsend, president and CEO of Hill-Townsend Capital Inc., said a halt in trading was a possibility.

"It's a way of smoothing market activity and making it orderly. No one would like to see it," he said.

Elsewhere in Asia on Friday, Hong Kong's Hang Seng index fell 8.3 percent to 12,618. Markets in India, Thailand, Indonesia and the Philippines were also down sharply as investors bailed from emerging markets to cut their exposure to risky assets and meet redemption needs at home.

The deepening gloom over growth expectations is having the added impact of putting small economies and currencies under extreme pressure. Investors are pulling money out of countries in Eastern Europe, Latin America and Asia on fears vulnerable countries will not only be hit hard by the financial crisis but may also default on debt.

In Europe, for example, Hungary, Ukraine and Belarus are all, like Iceland, in talks with the IMF to discuss possible loans.

Meanwhile, demand for U.S. Treasurys jumped as investors sought safe places to put their money. The three-month bill, regarded as the safest asset around, yielded 0.78 percent, down from 0.94 percent late Thursday.

There were signs that credit markets continue to thaw but are doing so more slowly amid growing economic fears. The rate on three-month loans in dollars — known as the London Interbank Offered Rate, or Libor — fell to 3.52 percent from 3.54 percent on Thursday.

The rates have fallen steadily for 10 days as confidence in the banking industry has been helped somewhat by government rescue measures. However, the improvements were smaller Friday on widening concerns about the health of the global economy.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.64 from 3.66 percent late Thursday.

The U.S. dollar, meanwhile, plunged below 93 yen, a 13-year low, as traders reacted to dismal U.S. jobs data that spurred speculation the Federal Reserve might cut interest rates. Meanwhile, gold prices plunged as low as $681 an ounce, the lowest trading level since Jan. 11, 2007.

Light, sweet crude fell $2.96 to $64.88 on the New York Mercantile Exchange. The sell-off, another sign that investors fear a severe recession, came despite OPEC's announcement that it will cut production by 1.5 million barrels a day in a bid to shore up sagging prices.

___

Associated Press writers Stevenson Jacobs, Sara Lepro and Stephen Bernard in New York, Carlos Piovano in London, Alex Kennedy in Singapore, Shino Yuasa in Tokyo and Kelly Olsen in Seoul and contributed to this report.
from: www.news.yahoo.com

McCain reminds Biden he's been tested in crisis

2008-10-21T16:03:00.000-07:00

By GLEN JOHNSON
HARRISBURG, Pa. – Republican John McCain told voters in this key electoral state Tuesday he was personally tested by the same kind of crisis that Democratic vice presidential nominee Joseph Biden warned Barack Obama will almost certainly face if elected president.

McCain recalled being ready to launch a bombing run during the October 1962 Cuban Missile Crisis, which Biden said over the weekend tested a new President John F. Kennedy and was the template for the kind of "generated crisis" the 47-year-old Obama would face within six months of taking office.

"I was on board the USS Enterprise," McCain, a former naval aviator, said in the capital city of Harrisburg. "I sat in the cockpit, on the flight deck of the USS Enterprise, off of Cuba. I had a target. My friends, you know how close we came to a nuclear war."

As the crowd of several thousand began to swell with cheers and applause, he added with dramatic effect: "America will not have a president who needs to be tested. I've been tested, my friends."

Biden told two fundraising audiences in Seattle over the weekend that he expected world figures to test Obama early if he wins the election in two weeks.

"He's gonna need you — not financially to help him — we're gonna need you to use your influence, your influence within the community, to stand with him," Biden said.

Biden predicted Obama would fare well because he's "got steel in his spine." In citing the Cuban Missile Crisis, though, he evoked a historic event in which McCain played a part.

"The Enterprise, sailing at full speed under nuclear power, was the first U.S. carrier to reach waters off Cuba," McCain wrote in his memoir, "Faith of My Fathers." "For about five days, the pilots on the Enterprise believed we were going into action. We had never been in combat before, and despite the global confrontation a strike on Cuba portended, we were prepared and anxious to fly our first mission."

He added: "Pilots and crewmen alike adopted a cool-headed, business-as-usual attitude toward the mission. Inwardly, of course, we were excited as hell, but we kept our composure and aped the standard image of a laconic, reserved, and fearless American at war."

McCain spent all day Tuesday in Democratic-leaning Pennsylvania, worth 21 Electoral College votes, before heading Wednesday into New Hampshire, a formerly reliable GOP state which Obama has made competitive this year. Though it has only four of the 270 electoral votes needed to win the presidency, New Hampshire could swing the election under some voting models which predict a very close Electoral College split.

The 72-year-old McCain regularly questions whether Obama — a first-term senator — has the experience to be president. He also questions whether the Illinois Democrat has the character to stand up to his own party and to stick with his core philosophical views.

In a region experiencing World Series fever, McCain underscored his argument by noting Obama had expressed support for both teams playing in the upcoming baseball championship.

Standing just miles north of Philadelphia, whose Phillies will represent the National League starting Wednesday against the American League champion Tampa Bay Rays, McCain noted Obama has identified himself with both teams while campaigning in their two politically important home states.

Obama said over the weekend in Philadelphia that while he was a Chicago fan, "Since the White Sox are out of it, I'll root for the Phillies now." On Monday in Tampa, Obama was introduced by a Rays pitcher and said, "I've said from the beginning that I am a unity candidate, bringing people together. So when you see a White Sox Fan showing love to the Rays — and the Rays showing some love back — you know we are on to something right here."

McCain told employees at TCI Millwork Inc. in Bensalem: "Now, I'm not dumb enough to get mixed up in a World Series between swing states. But I think I may have detected a little pattern with Sen. Obama. It's pretty simple really. When he's campaigning in Philadelphia, he roots for the Phillies, and when he's campaigning in Tampa Bay, he `shows love' to the Rays."

As boos echoed through a cavernous warehouse, he added:"It's kind of like the way he campaigns on tax cuts, but then votes for tax increases after he's elected."

McCain ended his day with a rally at Robert Morris University in Moon Township, just outside Pittsburgh. He tried to criticize Obama for saying in April that working class Pennsylvanians "cling" to guns and religion when their economic fears rise and Rep. John Murtha, D-Pa., for saying last week that some of his Western Pennsylvania constituents are racist. But McCain drew mostly silence as he fumbled the remarks several times before getting his point right.

"Sen. Obama's supporters have been saying some pretty nasty things about Western Pennsylvania lately. And you know I couldn't agree with them more. I couldn't disagree with you. I couldn't agree with you more than the fact that Western Pennsylvania is the most patriotic, most god-loving, most patriotic part of America. This is a great part of the country. My friends, I could not disagree with those critics more," McCain said.
from: http://news.yahoo.com

Kinds of economy problems

2008-10-19T15:49:00.000-07:00

Kinds of economy problems

Every economy action has main problem like, what things which have to product; how the technic and elaboration of production factors which have to use to produck that things; how the people income to be distributted between production factors and how the distribution can rise the people income up; do the production factors rise the high efficiency; why always there are inflation problems and how to get the solution for it; and how must the effort doing from time to time to get efficiency in using production factors.

How Will the Economic Crisis Change America?

2008-10-17T10:26:00.000-07:00

How Will the Economic Crisis Change America?

By R.M. Schneiderman

The new economic crisis is reshaping the American financial landscape. But what will the long-term cultural and political consequences be?

John Willman, a Financial Times editor, writes today that he expects the financial crisis to lead to anti-banker sentiment, “a surge of recruits from the best universities into professions such as teaching, social work and public administration,” and less support for public services, among other things.

Meanwhile, on tnr.com, Alan Wolfe, a professor of political science at Boston College, argues that we’re unlikely to see a replay of the aftermath of the Great Depression, during which “[a]n entire generation of Americans…voted Democratic, chose Social Security over economic liberty, believed in government, and admired political leadership.”

Instead, he thinks that “the partisan polarization that has characterized American politics over the past two decades will continue” and that American democracy is unlikely to fully recover from it.

I’m not sure what will ensue. But one thing is for sure: there will almost certainly be some ramifications to our economic turmoil. As Richard Cohen, a columnist for The Washington Post, wrote in a recent piece: “An economic crisis is like war. It’s impossible to contain. It affects everything it touches.”

Your thoughts?

From: http://economix.blogs.nytimes.com

comment

2008-10-17T10:11:00.000-07:00

As a 66 year old senior citizen I have seen many a financial downturn in America, but this most recent one is the most troubling. Regardless of how it started, the emphasis should be on how to fix it. I would like to share my thoughts on a few ways to do just that.

FIRST, the U.S. treasury should create a central credit clearing house that would approve all future personal and business loan applications submitted to them from banks and lending institutions. These would be loans for automobiles, homes, furniture, education, etc. for folks who need to borrow in order to buy these items. There would also be applications for business loans to increase inventories, hire new employees, expand business, etc.

When those applications are approved they would be returned to the banks and lending companies with a loan guarantee document that would backup the loans against defaults. This would promote confidence in the lending of money again because there would be no worry that the loan(s) would not be repaid. Business would again flourish; people would once again be buying cars, clothing, appliances. etc. The companies that sell these goods would make money again, hire more people who would be making money to spend buying other goods, paying their bills, paying taxes on their incomes and sales taxes too. Everyone would benefit from this process. Additionally, more government jobs would open up in the new government credit clearing house. It’s a win-win situation.

The SECOND suggestion would have to do with Real Estate Investment Trusts and other securities and funds that contain "packaged" mortgages. This practice should and must be stopped until these mortgages are first cleared through the aforementioned U.S. Credit Clearing House. If investment firms had this process in place before everything recently hit the fan with "subprime" mortgages, we would not be in the situation we are now in.

When I purchased my first house back in 1967 the bank from which I received and approved my first mortgage also serviced my mortgage along with all the other mortgages they sold. There were no REITs and no selling of mortgages as securities or for that matter, no "subprime" mortgages. If you didn’t qualify for a mortgage, you didn’t get one, PERIOD. Old-fashioned common sense business practices. Perhaps our current business transactions should take a lesson from their counterparts of a different generation. I hope that these suggestions are given serious consideration for I truly believe that if implemented correctly they will work.

From: http://www.economyincrisis.org

Wall Street Elites: Reverse Brain Drain

2008-10-17T10:00:00.000-07:00

Wall Street Elites: Reverse Brain Drain

Published 10/17/08 Craig Harrington - Print Article
E-mail - editor@economyincisis.org

It is no surprise that the U.S. Job market has dried up significantly in recent years. It is not even surprising to hear that Wall Street – the epicenter of America's elite – has stumbled mightily, hemorrhaging thousands of jobs as companies like AIG, Merrill Lynch, Bear Stearns and Lehman Brothers tried to stay afloat. But it may be surprising to consider where those new members of the workforce are now looking for stable income: overseas.

Foreign markets are suffering from the economic recession as well, but not to the degree we have seen in the United States. As a result, many qualified American workers are looking abroad for stability in these uncertain times, according to The Wall Street Journal.

American financial professionals seem to be most interested in coastal cities in China, the Persian Gulf and Europe. Developing economies in India, Russia and Brazil are also considered attractive.

It might be expected that a recent college graduate or MBA recipient would be willing to move overseas to make a name for themselves, but much of the interest is coming from professionals already working in the financial industry. The idea of looking into an “emerging market” for job security is symptomatic of just how bad the situation in New York and other financial hubs has gotten. An emerging market is typically unstable and prone to massive fluctuation. In markets like India and China the boom has been pronounced and steady. In Brazil and Russia, long-term viability has yet to be proven. The fact that each of these is considered equally enticing for would-be applicants shows how far down the rabbit hole the American finance industry has fallen.

Not only are layoffs increasing as financial firms implode, but hiring rates are also dropping. An investment firm isn't laying off a high-salary worker and replacing them with cheaper, younger labor. The firm is laying off a high-salary worker and simply taking a hit to its productivity, hoping that the payroll savings will offset the revenue losses.

Hiring at many U.S. firms is stagnant, the same cannot be said of firms in Dubai and Shanghai, where the talent pool continues to get bigger and better. Robert Olman, president of Alpha Search Advisory Partners, is an expert in the hiring processes of hedge funds and investment banks. He believes that the current malaise will continue well into 2009.

The United States cannot afford to lose talented professionals – and in many cases, their families – in yet another key area. The U.S. has already been gutted by NAFTA and the WTO which make outsourcing to cheap labor markets in Mexico, India, China and elsewhere almost unavoidable. The only bastion left in the U.S. economy was our finance and banking sector, but it has come under fire from upstart foreign competition and is now being poached of some of its best talent. The government hopes to convince you to spend this country out of our recession – that's what the Economic Stimulus Act was intended for – but we simply cannot do that without income. Without viable job options there can be no income, and thus no recovery.

from: http://www.economyincrisis.org

A light at the end of the tunnel?

2008-10-14T07:48:00.000-07:00

Concerted action is taken around the world to rescue the financial system

THE dithering has ended. After a week in which the financial system almost ground to a halt, governments of the industrialised world seem at last to have found the right tools to get credit markets moving again. At the weekend and early on Monday October 13th officials in Europe, America and Asia announced unprecedented and comprehensive plans to prop up failing banks, guarantee their loans and flood the world with cash by providing unlimited dollar funds through central banks. At first blush—and in contrast to previous failures after half-hearted efforts—the new plans seem to be working. Stockmarkets rose around the world on Monday, although the real sign that the situation is improving will come in the credit markets this week.

All the actions are aimed at dealing with the three related problems that have blocked credit markets and the banking system. These are that banks have been unable to raise enough money in the frozen short-term money markets; that banks are unable to take out loans for three-to-five years to make up the shortfall between deposits and lending, because markets for longer-term borrowing are also shut; and, last, that they are struggling to win the trust of lenders because they do not have enough capital as a cushion against losses.

To provide liquidity the Federal Reserve, acting with the European Central Bank (ECB), the Bank of England and the Swiss central bank, will provide banks with as many dollars as banks demand in a bid to reduce borrowing costs, which soared to record levels last week. The move follows a similar promise by the ECB to flood the market with euros. The provision of unlimited dollars to the Swiss central bank is especially important, as the country has a banking sector with foreign-currency liabilities that tower over its domestic economy.

Steps are also being taken to address problems of bank capital and longer-term borrowing. In Europe, the 15 countries that share the euro have now promised to guarantee new bank debt and to inject capital into ailing banks. The European plan draws on the main elements of a British programme, announced last week, that that will immediately see some £37 billion ($63 billion) injected into three of the country’s biggest banks. This will rebuild their capital cushions, or so-called Tier-1 capital ratios, to above 9%. Almost all of the extra capital is likely come from the government. Additional money will also be needed by other banks such as Barclays, although they are hoping to raise it themselves without help from the government.

The bank most in need of extra capital is Royal Bank of Scotland, which rashly bought ABN Amro at the top of the market last year. It needs some £20 billion and is unlikely to raise much of this in the market. The government, if it provides all that is needed, may end up owning over half the bank. HBOS and Lloyds TSB, two banks that are about to merge, need another £17 billion between them.

The British government is demanding a pound of flesh in return. Banks that take capital from the government have to agree to limit executive pay. They also face a potential government veto on the payment of cash dividends to shareholders and must promise to help struggling homeowners stay in their homes. More worrying, however, are signs that the government may also interfere in lending decisions by banks in the programme. The banks have to promise to make as much available in loans to homeowners and small businesses for the next three years as they did in 2007 at the height of the credit bubble.

Details are yet to emerge about how countries in the eurozone intend to guarantee bank loans or to inject capital into their banks, although early indications suggest that the scale of their action will be similar to that taken in Britain. The German bail-out, for instance, may be worth about €400 billion ($540 billion).

Despite all this activity, two weaknesses remain. The first is that the ECB is unable to buy commercial paper, the loans that companies issue, which may limit its ability to bypass frozen credit markets to get money directly to struggling companies, as it has been able to do with banks.

A second disappointment was the G7 meeting in Washington, DC. Its officials went into their gathering knowing that ad hoc responses of the prior week had hurt confidence and that they needed to deliver a co-ordinated message detailing what concrete measures would be taken. They promised to “support systemically important financial institutions and prevent their failure”, apparently indicating that no large banks would be allowed fail.

But to many market participants the statement lacked the necessary specificity to restore confidence and left open the question of whether smaller countries that are not part of the G7 or European Union would be included. Nor was it clear how countries that break ranks would be handled. Some governments still face a tough political sales job at home where voters are as upset as Americans about being asked to bail out wealthy bankers.

From: http://www.economist.com

Beyond crisis management

2008-10-14T07:44:00.000-07:00

Bold ideas for solving America’s financial mess

EVERY financial crisis involves a tug of war between the tacticians and the strategists. The tacticians dash from skirmish to skirmish trying to control a crisis, deciding in each case whether taxpayers should bail out a distressed bank, firm or country. The strategists call for a more comprehensive approach to resolving the mess—often involving new government bodies to recapitalise banks or take over troubled assets.

The present crisis in America conforms to this pattern. So far, the government’s response has been ad hoc and focused on crisis containment. The tacticians at the Federal Reserve and the Treasury have put plenty of taxpayers’ money on the line—whether through the huge expansion in the central bank’s liquidity facilities, the loan to Bear Stearns in March, or the government takeover of Fannie Mae and Freddie Mac, the mortgage giants, and, now, of AIG, a huge insurer. But they have focused on staving off catastrophe one bail-out at a time.

Now the strategists are pushing back. From across the political spectrum people are arguing that it is time for America to shift to a more systematic approach. In the past week Barney Frank, the leading Democrat on financial matters in the House of Representatives, Paul Volcker, a former chairman of the Fed, as well as writers of the editorial pages of the Wall Street Journal, have suggested that Congress may need to create a new agency to deal with the mess. All have pointed to the Resolution Trust Corporation (RTC), a government body set up in 1989 to deal with the fallout of the savings and loan (S&L) bankruptcies.

Americans focus on the RTC because it is the country’s most recent example of a comprehensive government plan to deal with a financial crisis. Between 1980 and 1994 almost 1,300 specialised mortgage lenders, known as thrifts, failed. Their combined assets amounted to more than $600 billion. By 1986 these failures had bankrupted the Federal Savings and Loan Insurance Corporation, the federal insurer for the thrift industry. At first the government tried to muddle through by trying to recapitalise the insurer. But the S&L mess escalated. In 1989 Congress created the RTC, an entirely new organisation, to dispose of the failed thrifts’ assets in a way that minimised downward pressure on financial and property markets.

The RTC is not a perfect parallel for today’s needs. It was set up—years after the S&L crisis began—to deal with the aftermath of widespread bank failures. Those who advocate comprehensive action today want to minimise the mess, not just clean up afterwards. Their proposals vary, but many who cite the RTC envisage an institution that buys troubled mortgage-backed securities (not only from failing institutions), putting a floor under their price. Some propose that the putative new agency should manage and write down the underlying mortgages, in effect combining the functions of the RTC with a Depression-era institution, called the Home Owners’ Loan Corporation, which bought and restructured defaulting mortgages. Details are in short supply, but intellectual momentum is building for a broader solution.

Not a moment too soon, suggest the results of a new study by Luc Laeven and Fabian Valencia, two IMF economists.* They examined all systemically important banking crises between 1970 and 2007, creating a database on how much financial crises cost and how they are resolved. The evidence is clear. Tactical crisis containment is expensive and frequently inadequate. In most financial meltdowns a comprehensive solution was required, and the sooner it was provided the better.

The study looks at 42 crises in all, spanning 37 countries. Like America today, most governments began with ad hoc crisis management. In 74% of cases, for instance, governments pumped emergency loans into failing banks or guaranteed their liabilities. An equally common tactic has been regulatory forbearance. Governments allowed banks to hold less capital than was normally required or softened their rules in other ways. These tactical responses, however, often did not work and ended up increasing the overall bill from a crisis. “All too often”, the economists conclude, “central banks privilege stability over cost in the heat of the containment phase.”

No such thing as a free crunch

Sooner or later most governments realise the need for a comprehensive solution to the crisis, involving public funds. This can take different forms, from bank recapitalisation to forgiveness of all the underlying debts. In three-quarters of the cases, governments shored up bank capital by, for instance, injecting preferred stock. About 60% of the time, governments set up institutions to manage distressed assets.

The evidence from these attempts is sobering for proponents of an RTC II. Some institutions worked well. In the early 1990s, for instance, Sweden successfully set up an asset-management company to take over and sell the bad loans from its biggest banks. But, in general, the paper argues, such government-owned asset-management firms are ineffective—often because politicians try to push them around.

On average, the study finds that government attempts to stanch systemic banking crises over the past three decades have cost 16% of GDP. That average hides enormous variation, much of which depends on how crises were handled. America’s mess, even if it has already led to the demise of famous Wall Street firms, is far from finished. That is why the international lessons are worth taking seriously. Resolving a financial mess is cheaper, quicker and less painful if governments take a rounded approach. For the moment, the bail-out tacticians are in overdrive. But the strategists’ moment is approaching.

from: http://www.economist.com

G7 Economic Meeting

2008-10-14T07:37:00.000-07:00

Finance ministers of G7 nations are meeting with President Bush this weekend in Washington, D.C. They're trying to come up with a strong and coordinated response to the economic crisis. What difference can and should the meeting make? We check in with Chris Farrell, chief economics correspondent for American Public Media.
october 11, 2008.

from: http://weekendamerica.publicradio.org

G-7: 'Urgent action' needed

2008-10-11T00:37:00.000-07:00

NEW YORK (CNNMoney.com) -- Finance ministers from the world's top economies pledged Friday to work together to stabilize global financial markets, but did not provide concrete plans to address the credit chaos sweeping the world.

"The G-7 agrees today that the current situation calls for urgent and exceptional action," the leaders, who are meeting in Washington D.C., said in a statement. "We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth."

The plan of action includes:

* Take decisive action and use all available tools to prevent "important" institutions from failing.
* Take steps to unfreeze credit and money markets and ensure that banks and other institutions have broad access to liquidity and funding.
* Ensure that banks and other major financial intermediaries can raise enough capital from public and private sources to re-establish confidence and kick start lending to individuals and businesses.
* Ensure that each country's deposit insurance programs are strong and consistent to assure depositors their money is safe.
* Take action to restart the secondary markets for mortgages and other securitized assets.

U.S. Treasury Secretary Henry Paulson said the group "finalized an aggressive action plan to address the turmoil in global markets and the stresses on our financial institutions."

The statement, however, didn't lay out any specific actions the G-7 will take, and that's what financial institutions and investors are waiting to see, experts said. The finance ministers must announce concrete steps by the end of the weekend if they want to soothe the roiling markets.

"The time for such statements is long past," said Eswar Prasad, economics professor at Cornell University and senior fellow at the Brookings Institution. "We need to see real action. But the markets are getting a little concerned that there aren't many arrows left in central banks' quivers at this stage."

The Dow Jones industrial average fell over 1,874 points, or 18%, in its worst weekly decline ever on both a point and percentage basis. Wall Street lost roughly $2.4 trillion in market value during the week, according to losses in the Dow Jones Wilshire 5000, the broadest measure of the market.

Markets worldwide fared no better, with every major exchange losing ground Friday.

But even decisive action by the G-7 ministers won't calm the markets overnight, Paulson said.

"We'll have some volatility for a while," he said. "This is about confidence...we need to restore confidence."
What needs to be done

A government guarantee that the banks won't fail is just about the only thing that might restore trust in the financial system, experts said. This can be done in a variety of ways, including injecting capital into the institutions or guaranteeing interbank lending, an idea floated by British officials earlier this week.

"What they should be saying is that the G-7 governments will put the full faith and credit of their nations behind the financial systems in order to remove the fear of financial institutions loaning to one another," said Lakshman Achuthan, managing director, Economic Cycle Research Institute.

The ministers need to announce a plan before the Asian markets reopen Monday lest more damage occurs, said Achuthan. Already, the delay has turned a mild recession in the United States into a more severe one.
Global governments already taking steps

Around the world, central banks this week have tried to contain the deepening global financial crisis. On Wednesday, a group of banks including the Federal Reserve coordinated interest rate cuts, hoping to lower banks' cost of borrowing and soothe nervous investors.

The Fed lowered its benchmark interest rate by a half-point to 1.5%. The European Central Bank, which had kept rates unchanged as the Fed engaged in a string of rate cuts over the last year, cut its rate by a half-point to 3.75% - its first cut in five years. The Bank of England also cut its rate by a half-point to 4.5%. The Swiss, Canadian and Swedish central banks also made cuts.

Some countries have also had to rescue their troubled institutions. The Dutch and Belgian governments took over Fortis, before selling pieces of it to BNP Paribas. The British are nationalizing mortgage lender Bradford & Bingley.

And some nations, including Ireland, France and Germany, have said that all bank deposits will be insured by their governments for the time being.

Meanwhile, the United States and United Kingdom are developing plans to inject capital into banks, which would entail acquiring stakes in the institutions.

"As we develop plans to purchase equity ... we are working to develop a standardized program that is open to a broad array of financial institutions," Paulson said.
Coordinated effort needed

Some experts say that a coordinated effort is needed to restore confidence and stability to markets.

"I hope the G-7 meeting will point toward coordinated actions to show that authorities are getting ahead of the curve," said Robert Zoellick, president of the World Bank, on Thursday. "Countries will take different actions, customized to their circumstances, yet the actions need to target the same basic problems."

That problem is a lack of confidence between financial institutions worried about their ability to safely trade and loan money to one another. These jitters prompted a near cut-off in credit needed to fund the day-to-day operations of businesses around the world.

"The G-7 countries can work through this crisis by dealing with bad assets, recapitalizing banks, and providing much needed liquidity," said Zoellick. "They need to work together to fix the financial, regulatory, and supervisory system that failed."

Each country, of course, will have to take steps to address its particular problems.

"I think that some people in the press and some in the markets are naive if they think that different countries with different financial systems - and different political systems, different laws - are going to come up with precisely the same policy to deal with the issues," Paulson said.
from: http://money.cnn.com

Obama's Challenge

2008-10-11T00:31:00.000-07:00

Obama's Challenge

America's Economic Crisis and the Power of a Transformative Presidency

by Robert Kuttner

"A manifesto, forceful but fair, by a leading political economist who lays out a bold but solid program if Obama is elected. As current as the morning's newspaper, this book should be read by all activists--especially Barack Obama."
—James MacGregor Burns, author of Leadership

The Challenge:
To Be a Transformative President

Barack Obama approaches the Presidency at a critical moment in American history, facing simultaneous crises of war, the environment, health care, but most especially in the economy. If he is able to rise to the moment, he could join the ranks of a small handful of previous presidents who have been truly transformative, succeeding in fundamentally changing our economy, society, and democracy for the better.

But this will require imaginative and decisive action as Obama takes office, action bolder than he has promised during his campaign, and will be all the more difficult given the undertow of conventional wisdom in Washington and on Wall Street that resists fundamental change. Decades of regressive politics and political gridlock have left America in its most precarious situation since the onset of the Great Depression. The collapse of the housing bubble continues, as does the financial meltdown it triggered; a revival of 1970s style stagflation threatens; incomes continue to lag behind inflation; our household and international debts pile higher; disastrous climate change looms; energy and food prices continue their escalation; and the ranks of un- and under-insured Americans grow as the health insurance system unravels.

Facing their own great challenges, Abraham Lincoln, Franklin Roosevelt, and Lyndon Johnson rallied the American people to overcome deadlocked politics in order to achieve progressive transformations—abolishing slavery, transcending economic depression, and redeeming the promise of civil rights. In his own way, Ronald Reagan oversaw a grand shift in public attitudes and government direction. Each president used exceptional leadership to change the national mood, and then the national policy.

By appealing to what was most noble in the American spirit, these presidents energized movements for change, and in turn put pressure on themselves and on the Congress to move far beyond what was deemed conceivable. They generated accelerating momentum for far-reaching reforms that proved politically irresistible.

Solutions to our multiple challenges do exist, but they won’t be found in overly cautious or expedient quick fixes. With his exceptional skill at appealing to our better angels, Barack Obama could be the right leader at the right time to re-awaken America to the renewed promise of shared prosperity coupled with responsibility towards future generations and the international community with whom we share the Earth. Invoking America’s greatest leaders, Robert Kuttner explains how Obama must be a transformative president—or a failed one.

Robert Kuttner will be blogging regularly about the election and the economy at http://www.obamaschallenge.org.

About the Author

Robert Kuttner

Robert Kuttner is cofounder and coeditor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. He was a longtime columnist for BusinessWeek, and continues to write columns in the Boston Globe.

His previous and widely praised books include The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity; Everything for Sale: The Virtues and Limits of Markets (about which Robert Heilbroner wrote, "I have never seen the market system better described, more intelligently appreciated, or more trenchantly criticized than in Everything for Sale"); The End of Laissez-Faire: National Purpose

from: http://www.chelseagreen.com

Satyam banned from offshoring work with World Bank: Report

2008-10-11T00:29:00.000-07:00

NEW YORK: Software major Satyam Computer Services has reportedly been banned from doing any off-shore work with the World Bank after forensic experts and bank investigators discovered that spy software was covertly installed on workstations inside the bank's Washington headquarters, allegedly by one or more contractors from Satyam Computer Services.

According to a FOX News report, apart from Satyam, two IP intrusions have been reported from China, and there have been six intrusions in all.

Investigators say that the software, which operates through a method known as keystroke logging, enabled every character typed on a keyboard to be transmitted to a still-unknown location via the Internet.

Upon its discovery, bank officials shut off the data link between Washington and Chennai, where Satyam has long operated the bank's sole offshore computer center responsible for all of the bank's financial and human resources information.

"I want them off the premises now," World Bank President Robert Zoellick reportedly told his deputies. But at the urging of CIO De Poerck, Satyam employees remained at the bank as recently as October 1 while it engaged in "knowledge transfer" with two new India-based contractors.
from: http://economictimes.indiatimes.com

Financial crisis hits poor nations as well

2008-10-11T00:19:00.000-07:00

WASHINGTON: As the world's richest nations debate how to bring a catastrophic financial crisis under control, international groups are warning that its reach now goes far beyond the developed world.

Poor countries in Africa, Asia and Latin America, which are already dealing with a surge in food and energy prices, are now finding it harder to sell goods abroad and encourage investment in their own economies.

Rich nations are falling well behind on their aid pledges as they face problems at home. As many as 30 countries are dealing with severe balance of payment problems, in other words, a shortfall of cash, according to the World Bank.

That lack of investment could lead to a rash of bank and business failures in poor nations, similar to the chaos that has played out since September in the United States and Europe.

As a result, the World Bank has "tentatively" cut its forecast for 2009 growth in developing countries to about 4 percent, down from an April prediction of 6.6 percent, World Bank President Robert Zoellick told reporters Thursday.

While that compares favourably with the likely recession many advanced economies will face next year, Zoellick said the slowdown in poorer nations was "so sharp as to feel like a recession".

The International Monetary Fund said it was ready to make emergency loans to developing countries to meet the cash shortfall from the broadening financial crisis.

from: http://economictimes.indiatimes.com

global finance

GMAC receives $5B in bailout funds

Fed grants GMAC ability to seek bailout funds

Wall Street expects jobless claims to rise

World markets mostly down as dismal data weighed

Retail sales post big drop in November

World markets mostly down ahead of US jobs report

Oil at 4-year lows below $44 on dire economic news

US, China promise $20 billion to finance trade

Oil Price History and Analysis (Updating)

Oil price and the $700B bailout by Steve Austin

The Medco group sounded out the possibility of the merger with Pertamina

Sofyan Djalil asked for BUMN

Descend Again, Oil 55 US Dollar

Pertamina was ready Free 60 percent Natuna D Alpha

The market economy

Subsystem economy

Stocks dive on belief global recession is at hand

McCain reminds Biden he's been tested in crisis

Kinds of economy problems

How Will the Economic Crisis Change America?

How Will the Economic Crisis Change America?

comment

Wall Street Elites: Reverse Brain Drain

Wall Street Elites: Reverse Brain Drain

A light at the end of the tunnel?

Concerted action is taken around the world to rescue the financial system

Beyond crisis management

Bold ideas for solving America’s financial mess

No such thing as a free crunch

G7 Economic Meeting

G-7: 'Urgent action' needed

Obama's Challenge

Obama's Challenge

America's Economic Crisis and the Power of a Transformative Presidency

by Robert Kuttner

The Challenge:To Be a Transformative President

About the Author

Robert Kuttner

Satyam banned from offshoring work with World Bank: Report

Financial crisis hits poor nations as well

The Challenge:
To Be a Transformative President