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Britain 'Heading For Recession'

The British economy is heading into recession, according to a member of the Bank of England committee which sets interest rates.

David Blanchflower, who sits on the Monetary Policy Committee, also warned that recent job losses could be "the tip of the iceberg".

In an interview in the Guardian newspaper, he said: "I think we are going into recession and we are probably in one right now."

He added: "We will probably have three or four quarters of negative growth, but the risks are to the downside.

"It's not too late to stop it, but we have to act right now. Monetary policy has been far too tight for too long. We can't just sit and do nothing as we have done for too long."

Mr Blanchflower, who lives in the US, was the sole committee member calling for a cut in interest rates in May and June.

But the Bank of England has held interest rates at 5% for the last three months after cutting them in April.

Minutes of this month's meeting will be published on Wednesday, but the academic economist seems certain to have repeated his call for lower rates.

Sky's business correspondent Joel Hills said: "If his forecasts are true, it would mean this recession, if it is one, would turn out to be worst than the five full-blown post-war recessions that we have seen, the last being in 1991.

Hills added: "This is all pretty gloomy stuff. However, bear in mind that he has been a lone voice on the panel for some time.

"He has been at odds with the prevailing consensus of the committee, which has been that the big problem isn't the slowing economy, it's rising prices."

Mr Blanchflower also said that house prices in Britain could fall by as much as a third and that the British economy could be facing a worse ride than even the US.

Independent.co.uk

Jeremy Warner's Outlook: With the credit crunch a year old, is it time to revisit the Glass-Steagall Act?

Wednesday, 6 August 2008

As we approach the first anniversary of the credit crunch, is it the end of the world as we know it for investment banking, the industry now universally blamed for the present mess?

Most investment bankers would still scoff at the idea. Yet even the most ebullient are being forced reluctantly to admit that the consequences of the present implosion are likely to be rather more momentous than previous cyclical downturns in which bankers have similarly been painted as villains. After past crises, they have nearly always come bouncing back after a few years of lying low. This time, it looks much more serious.

Nor is it just the threat of regulatory backlash which stands to clip their wings. Bear Stearns is already history, and at least three of Wall Street's bulge-bracket firms – Lehman Brothers, Merrill Lynch and UBS – will struggle to survive in their present form.

All three have been so neutered by the events of the past year that they can now scarcely be regarded as "bulge bracket" at all. In any case, it seems unlikely they will remain as the integrated investment banking operations they were. Lehmans may yet disappear entirely, UBS might shrink back to its core private banking franchise and Merrill Lynch too will surely return to its roots in traditional retail broking and asset management. Big challenges, both market-based and regulatory, lie ahead for those that try to maintain the game.

According to talk on Wall Street, so desperate have the investment bankers become for reasonably priced funding that even the mighty Goldman Sachs is now in the market for a sizeable retail bank that might give it access to cheap money. As things stand, some investment banks are paying up to 250 basis points over bank rate for funds, an unsustainably high rate, which undermines much of what they do.

At the same time, investment banks are facing the parallel threat of regulatory backlash. The quid pro quo for being allowed to borrow from the Federal Reserve's discount window is that investment bankers will have to accept a much higher degree of oversight. Again, this is going to affect much of what they do. Yet even if investment banks attempt to become "universal banks" – like JP Morgan Chase, Citigroup, HSBC or Barclays – it may not provide any relief.

Those political voices on both sides of the Atlantic clamouring for a return to something like the Glass-Steagall Act of the 1930s, which among other things forced a rigid separation of investment and commercial banking, grow ever louder. It may be a bit far fetched to cite repeal of Glass-Steagall by the Clinton administration in the late 1990s as the main cause of the present crisis, but this act of deregulation certainly can't have helped. When banking lender and fee earner become one and the same, it sets in train a fundamental conflict of interest, which is almost bound to end badly.

After Glass-Steagall went, investment bankers did more conventional lending and commercial bankers did more fee earning. The "originate and distribute" model for banking took off like wild fire. Commercial banks became more like intermediaries than traditional lending institutions. They would take a fee on originating the loan, then another on securitising, syndicating or otherwise distributing it. The process was meant to leave the bank free of the risk of default. Certainly it encouraged the collapse in lending standards that lies at the heart of the crisis.

If "originate and distribute" was meant to lay off the risk with others, how come so much of it ended back on the originators' books? The answer lies only in part in the practice of "warehousing", where banks would take the loans or securities on to their own books ahead of selling them out into the market. When the music stopped, they were left with the unsold risk.

In some cases, senior, apparently lower risk, tranches of the debt would be held back to expand the bank's own balance sheet. Yet much worse was the absence of centralised risk controls. While one part of the bank was selling out the risk of sub-prime mortgages, leveraged loans and so on, the proprietary trading desk on another floor or a different country was all too likely to be buying it back again in the hope of making a fast buck.

Treasury functions became seen as profit centres, rather than risk-control departments. Bizarrely, HBOS and others bought US mortgage-backed securities as part of their liquidity pools, a bank's key source of cash for depositor withdrawals, believing these triple-A rated bonds to be as safe as gilts, but higher yielding. The latter characteristic should have told them all they needed to know, but the warnings were ignored.

It is small wonder that now all these practices, and others more complex and ingenious still, have become exposed to the cold light of day, that everyone has lost faith in the banking system. To regain that trust, investment, retail and commercial banks need entirely to reboot.

UK economic growth ground to a halt between April and June, according to the latest official data.

The Office for National Statistics said economic growth was unchanged in the second quarter from the first, revising an earlier estimate of 0.2% growth.

It ends a run of 63 consecutive quarters of growth in the UK and is the weakest data since 1992.

The figures are likely to raise expectations of a cut in interest rates to prevent a protracted slowdown.

The UK is facing its worst economic crisis in 60 years, Chancellor Alistair Darling has admitted.

He told the Guardian newspaper that the economic downturn would be more "profound and long-lasting" than most people had feared.

Using strong language, Mr Darling acknowledged voters were angry with Labour's handling of the economy.

Shadow Chancellor George Osborne said Mr Darling had "let the cat out of the bag" about the state of the economy.

LONDON (Reuters) - The chief executive of home lender, HBOS, warned on Saturday that the credit crunch was likely to last until early 2010.

The current financial crisis was precipitated by the collapse of the U.S. sub-prime mortgage market and Hornby predicted any revival would be intimately linked with a recovery in the U.S. housing market.

"It's going to take 18 months before U.S. house prices have started to rise again -- which is what's required for banks to have the confidence to start lending again. It will take a long time to play out.

"What will eventually bring wholesale funding markets back is when U.S. house prices start to rise and then people will believe the underlying value of asset backed securities is likely to stop falling and the system will start to untrap."

Analysts expect UK house prices to tumble at least 20 percent from their peak as the decade-long boom shudders to a halt and Hornby was equally pessimistic in his outlook.

"Over the next 18 months we'll see considerable slowdown in GDP, and we're also looking at a period of strong house price deflation -- stronger than the early 1990s.

"But I don't believe unemployment levels will be as high as they were as the early 1990s and that is going to be a very important underpin in terms of people's ability to pay their mortgages."

Hornby also warned banks' shareholders must be prepared to accept lower returns as the industry adopts a more conservative strategy.

"Banks' models will be altered for the long term and right across the international spectrum they'll fund more of their growth from customer deposits and rely less on international wholesale funding markets as the source of long-term growth.

"That means we will plan for slightly lower growth than you have seen in previous credit cycles."

In July HBOS posted an underlying pretax profit, including the negative adjustments, of 1.45 billion pounds in the first six months of the year, down from 2.96 billion in the same period of 2007.

(Reporting by John Joseph; Editing by Clarence Fernandez)

US President George Bush says mortgage giants Freddie Mac and Fannie Mae have been taken over because they posed "an unacceptable risk" to the economy.

The two companies account for nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.

The most recent figures show about 9% of US homeowners were behind on their payments or faced repossession.

The federal takeover is one of the largest bail-outs in US history.

US bail-out sends UK shares leaping

The dramatic nationalisation of mortgage giants Fannie Mae and Freddie Mac by the US Government today sent London's leading shares soaring almost 4 per cent.

Lehman racing to find buyer for beleaguered firm

With Lehman Brothers' shares signaling another steep drop on Friday, top executives are racing to put a sale of the beleaguered investment bank in place before it loses further market value and confidence.

Confidence has waned that Lehman Brothers Holdings Inc. will emerge from the financial crisis as an independent franchise, and the No. 4 U.S. investment bank is scouring Wall Street for a financial lifeline. Executives worked feverishly in the past 24 hours to find someone willing to buy all or part of the company, bankers and industry executives close to the situation said.

Lehman's losses soared to almost $7 billion in the last two quarters alone, primarily because of wrong-way bets on mortgage securities and other risky investments.

It's not alone. Global banks have lost more than $300 billion since the subprime mortgage crisis spread to the credit markets one year ago. And the International Monetary Fund has suggested total losses globally could hit $1 trillion.

Meltdown in US finance system pummels stock market

Gordon Brown has pledged to "clean up" the financial system following the rescue of Britain's biggest mortgage lender HBOS by Lloyds TSB.

The prime minister said he had taken "quick action" to "maintain the stability of the financial system".

But he said he also had proposals to end "irresponsible behaviour" in the money markets to prevent similar problems happening in the future.

Mr Brown was speaking before the FSA announced a clampdown on short-selling.

Irish bank guarantee 'anti-competitive'

The Irish government's blanket guarantee of deposits at six major banks in the face of the global financial crisis is anti-competitive, the body representing banks in Britain says.

Crisis spreads as bailout focus on U.S. House

NEW YORK/WASHINGTON (Reuters) - Shockwaves from the global credit crisis spread on Thursday rattling industries around the world and raising the stakes for the U.S. Congress to finish up a $700 billion (397 billion pound) bank bailout.

U.S. economic data amplified warnings that a recession is near, and European Central Bank President Jean-Claude Trichet said Europe's economy was weakening, opening the door for the first interest rate cut there in five years.

Business leaders from hoteliers to automakers warned that a crisis that began with risky lending to the overheated U.S. housing market was on the cusp of a dangerous new phase.

"There are thousands, maybe tens of thousands of jobs at stake in our company alone, and we are typical," Marriott International Inc Chief Financial Officer Arne Sorenson said in urging Congress to pass the bailout.

Backers of the rescue plan, including U.S. Treasury Secretary Henry Paulson, called on members of the House of Representatives who opposed a similar measure on Monday to change their vote. The Senate passed the bill Wednesday night and the House is expected to vote again on Friday.

Investors around the globe scurried for safety, betting that frozen credit markets would slam the brakes on global economic growth.

Latin American currencies tumbled and stocks sank, led by a nearly 8 percent drop in Brazil's benchmark stock index, as concern grew that the U.S. rescue package would be too little and too late to head off a deeper downturn.

U.S. stocks dropped more than 3 percent, while U.S. and euro-zone government bonds drove higher in a renewed safe-haven rally.

Oil prices fell more than $4 a barrel on the expected slowdown, and the dollar rose to a year high against the euro on the speculation of a rate cut by the ECB.

U.S. AIMS TO PUT HOUSE IN ORDER

House Speaker Nancy Pelosi said congressional leaders were working hard to secure votes for the bailout bill and would not risk bringing the measure to the floor without being confident it would pass, avoiding a repeat of the defeat Monday that stunned investors around the world.

U.S. data underscored the growing threat to the world's largest economy.

U.S. factory orders fell 4 percent in August, the sharpest contraction in two years, which came on top of data on Wednesday that showed manufacturing activity in September at its weakest since the 2001 recession.

U.S. jobless claims rose last week to their highest level in seven years, ahead of September payrolls data due out on Friday.

In a sign of how the credit crisis has hit even the bluest of the blue chips, shares of General Electric Co tumbled to a five-and-a-half-year low. The bellwether involved in businesses from turbines to television failed to soothe market concerns with sale of $15 billion in new stock to investors including Warren Buffett.

Automakers including General Motors Corp and Ford Motor Co warned of tougher times, as evaporating credit raises the risk of deeper production cuts and job losses for a struggling industry.

"The problems of subprime and credit crunch are now all over the world," Ford Chief Executive Alan Mulally said. "The downturn is longer and deeper than we foresaw a year ago."

In a week marred by bank rescues across Europe, French President Nicolas Sarkozy's office said he would host the leaders of Britain, Italy, Germany and the ECB on Saturday to discuss a response to the credit crisis. Sarkozy denied reports a 300 billion euro (235 billion pound) plan akin to the U.S. bailout was under consideration.

Fears about the health of banks put upward pressure on interbank lending rates on Thursday, despite the Senate vote and large injections of cash by central banks.

The U.S. commercial paper market also contracted for the third straight week, suffering its sharpest weekly decline in seven years, as business lending effectively shut down.

Investors remained cautious about the prospects for the U.S. bailout bill.

"I'm not betting anything here because I don't know what the House is going to do," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "If this bill doesn't pass in the House, it's game over."

Even if the bill is passed, worries have deepened over the global economic outlook and whether the package will go far enough to stop the housing-related dominoes from toppling in the United States.

"There are almost 10,000 foreclosures a day now, and between 1 and 2 million adjustable rate mortgages are due to adjust upward in the next year," said Timothy Canova, a monetary policy expert at Chapman University School of Law. "Without help for the bottom of the pyramid, Wall Street will be back next year asking for another trillion dollars.

AFTER THE UNCERTAINTY: MORE UNCERTAINTY

The bailout plan, equivalent to some $2,300 per American, is intended to reinvigorate credit markets that have frozen as financial institutions, staggered by failed mortgages, focussed on preserving capital.

A group of House Republicans led opposition to the bill on Monday over criticism it put the government at the centre of a problem that capital markets had created and could still fix.

Many Americans also opposed the $700 billion rescue plan because of objections across the political divide, including criticism that it would bail out powerful bankers without doing enough to help families struggling to hang on to their homes.

The Senate added tax cuts for families and businesses and an increase in bank deposit insurance in a bid to win broader support for the bill. Monday's House vote was 228-205, requiring a net gain of 12 votes for it to pass.

Rep. Steny Hoyer, the House Democratic leader, said calls from voters to representatives had been running 6-1 against the bill before Monday's failed vote but were now closer to 3-1 against.

Under the deal, the Treasury would buy illiquid assets held by financial institutions, in the hope of restoring confidence and thawing credit markets vital to the wider economy.

President George W. Bush, his authority eroded by the approaching end of his term, welcomed Senate passage of the package and urged the House to do the same, quickly.

"The bill that's before the Houses of Representatives tomorrow is a bill that has got the best chance of providing liquidity, providing credit, providing money so small businesses and medium-sized businesses can function," he said.

The crisis has become the biggest issue in U.S. elections, now just over a month away. Both presidential candidates, Republican Sen. John McCain and Democratic Sen. Barack Obama, voted for the package.

The tally for all the various rescue measures launched by U.S. authorities this year runs near $1.8 trillion -- more than the combined economic output of Canada and Spain last year.

(Additional reporting by Reuters reporters in New York, London, Paris, Brussels, Hong Kong and Tokyo; Editing by Tom Hals)

Bailout bill gains momentum on House floor

The UK government has announced a package of measures aimed at rescuing the banking system which could add up to £500bn ($880bn).

It will initially make extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them.

It is "designed to put the British banking system on a sounder footing", said Prime Minister Gordon Brown.

But the FTSE 100 in London fell 4% after the measures were unveiled.

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

Taxpayers may even end up making a profit from the shares, but that is by no means guaranteed.

Robert Peston said there would be strings attached for banks that take the government money.

"Taking taxpayers' money will not be a licence to trade as normal," he said.

Negotiations will take place with each participating institution that will require them to extend normal credit lines to homeowners and small businesses, in addition to rules on executive pay and dividends to other shareholders.

'Stop the panic'

It is hoped that the deal will get the money markets going again and assure the future of the banking system.

"They've got additional capital now if they want it, they've got an unlimited source of liquidity," said Terry Smith, chief executive of the money brokers, Tullett Prebon.

"That certainly should stop the panic in terms of people wondering whether or not the banks are safe."

The deal has also been welcomed by the banks.

"The government's announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system," HBOS said in a statement.

Barclays, Lloyds TSB and RBS also issued statements welcoming it.

HSBC, Nationwide and Standard Chartered also welcomed the plan but said they did not intend to take on any new capital at the moment.

All that money you've lost — where did it go?

The first banks to get money under the UK government's £50bn bank rescue plan could do so as soon as Monday morning.

The banks and the Treasury are working on announcements to be made before the markets open, according to BBC business editor Robert Peston.

He says the first banks to take up the recapitalisation are likely to be HBOS and Royal Bank of Scotland (RBS).

A key aspect of the announcements will be what the government requires the banks to do in return for the cash.

US, bankers rework bailout plan; stocks surge

All 27 EU states broadly support the bank rescue plan proposed for the bloc and the holding of a world finance summit, France's president has said.

Nicolas Sarkozy, whose country currently chairs the EU presidency, was speaking at the EU summit in Brussels.

The heads of the G8 top industrialised nations also backed holding a summit with other non-member states on global financial reform.

UK PM Gordon Brown has called for the IMF to be rebuilt.

US President George W Bush is holding talks on the global financial crisis with French counterpart Nicolas Sarkozy and the European Commission president.

Mr Bush, Mr Sarkozy and Jose Manuel Barroso are meeting at Camp David.

They are discussing plans to hold a global summit of G8 nations as well as China, India and other major economies, which Mr Bush has offered to host.

The Europeans want the summit to pave the way for talks on an overhaul of the world's financial regulatory systems.

Shadow business secretary Alan Duncan told Sky News: "I think a lot of small and medium-sized businesses in particular are going quite simply to be in a battle for survival.

"We have got to make sure that the lifeline that was given to banks doesn't just support bankers - that's not what it's for. It's got to support the businesses and the economy."

Bank of England Governor Mervyn King has warned that "it now seems likely the UK is entering a recession".

He added that the British banking system had been closer to collapse earlier this month than at any time since the start of World War I.

But speaking at an event in Leeds, Mr King said the country's banks had now "turned the corner", thanks to the government's £50bn bail-out package.

He said the move would slowly lead to a resumption of normal bank lending.

Fed aids money markets as IMF readies rescues

Prime Minister Gordon Brown has said the government is fighting recession "every way we know how" but it needs other countries "to work with us".

He spoke as official figures showed the UK economy shrank by 0.5% in the three months to September, twice what some economists were predicting.

Mr Brown rejected Tory claims the downturn was fuelled by his policies.

He said it was a global recession and he urged other countries to follow Britain's lead in tackling it.

World leaders pledge financial reform as gloom deepens

BEIJING (AFP) – World leaders vowed Saturday to overhaul the global financial system in the face of recession fears, but US President George W. Bush urged nations to "recommit" to free markets despite economic turmoil.

After a week of growing economic gloom and plunging stock markets, Asian and European leaders meeting in Beijing promised wide-ranging reforms while UN Secretary General Ban Ki-moon also called for quick change.

"Leaders pledged to undertake effective and comprehensive reform of the international monetary and financial systems," the 40-member Asia Europe Meeting (ASEM) said in a statement released late Friday.

"They agreed to take quickly appropriate initiatives in this respect, in consultation with all stakeholders and the relevant international financial institutions."

China's Premier Wen Jiabao called for more regulation of the world's financial system, saying after the summit "we need to draw lessons from this crisis."

"We need financial innovation to serve the economy better, however we need even more financial regulation to ensure financial safety."

Wen confirmed China's participation in a crucial summit in the United States on November 15 aimed at tackling the financial meltdown, without specifying which Chinese leader would attend the meeting of 20 industrialised and emerging powers.

The economic turmoil has led to growing criticism of US-style free market capitalism, with French President Nicolas Sarkozy earlier this week saying "the ideology of the dictatorship of the market... is dead."

But Bush on Saturday, moving to set an agenda for the upcoming international economic summit, said its participants must "recommit" to the principles of free enterprise and free trade.

"As we focus on responses to our short-term challenges, our nations must also recommit to the fundamentals of long-term economic growth -- free markets, free enterprise, and free trade," Bush said in his weekly radio address.

The US president, who leaves office in January, added that "open market policies have lifted standards of living and helped millions of people around the world escape the grip of poverty."

Ban said the Washington meet must address the need for change and joined chief executives of key UN institutions in calling for considered but large-scale reforms.

"The market and regulatory failures that have led to this crisis must be addressed as a matter of urgency," a joint statement said.

"We reaffirm the need for meaningful, comprehensive and well-coordinated reform of the international financial system and pledge our support to this end."

But next month's Washington summit came in for criticism at an African summit Saturday by Benin's President Boni Yayi for excluding poor countries, which he described as "the main victims" of the meltdown.

On the heels of Beijing's meet, South American finance officials gathered Saturday to exchange views on how to keep the effects of the crisis at bay in the region, but host Brazil struck a somber tone.

"No one has an immediate solution. We are under no illusion that we will resolve all the problems," Brazil's Foreign Minister Celso Amorim told an emergency meeting of regional trade bloc Mercosur.

Stock markets provided a grim backdrop to the Beijing meeting, plummeting Friday after a raft of pessimistic corporate and economic news. Tokyo's dizzying 9.6 percent slump spilt over into Europe, where London's FTSE plunged 5.0 percent.

The Dow Jones Industrial Average slid 3.59 percent, capping a week when the US blue-chip index dropped more than five percent.

The Saudi stock market, the largest in the Arab world, began its trading week on Saturday with a nine percent plunge to sink to its lowest point in four years.

Giants of the auto, airline and technology industries took emergency action on Friday.

France's PSA Peugeot-Citroen and Renault ordered huge production cuts, while Japan's electronics giant Sony Corp. and Europe's biggest airline Air France-KLM issued profits warnings.

Chrysler LLC, the number three US automaker, said it would cut up to 5,000 white-collar jobs by the end of the year as prospects in the sector grow dimmer.

Britain's economy shrank by 0.5 percent in the three months to September compared with the previous quarter, official figures showed, marking the first contraction since 1992.

German Finance Minister Peer Steinbrueck predicted the financial crisis would last until late 2009 in an interview to be published Sunday.

"The risk of collapse is far from over," he told the Bild am Sonntag weekly.

One Planet  (BBC World Service)

Niall Ferguson: You Ask The Questions http://www.independent.co.uk/news/people/profiles/niall-ferguson-you-ask-the-questions-986866.html

The historian answers your questions, such as 'Do we face recession or depression?' and 'Where should I invest my cash?'

Who would you like to see win the US election? Ian Barker, Brighton

I was one of John McCain's foreign policy advisers when he was campaigning for the Republican nomination, but haven't been involved since the presidential campaign became a two-horse race. I think McCain was by a wide margin the best of the Republican candidates, but I can't see him beating Barack Obama, who has run one of the most inspiring and at the same time disciplined campaigns of modern times.

Like so many historic events, this has a financial back-story. Without the credit crunch I think they'd be neck and neck. But the economic crisis is surely going to hand victory to the Democrat, whose cool, calm and collected manner are an asset at a time of panic and pessimism. I will not be sorry. Obama has the potential to be a great president – and who could fail to be uplifted by the prospect of a black man as commander in chief, 40 years after the assassination of Martin Luther King?

What do you think are the biggest challenges he will face? Stephen Mottram, Newcastle

The economy, the economy and the economy – followed by Iran, followed by his own party in Congress. The trouble is that Obama's plan to spend around $1.3 trillion in tax cuts and new spending is going to be very hard to implement when over a trillion has already been committed by his predecessor to the financial bailout. At some point the bond market may take fright at the explosion of government borrowing. Alternatively, the US may be heading for a period of Japanese-style stagnation and deflation, no matter how much the Treasury throws at the problem. Neither scenario is going to make the next president's life easy.

Is the US in terminal decline? MARK SUTTON, COLCHESTER

No empire lasts forever, but the US itself is not in terminal decline. It has an immensely successful political system. Its economy remains the most attractive place in the world for entrepreneurs and innovators. It's social system is wonderfully good at integrating new immigrants. Sure, there are problems, but I would say the EU looks much more vulnerable at the moment. And let's not forget that the US is still miles ahead of the competition when it comes to military power.

What does Obama's candidacy say about race relations in the US? TINA WEEKS, BRISTOL

That there has been a real change of attitudes. Some Americans may still harbour racial prejudice, but it is no longer socially acceptable to express it. That's one of the most heartening changes I have witnessed in the U.S. since I first started going there in 1981.

Will the world face recession in the next few years, or depression? PATRICK HOBSON, LONDON SE8

Call it a Great Recession. It won't be as bad as the Great Depression of 1929-32 (which actually dragged on until the Second World War in many countries). But it will almost certainly be a deeper and longer recession than anything we've experienced since the mid 1970s.

Given recent events, has your view of markets changed? MADDY PHILLIPS, LONDON N19

My new book The Ascent of Money was written in the expectation that a major liquidity crisis was going to strike financial markets in the near future, and that we would see a herd-like switch from greed to fear. This happens quite frequently in financial history. So I am not surprised and my view hasn't changed. As Churchill said of democracy, the free market is the worst of all possible systems, except for all those others that have been tried from time to time. In the book, I try to show that the financial system has an evolutionary character. That means that periodic crises are inevitable.

Where would you advise me to invest/save my money at the moment? DAVID ADAMS, BIRMINGHAM

Well, you're doing the right thing by saving. The key thing is to reduce indebtedness if you can, because it's leverage that's most dangerous at a time like this. A diversified portfolio of stocks and bonds, domestic and foreign securities, some real estate and some other assets (like art) remains the best bet. But the devil lies in the detail.

There are some bargains out there among small-cap US companies. Right now, I would be searching Silicon Valley for the next Google. Remember: Microsoft and Apple were both established in the depths of the mid-1970s stagflation.

Should Britain join the euro? ELLEN POWELL, LONDON W6

No. The last thing you want, especially in a financial crisis, is to have given away control of your monetary policy.

Where will the balance of global power lie in 20 years' time? Will the Asian Century be well and truly up and running? MICHAEL WILKES, ALDERSHOT

In The War of the World, I argued that the Asian century got underway nearly a century ago with the rise of Japan and its emergence as a credible rival to the European empires! Japan's had the second biggest economy in the world for decades now, so this is not a new story. The real issue is how far and for how long China can sustain the growth we have seen in the past three decades. If it can, then by mid-century it will be the biggest economy in the world. Then we may need to ask if we are entering the Chinese century. But remember: Japan was also projected to overtake the US and never made it. Economic history is seldom a smooth upward curve.

What moment is there from financial history from which we can most profitably learn? HENRY JOHNSON, NORWICH

I keep thinking that we are living through 1914 without the war – a huge liquidity crisis requiring all kinds of extraordinary emergency measures and extensions of state power over the financial system. In the past this only happened in time of war.

Who do you think will win the next UK election and why? BRIAN DOUGLAS, CARDIFF

The Conservatives because the Labour Party has so obviously failed to deliver the kind of improvements to public services that it promised more than 10 years ago, and has also presided over the worst financial crisis since an earlier Labour government had to call in the IMF. Things are going to be very ugly for the UK economy next year. If Gordon Brown were a stock, I would short him. His recent revival in the polls is a sucker's rally.

What do you think about the way the BBC has handled the Russell Brand/Jonathan Ross affair? LYNN THOMAS, LONDON NW6

I am afraid I do not know who these people are. Nor was I aware that they are having an affair.

Should the BBC be privatised? LIAM BRYAN, WORCESTER

Yes. There is no credible justification for the licence fee, which simply subsidises one bloated broadcaster.

Who do you think was the greatest British prime minister. And who was the greatest US president? GAVIN PHILLIPS, CANTERBURY

Churchill was the greatest prime minister, Roosevelt the greatest president.

You wrote a history of the Rothschild family. What do you make of George Osborne's recent brush with one of the younger inheritors? IAN CLARKE, DEVIZES

I think the episode merely illustrates the danger of talking to journalists about private conversations. This applies whether or not the conversation was with Peter Mandelson, whether or not it was on a yacht, and whether or not a Rothschild was present.

Which historian has had the biggest influence on you? CHARLIE BLAKE, MANCHESTER

Probably A.J.P. Taylor, who was a wonderfully gifted writer of diplomatic history, but my principal debts as a financial historian are to Charles Kindleberger, David Landes and Fritz Stern.

How do you manage to produce so many books so quickly? NIGEL PORTER, BARNET

By neglecting my family.

Niall Feguson's 'The Ascent of Money' has just been published by Allen Lane at £25

Market sinks on economic gloom as Cisco warns late

NEW YORK (Reuters) -Stocks plummeted on Wednesday, a day after Barack Obama's historic victory in the U.S. presidential election, as a fresh batch of dismal economic data underscored the massive challenges awaiting his administration.

The drop marked Wall Street's biggest loss ever on the day after a presidential election, coming immediately on the heels of its biggest Election Day rally on record in the previous session.

Selling hit across the board, with shares of big manufacturers, including Boeing, as well as banks, technology companies, home builders, retailers and energy companies among the biggest casualties.

And Thursday could be even uglier after Cisco Systems Inc , a technology bellwether, said after the close of regular trading that fallout from the United States had now spread to key markets abroad and its revenue could fall as much as 10 percent in the current quarter. It shares slid more than 6 percent after the bell to $16.25, down $1.14 from their Nasdaq close at $17.39.

Investors worry that the new administration won't be in a position to act fast enough to avert a deep economic downturn.

"Even though there's a lot of enthusiasm and a lot of excitement around the new president, I think it's going to be very difficult for anything quick to happen," said Dean Barber, president of investment firm Barber Financial Group in Kansas City.

"Today we just had reality set in that ... we're still losing jobs and we still have consumer spending at very low levels and we are heading into a holiday season that looks like it could be one of the worst."

The Dow Jones industrial average slid 486.01 points, or 5.05 percent, to 9,139.27. The Standard & Poor's 500 Index plunged 52.98 points, or 5.27 percent, to close at 952.77. The Nasdaq Composite Index lost 98.48 points, or 5.53 percent, to 1,681.64.

Grim economic news included a report that showed deep cuts in employment by private employers in October and data that showed the vast service sector contracted sharply last month as the worst financial crisis in 80 years roiled the world's largest economy.

Jet aircraft manufacturer Boeing sank 6.9 percent to close at $49.55 on the New York Stock Exchange, making it the second-heaviest drag on the Dow and ranking only behind Exxon Mobil Corp, whose shares tumbled 4.9 percent to $73.69, while rival Chevron lost 4.2 percent to $74.88.

The slide in energy shares was also precipitated by a sharp drop in oil prices on fears that an economic downturn will hurt energy demand. December crude fell $5.23, or 7.42 percent, to settle at $65.30 a barrel on the New York Mercantile Exchange.

On Nasdaq, the stock of iPhone and iPod maker Apple was the top drag, down almost 7 percent at $103.30.

Shares of Cisco, a maker of equipment that forms the backbone of corporate technology networks, dropped 5.1 percent to $17.39 on Nasdaq. After the bell, the stock slid to $16.25.

Financials weighed on the S&P 500, with shares of Morgan Stanley ending down almost 10 percent at $17.06, and those of Bank of America down more than 11 percent at $21.75. The S&P financial index fell 8.8 percent.

Steelmakers Nucor Corp and U.S. Steel Corp tumbled after Arcelor-Mittal, the world's largest steelmaker, forecast a weaker fourth quarter, slashed output and froze growth plans.

Nucor plunged 10.5 percent to $35.50, while U.S. Steel tumbled 8.3 percent to $37.75, both in NYSE trading.

Among home builders, luxury home builder Toll Brothers plunged nearly 10 percent to $20.73, while among retailers, Wal-Mart Stores , a Dow component, fell 3.6 percent to $54.13.

All 30 Dow components ended in the red.

A report from ADP Employer Services showed private employers made their deepest job cuts in six years last month and companies' planned layoffs surged to their highest in nearly five years.

The Institute for Supply Management said the U.S. service sector contracted sharply in October.

Investors were also nervous ahead of Friday's government data on October non-farm payrolls. Economists polled by Reuters have forecast a loss of 200,000 jobs in October.

Trading was muted on the New York Stock Exchange, with about 1.31 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.21 billion shares traded, slightly above last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by a ratio of about 4 to 1 on both the NYSE and the Nasdaq.

(Additional reporting by Leah Schnurr; Editing by Jan Paschal)

News Release
Bank of England Reduces Bank Rate by 1.5 Percentage Points to 3%

6 November 2008

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 1.5 percentage points to 3%.

Obama urges action as Asian, European data gloomy

NEW YORK (Reuters) – Fresh signs of economic weakness from China, Japan and Britain reinforced fears of a prolonged recession, and U.S. President-elect Barack Obama urged the Bush administration to back a second economic stimulus package and aid the ailing auto industry.

Oil, which is heavily dependent on global growth, tumbled 5 percent to $59 a barrel after touching a 20-month low of $58.32. World stock and other commodity prices also fell, with U.S. stocks closing 2 percent lower.

Shares of U.S. automaker General Motors fell as much as 15 percent to lows last seen during World War Two before closing down 13 percent for the day.

"Reality is setting in that we are in a recession. It's almost like an endless abyss for the market -- it's sell first, ask questions later," said Ryan Detrick, technical analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

In an effort to reverse a wave of defaults threatening the U.S. economy, the regulator for Fannie Mae and Freddie Mac, the two largest U.S. mortgage finance companies, unveiled a plan to cut payments for struggling homeowners.

U.S. homeowners who face foreclosure and are spending more than 38 percent of their income on mortgage payments could have monthly payments reduced by Fannie and Freddie, which own or insure roughly half of U.S. home loans. The move could provide relief for hundreds of thousands of borrowers.

The widening global slowdown has prompted a rash of corporate profit warnings and led some companies to warn about their ability to operate in the darkening environment.

Obama urged President George W. Bush to back a second stimulus package and asked him to use existing bailout measures to help an auto industry battered by a rapid drop-off in sales, an aide said.

A spokeswoman for Obama said he raised the issue in his meeting with Bush at the White House on Monday.

The White House said it was open to considering any proposals from Congress to accelerate loans to the U.S. auto industry from funds already appropriated.

U.S. House of Representatives Speaker Nancy Pelosi threw her weight behind an automobile industry rescue plan, saying aid was urgent and that she was confident Congress could act on emergency bailout legislation next week.

Evidence of a global slowdown was ample as the worst financial crisis in 80 years, arising from huge banking losses in the slumping U.S. housing market, has sown a broad economic downturn. Even fast-growing China has not been immune.

Chinese import growth slowed in October and inflation fell to a 17-month low as domestic demand cooled, raising the likelihood Beijing will soon cut interest rates to back up the government's new economic stimulus plan.

In Japan, exports fell nearly 10 percent in the first 20 days of October, corporate bankruptcies jumped 13.4 percent year-on-year and sentiment in its service sector hit an all-time low -- all signs the world's second-biggest economy was teetering on the brink of recession.

German analyst and investor sentiment about the outlook for Europe's largest economy improved but remained gloomy with the nation probably already in recession.

British retail sales fell by the biggest amount in more than three years in October, and a housing industry survey showed home sales slumped to their lowest level in at least 30 years.

SUMMIT HOPES

Investors are looking to a summit of world leaders in Washington on Saturday for new solutions, following moves worldwide to cut interest rates, free up seized money markets and recapitalize banks, at a cost of more than $4 trillion.

"We need monetary and fiscal policy coordination across the world ... a broad, concerted economic response is now urgent," British Prime Minister Gordon Brown told a news conference. "The second priority is that we agree a timetable for measures that will clean up the failings in our banking system.

But officials are playing down the likelihood that the weekend meeting will produce dramatic measures, and aides to Obama -- whom world leaders have urged to make the credit crisis his No. 1 priority -- said he would not attend.

Brown said there could be no retreat into protectionism and that he was confident Obama shared that view.

CORPORATE PAIN

The hard times have prompted a number of companies to issue profit warnings. Among the latest:

U.S. industrial conglomerate Tyco International Ltd and diversified U.S. manufacturer Rockwell Automation Inc both warned that fiscal-year profits would be well below Wall Street forecasts. Tyco's shares fell 13 percent, and Rockwell's 8 percent.

Vodafone, the world's largest mobile phone company by revenues, cut its full-year revenue outlook for the second time in four months but said it would maintain profits by cutting 1 billion pounds ($1.58 billion) of costs.

The world's largest hotelier, InterContinental Hotels, posted a 14 percent rise in third-quarter profits but said it saw a sharp deterioration in October market conditions.

General Growth Properties Inc, the second-largest U.S. mall owner, expressed doubts that it could continue to operate due to $4.2 billion in debt coming due November 28 and next year. Its shares plunged to about 40 cents, down more than 99 percent over the past year.

Rona Inc, Canada's biggest home-improvement chain, reported a lower third-quarter profit due to a slump in construction and home renovation, and warned that it might not meet its profit targets.

(Editing by Elizabeth Piper, Steve Orlofsky, Gary Hill)

They said they were determined to work together to achieve "needed reforms" in the world's financial systems.

Britain's Prime Minister, Gordon Brown, said the agreements reached by leaders were "historic".

US President George W Bush said that finance ministers would now work on detailed reform proposals, and then report back.

Obama warns of dire consequences without stimulus

FAIRFAX, Va. – President-elect Barack Obama urged dubious lawmakers Thursday to work with him "day and night, on weekends if necessary" to approve the largest taxpayer-funded stimulus ever, warning in almost apocalyptic terms that a dire economic future was certain without it.

Obama's speech, an extraordinary move for a president-in-waiting that reflected the grim urgency of the times and perhaps the crack in congressional support, came amid a flurry of new activity in the negotiations on Capitol Hill over the massive proposal's details. Not long after Obama spoke, some senators from his own party publicly criticized his plan to include tax cuts.

Emerging from a private meeting of the Senate Finance Committee, several Democrats expressed deep skepticism that the kind of business and individual tax cuts Obama has been discussing would do much to create jobs or increase consumer spending.

Sen. Kent Conrad of North Dakota said a proposed $3,000 tax credit for companies that hire or retrain workers wouldn't spur job creation if those companies' products still weren't selling. Sen. Ron Wyden of Oregon said a tax cut giving workers only about $10 to $20 more per week wouldn't change purchase patterns.

Meanwhile, Obama's economic advisers were on Capitol Hill briefing Democratic lawmakers on details of the president-elect's plan. And the Senate Democratic caucus planned a late afternoon meeting, followed by a news conference by Majority Leader Harry Reid and other caucus leaders.

Making a case for action, Obama warned in his speech that "a bad situation could become dramatically worse" if Washington doesn't go far enough. He talked of the possibility of double-digit unemployment and $1 trillion in lost economic activity, stark predictions that recalled the days of the Great Depression in the 1930s.

But, he said, "We are still the nation that has overcome great fears and improbable odds. If we act with the urgency and seriousness that this moment requires, I know that we can do it again."

Since his November election, Obama has deferred to President George W. Bush on foreign policy matters such as the Middle East. But, with the economic situation worsening, Obama has waded in deeply on that front, an issue certain to define and dominate his early presidency.

It was the fourth day in a row that he had made a pitch for a huge infusion of taxpayer dollars to revive the sinking economy he will inherit from Bush.

Obama's events have increasingly taken on the trappings and air of the presidency. Thursday's speech — coming 12 days before he takes over at the White House — was a particularly showy move. Presidents-elect typically stick to naming administration appointments and otherwise staying in the background during the transition period between Election Day and Inauguration Day, but Obama has clearly made the calculation that a nation anxious about its economic outlook needs to hear from him differently and more frequently.

The president-elect cast blame on "an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington."

Obama shed no new light on the details of his plan that could cost as much as $775 billion over two years. And, he said little about the unprecedented red ink and rising debt confronting the government, even after spending days reassuring the public and Congress that he is committed to tackling long-term deficits once the economy rebounds.

But he laid out goals of doubling the production of alternative energy over three years, making 75 percent of federal buildings and two million homes more energy efficient, computerizing all medical records in five years, expanding broadband networks and updating schools and universities.

"It's a plan that represents not just new policy but a whole new approach to meeting our most urgent challenges," he said at George Mason University in suburban Washington.

Obama's economic team is considering a package, half of which would be devoted to spending ranging from infrastructure to assistance to states. About 40 percent — roughly $300 billion — would be tax cuts for individuals and businesses, and about 10 percent would be spent on assistance to unemployed workers.

Governors of six states and mayors of 14 cities — a bipartisan audience that came from as far away as Minnesota and Utah to be among the few hundred in attendance — listened to the speech that lasted less than a half hour. The group remained silent until light applause at the end.

Elsewhere, there was more grim economic news.

A government report showed that the number of people drawing jobless benefits rose last week to the highest level since 1982, demonstrating the troubles the unemployed are having in finding new jobs.

And broader unemployment figures due out Friday are expected to show that the U.S. lost a net total of 500,000 jobs in December. That would bring 2008's total job losses to 2.4 million, the first annual job loss since 2001 and the highest since 1945, though the number of jobs has more than tripled since then.

Speaking a day after the release of a stunning new deficit estimate — that the federal red ink will reach an unprecedented $1.2 trillion this year, nearly three times last year's record — Obama acknowledged some sympathy with those who "might be skeptical" of the stimulus. Vast sums already have been spent or committed by Washington in an attempt — largely unsuccessful so far — to get credit, the lifeblood of the American economy, flowing freely once again.

Such statements are meant to appeal to both parties' budget hawks, whom Obama wants to win over so that approval of a package draws wide, bipartisan support in the Democratic-led Congress.

___

Associated Press writers Stephen Ohlemacher and Andrew Taylor contributed to this story from Washington.

Dow ends under 7,000, S&P tests 700 on AIG fallout

NEW YORK (Reuters) – U.S. stocks slid to 12-year lows on Monday as a record $61.7 billion loss for AIG and another government bailout for the insurer heightened concerns about the extent of the damage to the financial system.

Shares of companies that have found themselves on the wrong side of President Barack Obama's proposed budget fell again, with drugmakers and health insurers suffering a fourth day of losses amid worries their profits are under threat. The Morgan Stanley healthcare index has lost 26.4 percent over the past four days and the AMEX pharmaceutical index has dropped 12.3 percent over that same time span.

Story at http://news.yahoo.com/s/nm/20090302/bs_nm/us_markets_stocks

Greening the Debt

The global economic crisis and climate change are probably the two signature challenges of our time. Luckily, there are ways to make our responses to these challenges mutually reinforcing.

One approach is to green the expenditures of the fiscal stimulus packages, as called for by the final communiqué of the G-20 summit. But the room for maneuver here is limited. An estimated 15 percent of the stimulus packages are already green. And because it is the primary objective of the fiscal stimulus to support the economy in the short run, it is not possible to devote a much larger proportion to the longer term objective of fighting climate change.

However, there is another way to green the stimulus: greening the enormous additional debt due to deficit spending. In 2009 alone, E.U. countries will pile up a stimulus debt of around €115 billion, or 0.9 percent of GDP, with the United States adding twice as much — an estimated €220 billon, or 2 percent of GDP. These debts could be “greened” by a firm international commitment to repay them exclusively with additional revenues from CO2 taxes and emissions cap-and-trade schemes.

This is what I propose should be done.

The additional green revenues would be raised as soon as economies recover enough to repay the stimulus debts. The time-path of debt repayment could be explicitly linked to the timing of the economic recovery. And once the stimulus debt has been repaid, the green revenues would be used to reduce the fiscal burden on labor. Such a shift from taxation that reduces desirable employment to taxation that reduces undesirable pollution will lead to welfare gains.

The envisaged increase in green revenues is ambitious, but not utopian. In the E.U., green taxes already make up 2.6 percent of GDP — substantially more than the annual size of the stimulus packages to date. Green tax revenues in the United States are far lower, but the Obama administration is already working on a cap-and-trade scheme that could generate the required revenues.

Repaying stimulus debt through green taxes has a number of advantages:

First, there are efficiency reasons to complement the carrot of green subsidies with the stick of green taxes. The latter clearly addresses the underlying problem, namely that private agents do not fully take into account the negative climate externality of CO2 emissions. By contrast, the carrot of green subsidies is better suited to dealing with a narrower and positive externality — the spill-over effects of technological innovation aimed at reducing CO2 emission.

Second, green revenues not only improve environmental but also fiscal sustainability. A credible commitment by countries under fiscal pressure on how they will repay their debts could serve to reassure financial markets. Even countries like Ireland without the fiscal room for maneuver for discretionary fiscal measures might be tempted to participate in the greening of part of its debt.

Third, green debt makes the case for coordination of fiscal stimuli even more compelling. Such coordination could address fiscal and environmental free-riding at the same time: All countries that commit to a fiscal stimulus would thereby automatically commit to increase their CO2 taxes at a later stage to service their green debt.

Only a couple of years ago, this proposal would have been completely unrealistic. Ironically, the threat to fiscal sustainability during this economic crisis may be decisive in helping our economies to move toward environmental sustainability.

Jakob von Weizsäcker is a resident scholar with Bruegel, a think tank in Brussels partly funded by 16 E.U. member governments.

The Bank of England's rate-setters have decided to pump another £50bn of new money into the economy in their programme of quantitative easing.

It will take their total spending to £175bn, unexpectedly going over the £150bn set aside by the chancellor.

http://news.bbc.co.uk/1/hi/business/8187360.stm

Gordon Brown has admitted for the first time that spending cuts will be needed, in a speech to union leaders.

The prime minister said he would "cut costs, cut inefficiencies, cut unnecessary programmes and cut lower priority budgets".

But he said Labour would not "support cuts in the vital front-line services on which people depend".

The Tories say he had made a "grudging admission" on cuts. The Lib Dems have urged "serious proposals" to cut debt.

U.S. to push for new economic world order at G20 

Monday, September 21 09:19 pm

Alister Bull

The United States wants world leaders to agree this week to launch a major rethink of the world economy in November as they try to strengthen the global economy after its near meltdown.

Documents outlining the U.S. position ahead of the September 24-25 Pittsburgh summit of Group of 20 leaders said exporters, which include China, Germany and Japan, should consume more, while debtors like the United States must boost savings.

"The world will face anaemic growth if adjustments in one part of the global economy are not matched by offsetting adjustments in other parts of the global economy," said the document obtained by Reuters.

Obama, cutting through the coded diplomatic courtesies, made the case more bluntly for a change in business as usual.

"We can't go back to the era where the Chinese or Germans or other countries just are selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them," he said on Sunday.

The framework proposed by U.S. policy-makers foresaw "candid, even-handed and balanced analysis" of G20 members' economic policies by the International Monetary Fund to figure out if they were consistent with balanced growth.

"We call on our finance ministers to launch the new framework by November," the document said, signalling a determined effort to maintain the momentum for change created by last year's global financial crisis.

Finance ministers and central bankers from the G20 countries are due to meet November 7-8 in Scotland.

The IMF will play a central role in this process of "mutual assessment" by making policy recommendations to the G20 every six months based on its assessment of global economic developments and emerging patterns of demand.

Taxpayer money to the tune of $5 trillion (3.08 trillion pounds) has been pumped into the world economy to keep it from seizing up since the beginning of the crisis last September.

G20 leaders will maintain that pace of stimulus while acknowledging that at some point it will have to be wound down, the document said.

But, mindful of how a disorderly rush to raise interest rates could roil world markets again, they will also ask finance ministers to thrash out a "transparent and credible" exit strategy.

There were no details of how to achieve this in practice, but the document echoed the caution of G20 finance ministers at their meeting in London earlier this month acknowledging the pace of change would vary by country.

"The scale, timing and sequencing of this process will vary across countries and across the type of policy measures," the document said.

European Central Bank President Jean-Claude Trichet said on Monday that persuading Europe, the United States and China to accept International Monetary Fund advice on economic polices may be difficult.

In the past many countries have ignored advice dished out in regular reviews by the IMF.

Trichet told French newspaper Le Monde that the G20 had made progress on reforms to make the financial system more stable after the crisis.

"But the most difficult question is still open: Europe, America, China, are they ready to modify their macroeconomic policies in the future -- by following the advice of the IMF and under pressure from their peers, for the common good, and world economic stability?" he said.

G7 sources told Reuters there was a renewed determination to act to stem the global imbalances because the crisis had underlined the interconnectedness of the financial system and how joint action could be more effective.

(Additional reporting by Anna Willard in Paris and Darren Ennis in Brussels; Editing by Chizu Nomiyama )

Baroness Vadera is stepping down as business minister to take up a new role advising the G20 from Downing Street.

She will focus on the institutions needed to implement the "framework of sustainable and balanced growth" to be agreed this week by the G20.

The former investment banker was a senior Treasury adviser to Mr Brown when he was chancellor and has remained one of his key aides since becoming PM.

A sometimes controversial figure, she became a minister in January 2008.

Analysis: Can G-20 succeed where G-8 failed?

PITTSBURGH – The world's most exclusive club has just gotten bigger, and it is promising a lot of big things for the global economy. But it is likely to have just as much trouble delivering results as the smaller group it replaced.

Leaders of the Group of 20, holding their third summit in less than a year, proclaimed that the 21st century needed a new way of coordinating the global economy to replace the much smaller Group of Seven and later the Group of Eight that ruled over economic decision making for the past three decades.

Going forward, it will be the G-20 calling the shots. That means that the old economic powers — the United States, Japan, Germany, France, Britain, Italy, Canada and relative newcomer Russia — have now been joined by fast-growing developing countries like China, Brazil and India.

The old leaders were effusive in their praise of the expanded club. British Prime Minister Gordon Brown said the new grouping would be the "premier economic organization for dealing with economic management around the world."

President Barack Obama, who had helped handle the membership negotiations between the old guard G-7 members and the new countries, said that "we can no longer meet the challenges of the 21st century economy with 20th century approaches."

But despite the lofty rhetoric, the results the G-20 managed to produce in Pittsburgh looked very much like the mishmash of proposals that have been produced through the years by the G-8: lots of lofty goals but few specific details.

That shouldn't be surprising since the process of getting results is the same. Before the leaders sit down together, their aides spend hours working on the details of agreements.

Getting a bunch of government bureaucrats in a room for lengthy negotiating sessions invariably means that any bold proposals get whittled down to the lowest common denominator to meet objections from other countries.

France and Germany called for tough caps to penalize greedy bankers, an effort that ran into objections from the United States. The result: a proposal that calls for banking regulators to do a better job of linking pay to performance but without any binding caps. This is a disappointing outcome for voters already angry about a return of significant paydays for bankers whose institutions received massive government bailouts only a few months ago.

Likewise, an effort by the United States to avert another financial meltdown by forcing all countries to adhere to stronger capital standards seems destined to fall short of its lofty goal of preventing the next financial meltdown.

On its surface, the idea seems sound. Banks got in trouble last year because they did not have enough capital, the reserves used to cushion against losses from bad loans and other sour investments.

The G-20 did adopt the broad outlines of a tougher approach to capital, but the effort is likely to run into heavy opposition between the goal-setting phase and the implementation phase from banks upset that the new rules could cut into their profits.

The list of misses in the G-20's Pittsburgh communique is a lengthy one. In some areas the best that can be said is that the countries agreed to keep talking about thorny problems they have already been debating for years.

One example is the lengthy drive by China and other fast-growing developing countries for more of a say in the running of international lending institutions such as the International Monetary Fund and the World Bank.

On that issue, the G-20 agreed to move toward equalizing the voting power of developed and developing nations but left many tough decisions for a later day.

In some cases, the rhetoric did not match reality. For their third straight meeting, the G-20 promised to resist demand to erect protectionist trade barriers during the current hard times, seeking to avoid the disastrous spiral of tit-for-tat trade retaliation that deepened the Great Depression during the 1930s.

However, the track record of the G-20 countries including the United States, the world's biggest economy, has fallen far short of the promises. Just last week, the Obama administration announced it was imposing punitive tariffs on Chinese tire imports as the president moved to keep a campaign promise to a key labor constituency, despite an angry reaction from the Chinese government.

But even with all the failings, the G-20 could still offer more promise than the old G-7, if for no other reason than the right people are now at the table where decisions are being made. It made no sense to exclude China, now the world's third biggest economy, and such rapidly growing economies as Brazil and India from the decision-making process.

Russian President Dmitry Medvedev, whose country took years to crack the barriers keeping it out of the G-7, took a philosophical view of the latest expansion, saying no matter how big the ruling group, they need to be mindful of those left out.

"In the world, there are not just 20 countries, 20 economies, and therefore we have to think how the G-20 can work with the other countries that are not part of this club," Medvedev told reporters at the conclusion of the Pittsburgh discussions.

___

EDITOR'S NOTE — Martin Crutsinger has covered G-7, G-8 and now G-20 meetings for The Associated Press since 1988.

The UK economy unexpectedly contracted by 0.4% between July and September, according to official figures, meaning the country is still in recession.

It is the first time UK gross domestic product (GDP) has contracted for six consecutive quarters, since quarterly figures were first recorded in 1955.

But the figures could still be revised up or down at a later date, because this figure is only the first estimate.

GDP measures the total amount of goods and services produced by a country.

The Big Question: Is quantitative easing creating more problems than it is solving?

Why are we asking this now?

Because the Bank of England's Monetary Policy Committee - which comprises bank officials as well as outside independent advisers - has voted to expand its policy of "quantitative easing", colloquially known as printing money, by a further £25bn to a staggering £200bn. That's almost three times the initial dose agreed in March, when the Bank thought that £75bn ought to do the trick, though even then it thought it might take up to £150bn. Evidently, the economy has not been responding to the medicine with the alacrity once hoped for.

So what exactly is 'quantitative easing'?

An unlovely name for a fairly straightforward idea. The "quantitative" bit refers simply to the fact that the Bank is directly altering the quantity of money in the economy, rather than the price, or interest rate, which has been set at 0.5 per cent since March, the lowest level in the Bank's 315-year history. The "easing" bit merely means that the Bank wants to make money easier.

Given that "negative interest rates" are very hard to engineer, and official rates are already about as close to zero as practicable, the Bank's minds have turned to how to inject more money and spending. The answer - QE as it's known for short - is supposed to provide an adrenaline shot for the economy, a direct injection of money to help boost demand and spending and, in due course, get inflation back to the Bank's 2 per cent target. Although it isn't far off that number now, the Bank thinks underlying inflation in the economy will continue to subside given the weak state of demand.

So are the bank's printing presses working flat out?

That would be an old-fashioned way of going about things. Nowadays money is about much more than the notes and coins in circulation. Think of the money you hold in your bank account, which is electronic money, numbers on a spreadsheet or some other piece of software, with not even a piece of paper with the Queen's image on it to back it up in some vault, let alone gold or silver. Magical, really.

How do you increase the amount of money in the economy?

The way the Bank of England has chosen to do it is to create "central bank money", offering money to holders of government securities, or gilts, at twice weekly "reverse auctions". Bodies such as pension funds are offered a very good price for their gilts, and they sell them to the Bank of England. The money the pension funds receive is then banked at Barclays or wherever, and the account that Barclays holds with the Bank of England, a sort of bankers' bank in this case, is credited.

No picturesque, nicely engraved bits of paper fly around. Even the gilts have been "dematerialised" nowadays, so it is all computerised, but real nonetheless. Smaller quantities of bonds and other securities issued by the private sector have also been bought by the bank, on the same principle of putting money into the economy.

But won't this process cause inflation?

Yes! That is the general idea, at least if you think that deflation - falling prices - are now the problem rather than rampant inflation, as the Bank does. The Bank is worried that demand in the economy is so weak that we won't even see inflation going back to the 2 per cent target as next year drags on. The Bank has to work with unusually long and variable "lags" with QE. It doesn't know when it will make its presence felt, as the country has never before tried this policy in these sorts of conditions. The Bank has indicated that it takes at least six months for the policy to work through and maybe much longer. Some people are still worried that the Bank's policy will deliver higher inflation over the next few years, if it isn't able to reverse its policy easily - the so-called exit strategy.

So how does it work?

Just by putting more money, which ought to get spent somehow, into the economy. The main effect has been to boost the capital markets, ie shares and corporate bonds. Hence the remarkable recovery in the stock markets since their low point in the spring, though some see this as just new, unsustainable "bubbles". The idea is that companies are able to raise funds and spend them on new investment, and the effects trickle down through the rest of the economy. The mechanism is fairly easy to see. The Bank's appetite for huge quantities of gilts pushes their price higher and thus depresses their yield on any given "coupon", or nominal interest rate. As pension funds and other investors look at the pitifully small returns now offered on gilts, they are more inclined to invest in - say - blue-chip shares or top rated company bonds. But all securities seem to have enjoyed some sort of benefit. Even the banks have been able to raise extra cash through issues of new shares, and some heavily indebted companies that thought they might go under have been able to persuade their bondholders to swap those debts for shares. We have even seen some revival in the market for a cleaned-up version of mortgage-backed securities, which got such a bad name for themselves during the credit bubble.

Why isn't the economy growing then?

A few problems seem to have grown up. First, QE appears to be helping really big companies who have access to the capital markets, but has been less use to smaller firms and first-time home-buyers, who rely on bank finance. There was some suggestion from the Bank at the beginning of the policy in March that the banks would lend more as they found themselves with more money, but that seems not to have happened - presumably because so many of our banks are bust or nearly bust.

Second, even in the case of the bigger companies, there is some evidence to suggest that all they are doing with the cash they raise is to pay off their debts, rather than spending lots on new plant and machinery or hiring new staff.

Third, we seem to have suddenly lost our historic appetite for consumer debt. We've been paying our credit card bills and bank loans, and we are saving more too, despite the absurdly low interest rates being offered by banks and building societies. The argument here is that the Bank should have done even more, and sooner, to prevent this "deflationary mindset" taking hold.

What if QE fails?

It's fair to say that we would probably be in even worse trouble if the Bank of England (and other central banks around the world) had not pursued this policy - though it is impossible to imagine precisely "what might have been". You could argue that QE cannot fail in the sense that there is always more that the Bank can do. Mr King and his colleagues possess a theoretically unlimited capacity to buy gilts and other assets with money they create at the stroke of a computer keyboard. But the efficacy of the policy isn't necessarily increased by just throwing more money at it.

Given the parlous state of the public finances, the Government has no scope to spend our way out of trouble, even with the Bank buying its debts (indirectly). So - worryingly - the authorities seem to be running out of ideas.

Continuing global economic growth "is not possible" if nations are to tackle climate change, a report by an environmental think-thank has warned.

The New Economics Foundation (Nef) said "unprecedented and probably impossible" carbon reductions would be needed to hold temperature rises below 2C (3.6F).

Scientists say exceeding this limit could lead to dangerous global warming.

"We urgently need to change our economy to live within its environmental budget," said Nef's policy director.

5-day Davos forum ends on note of humility

DAVOS, Switzerland – The world's foremost gathering of business and government leaders wrapped up a five-day meeting Sunday with widespread agreement that a fragile recovery is under way but no consensus on what's going to spur job growth and prevent another global economic meltdown.

http://news.yahoo.com/s/ap/20100131/ap_on_re_eu/davos_forum

World financial leaders focusing on budget crises

IQALUIT, Nunavut – A crisis in Europe over budget belt-tightening has upended global markets and seized the attention of financial leaders meeting in the Canadian Arctic.

Finance ministers and central bankers from the Group of Seven major industrial countries also planned to try on Saturday to settle differences on banking industry changes. There are that go-it-alone action such as President Barack Obama's plan to break up big banks will further hamper the fledging economic recovery.

Canadian Finance Minister Jim Flaherty hoped his choice of the remote town of Iqaluit, population 7,000, where temperatures can dip to 40 degrees below zero in February, would make officials focus on the task ahead.

The United States was represented by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke. The G-7 consists of the United States, Japan, Germany, Britain, France, Italy and Canada.

The agenda Saturday included on developments in the global economy, banking reform and proposals for more debt relief to Haiti, recovering from a devastating earthquake.

Developments in Europe provided a sobering reminder that G-7 policymakers still face major hurdles in repairing a broken global economy.

The Portuguese parliament's defeat of a government austerity plan triggered renewed concerns that it and other countries such as Greece and Spain were having trouble tightening budget controls to manage their budget deficits. That could threaten the economic recovery in Europe.

Stocks fell in Asia and Europe, while the Dow Jones industrial average clawed back to a small gain after suffering the largest single-day drop in seven months, on worries about the global economy.

"I think we have to be very mindful of the failure or potential failure of domestic economies," Flaherty told reporters.

On banking reform, the other G-7 countries were expected to press Geithner to explain the announcement by Obama last month that the United States would seek tougher rules to prevent risky actions by big banks from toppling the entire financial system.

British Treasury chief Alistair Darling has led calls for more coordinated action. He has said that the U.S. proposal does not address the biggest threat of the links between banks that can quickly transmit loan troubles at one institution to the entire system.

Flaherty said G-7 countries agreed on the need to continue with government stimulus programs to prevent the world from plunging back into recession. But Germany and France have expressed concern about how long stimulus aid should be maintained. They worry about soaring budget deficits and the risk of inflation.

Obama presented a budget plan this past week that would boost job-creation efforts and raise the U.S. budget deficit to a record $1.56 trillion this year. British Prime Minister Gordon Brown is also stressing government stimulus even though critics point out that the country's budget deficit as a share of its gross domestic product could reach 12 percent this year.

In Japan, where the economy has struggled for two decades, the government unveiled more stimulus spending last week.

___

Associated Press writer Rob Gillies contributed to this report.

Bernanke outlines plan for pulling in stimulus aid

WASHINGTON – Federal Reserve Chairman Ben Bernanke began Wednesday to outline the central bank's strategy for reeling in stimulus money once the economic recovery is more firmly rooted.

Bernanke said the Fed will likely start to tighten credit by boosting the interest rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks' prime rate and affect many consumer loans. Companies and ordinary Americans would pay more to borrow.

But in prepared remarks to a House committee, Bernanke indicated the Fed is still months away from raising rates or draining most of the stimulus money it injected to rescue the financial system. He said the recovery still needs support from record-low interest rates.

The Fed chief used his remarks to explain how the central bank will try to withdraw the stimulus money without tipping the economy back into recession.

Using the rate it pays on banks' excess reserves to affect credit would be a new strategy for the Fed. Since the 1980's, its main lever to tighten or loosen credit has been the federal funds rate. That rate is now at a record low near zero.

The rate paid on banks' excess reserves is 0.25 percent. Boosting that rate would give banks an incentive to keep money parked at the Fed, rather than lend it.

It also would cause the funds rate to rise, economists say. Adjusting the interest paid on banks' excess reserves helps stabilize the funds rate when the financial system is awash in cash, as it is now.

Paying interest on the reserves is a relatively new tool for the Fed, having been authorized by a 2008 law. Many foreign central banks rely on it. The Fed started paying interest on the reserves at the height of the financial crisis in October 2008.

In his prepared remarks to the House Financial Services Committee, Bernanke lays out his most extensive details to date on the Fed's exit strategy from record-low rates and economic stimulus.

Under the threat of a major snowstorm, the panel postponed its hearing scheduled for Wednesday. The hearing was intended to review the Fed's plans for withdrawing its emergency supports. Bernanke chose to release the prepared testimony.

Deciding when and how to remove all the stimulus is the biggest challenge for Bernanke in his second term, which started last week. Reeling in the stimulus too soon risks short-circuiting the recovery. That could send unemployment up.

Yet the Fed keeps its stimulus measures in place for too long, they could help unleash inflation.

Bernanke repeated the Fed's pledge to hold rates at record lows for an "extended period." Economists think that means for at least six more months. But Bernanke cautioned that the Fed eventually will need to raise rates to ease inflationary pressures.

Even before the Fed raises the rate paid on banks' excess reserves, it could raise the rate it charges banks for emergency loans, Bernanke said. That rate, called the discount rate, is 0.50 percent. An increase in the discount rate wouldn't affect interest rates charged to consumers and businesses. But Bernanke said it would help normalize the Fed's interest rate policy now that the worst of the financial crisis has passed.

He said he expected the Fed to consider a "modest" increase to the discount rate. Such a move would not raise rates for households and businesses and would not signal any change in interest-rate policy, Bernanke said.

The Fed is still weighing the order of steps it can take to reel in the stimulus.

Under one scenario, the Fed would first use its tools to drain money from the financial system. Then it would start pushing up rates throughout the economy by boosting the rate paid on banks' excess reserves, Bernanke said.

But if a faster exit is needed, the Fed could raise the rate on reserves even as it's using its other tools to pull money from the financial system.

The Fed is fine-tuning one tool to withdraw money: By selling securities from its portfolio with an agreement to buy them back later. Those operations are called reverse repurchase agreements.

And the Fed is moving ahead on a proposal to let banks to set up the equivalent of certificates of deposit at the central bank. This, too, would help the Fed mop up money pumped into the economy and prevent inflation from flaring later.

Together, those two operations — reverse repos and the CD-like deposit accounts — would let the Fed "drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so," Bernanke said.

Bernanke said he doesn't expect the Fed to sell any of its securities anytime soon.

To fight the financial crises, the Fed pumped so much money into the economy for lending programs that its balance sheet swelled to $2.2 trillion — more than double the pre-crisis level. The Fed will need to mop up that money to prevent inflation later.

Bernanke said another economic support program aimed at driving down mortgage rates and bolstering the housing market is on track to end in March. By then, the Fed will have finished buying $1.25 trillion in mortgage securities from Fannie Mae and Freddie Mac. It will also have finished buying $175 billion in debt from the mortgage giants.

But the Fed hasn't ruled out continuing to buy mortgage securities after then to support the economy.

EU assembly rejects U.S. bank data deal

BRUSSELS (Reuters) – The European Parliament rejected on Thursday an agreement with the United States on sharing bank data, snubbing appeals from Washington for help in counter-terrorism investigations.

The nine-month interim agreement went into force provisionally at the start of February but some deputies opposed it on the grounds that it failed to protect the privacy of EU citizens.

Washington will now have to seek other ways to access information on money transfers in Europe.

It says such data is vital to track terror suspects.

(Reporting by Justyna Pawlak; Editing by Dale Hudson)

• let Greece remain in the EU and in the Euro but go bankrupt
• force Greece to leave the Eurozone
• support Greece through the ECB and the IMF and the ECB with agreed participation by the main EU countries

Stephen King: The UK economy won't rebalance until we recognise the world has changed

Outlook: The UK didn't go into recession alone, and exports therefore were unable to make any headway even as imports collapsed

Global currency wars pose "a real threat" to economic recovery, the head of the International Monetary Fund, Dominique Strauss-Kahn, has warned.

In an interview with the BBC, he said currency disputes showed countries were not co-operating as well as they had during the financial crisis.

In recent weeks both the US and Europe have led criticism of China over its undervalued yuan.

Meanwhile, Japan been forced to intervene to curb rises in the yen.

Mr Strauss-Kahn said there were signs that countries were trying to use their currencies "as a weapon".

"The willingness of the countries to work together, which was very strong at the climax of the [financial] crisis is not as strong today," he said.

"'Currency war' might be too strong, but the fact the countries want to find domestic solutions to a global problem is really a threat to the recovery."

He added that China would have to revalue the yuan in order for the country's economy to reduce its reliance on foreign export markets.

Mr Strauss-Kahn agreed that China should act to raise the value of its currency "the sooner the better".

But he warned against placing too much importance on it.

"We have been saying for years that the [yuan] was undervalued," he said.

"[China] will go in this direction - the question is the speed. Certainly they can go faster than they are today.

"On the other hand we shouldn't believe that all the imbalances in the economy today will be solved if the value of yuan was changed."

The US has been at the forefront of criticism of China's currency policy.

It claims that China is keeping its currency artificially low in order to aid its exporters, hurting US competitors.

David Cameron promises 'relentless' push for growth

David Cameron has promised a "forensic, relentless approach" to ensuring the UK's future economic growth.

SEOUL, South Korea – President Barack Obama said a strong, job-creating economy in the United States would be the country's most important contribution to a global recovery as he pleaded with world leaders to work together despite sharp differences.  http://news.yahoo.com/s/ap/20101110/ap_on_bi_ge/obama_asia

An unbridgeable gulf in economic thinking

Mercantalist nations seem to believe every country can cut and save its way to renewed prosperity

Leaders of the G20 group of major economies have agreed to avoid "competitive devaluation" of currencies after a second day of difficult talks in the South Korean capital, Seoul.

I have never doubted by own relative sanity in the 73 years I have been alive and I still trust it. All I can say is that if the ONS had reported any growth at all in the last quarter of 2010 I would have advised them to look again. How could it have been possible in an economy so dependent on personal options and possibilities that can vary quite substantially at short notice, when exposed to such events?
http://www.bbc.co.uk/news/business-12272717

Global stock markets surged as some of the world's big central banks launched plans for co-ordinated action aimed to support the financial system.

Wall Street's Dow Jones index saw its biggest gain since March 2009, rising 4.2%, after jumps on European bourses.

It came after the US Federal Reserve, European Central Bank, and the central banks of the UK, Canada, Japan and Switzerland acted to improve lending.

Banks should brace themselves to withstand the "extraordinarily serious and threatening" economic situation, the Bank of England governor has said.

The Bank's Financial Policy Committee (FPC) said the eurozone crisis was the biggest threat to the UK's banking system.

It said banks should build up their financial buffers to withstand that.