Global Economy

derkonig · Post by **derkonig** » 27 Jan 2009 18:03

AoA
70k job cuts announced in a day

Chinmayanand · Post by **Chinmayanand** » 28 Jan 2009 01:07

Investment Adviser

Chinmayanand · Post by **Chinmayanand** » 28 Jan 2009 01:08

Subprime Crisis

Chinmayanand · Post by **Chinmayanand** » 28 Jan 2009 01:10

Iraq Oil

ramana · Post by **ramana** » 28 Jan 2009 01:24

Please post description of the videos. Thanks, ramana

Vipul · Post by **Vipul** » 28 Jan 2009 20:52

51 mn could lose jobs by 2009 end: ILO.

svinayak · Post by **svinayak** » 29 Jan 2009 05:30

http://dabagirls.wordpress.com/

Are you or someone you love dating a banker? If so, we are here to support you through these difficult times. Dating A Banker Anonymous (DABA) is a safe place where women can come together – free from the scrutiny of feminists– and share their tearful tales of how the mortgage meltdown has affected their relationships. DABA Girls was started by two best friends whose relationships tanked with the economy. Not knowing what else to do, we did what frustrated but articulate girls have done since the beginning of time - we started a blog. So if your monthly Bergdorf’s allowance has been halved and bottle service has all but disappeared from your life, lighten your heart with laughter and email your stories to [email protected]. Warning all stories sent will be infused with our own special brand of DABA Girl humor.

http://www.nytimes.com/2009/01/28/nyreg ... .html?_r=1

***** CAUTION ***** RACY 18+ *****

Nandu · Post by **Nandu** » 29 Jan 2009 06:02

p_saggu wrote:How is the health sector doing in the US?
I mean specifically Doctors and Jobs and salaries. Is the downturn also affecting them too? Are new recruitments affected? Are there pink slips being issued?

SHQ is a doc, and what she sees is that they are still hiring docs, though trying to freeze or cut in other areas. Salaries still growing at a good pace. My own forecast is that things might slow a little bit because HMOs and Insurance companies will find it harder to raise premiums and still retain members, but Obama's healthcare plan should backfill that and keep the good times rolling for the healthcare industry.

Shivani · Post by **Shivani** » 29 Jan 2009 09:15

Starbucks to Cut 6,700 Jobs After Earnings Fall 69%

Bloomberg wrote:

Jan. 28 (Bloomberg)-- Starbucks Corp., the world’s largest chain of coffee shops, said it will cut 6,700 jobs and close 300 more stores after reporting first-quarter profit that fell more than analysts estimated.

The company plans to close 200 locations in the U.S. and 100 overseas, in addition to the 600 Starbucks said it would close last year. The workforce reduction will eliminate 6,000 café positions and 700 corporate jobs, the Seattle-based chain said today in a statement.

Chief Executive Officer Howard Schultz warned in December that Starbucks’ profit would be less than analysts’ estimates at the time as sales in established stores worsened in November. Customers pinched by job losses and falling home prices are cutting back on premium coffee. The firings and closings announced today further accelerate Schultz’s plan to trim costs.

Schultz also asked the board to cut his annual base pay to less than $10,000, or the minimum required to maintain benefits for him and his family, spokeswoman Deb Trevino said today in a telephone interview. His base pay was about $1.2 million in 2008. Starbucks is also selling a corporate jet, bringing the fleet to one plane following a similar sale late last year.

“The only grown-up attitude and thing for them to do in this environment” is to adjust to the declining revenue, Sharon Zackfia, an analyst with William Blair & Co. in Chicago, said today in a Bloomberg Television interview. “You have to give this company credit for coming up with ways to bolster their margin even though same-store sales are down.”

Trimming Expenses

The additional measures increase the company’s plan to trim costs by $100 million this year, to at least $500 million, Starbucks said. Starbucks may save more next year as the store closings take effect, Chief Financial Officer Troy Alstead said on a conference call.

Sales at U.S. stores open at least 13 months dropped 10 percent in the first quarter. The company had a total of 16,875 stores, including franchised locations, as of Dec. 28.

“The pace of weakening in the business environment and the global economy has been accelerating,” Schultz said on the conference call today. “I’m far from pleased with our performance this quarter and I anticipate that our results could remain under pressure until the economy begins to recover.”

Starbucks rose 50 cents to $9.65 today in Nasdaq Stock Market composite trading. The stock has lost 51 percent in the past 12 months.

‘Slow Drip’

The coffee seller in July said it would close 600 company operated stores in the U.S. and 61 shops in Australia. The move slashed 12,000 café positions, although about 70 percent of workers were able to transfer to nearby locations, resulting in about 3,600 jobs lost.

Net income dropped 69 percent to $64.3 million, or 9 cents a share, from $208.1 million, or 28 cents, a year earlier, the company said in the statement. Sales fell 5.5 percent to $2.6 billion in the period ended Dec. 28.

Excluding some restructuring costs, profit was 15 cents a share. The average of 16 analyst estimates compiled by Bloomberg was for profit of 17 cents a share on sales of $2.71 billion. The company doesn’t give quarterly forecasts.

The store closings announced last year are still being implemented, and the shutterings announced today will be carried out through the year that ends in September, Starbucks said. Half of the corporate cuts announced today will come from Seattle.

“I’m hoping 300 stores is enough, and that they’ve done what they need to do,” said Patty Edwards, a retail analyst with Storehouse Partners in Seattle. “Slow drip, even in coffee, isn’t necessarily the best thing. Sometimes you just need to get the pain over with.”

Boeing Plans to Cut 10,000 Jobs as Demand Weakens

Bloomberg wrote:

Jan. 28 (Bloomberg) -- Boeing Co. said it plans to cut 10,000 jobs, or more than 6 percent of its workforce, after a strike and program delays led to a fourth-quarter loss and a global recession began to erode demand for aircraft.

The job reductions include 4,500 that were previously announced by Boeing, the second-largest maker of commercial planes and the No. 2 defense contractor. The new target was disclosed on a conference call after the Chicago-based company reported a net loss of $56 million after a year-earlier profit and said 2009 earnings will be lower than analysts predicted.

Boeing expects an increase in canceled or deferred orders this year as airlines cope with a drop in travel demand and tight credit. Almost a third of the world’s carriers are likely to defer deliveries this year, up from 8 percent three months ago, a survey released last week by UBS Investment Research showed.

“We can and must prepare for the continued market uncertainty,” Chief Executive Officer Jim McNerney, 59, said on the call. The company is taking steps to manage costs and investments more aggressively, he said.

The 5,500 new job cuts announced today will be spread out over the year, with emphasis on the first half, and will come from support services, corporate positions and the defense side of the business, McNerney said. He also said he’s planning “additional measures to further strengthen the team” after making personnel changes at the commercial unit last month.

The CEO didn’t elaborate on those plans, and spokesman Todd Blecher said he had no further information.

Earnings Results

The planemaker’s fourth-quarter net loss was 8 cents a share, compared with net income of $1.03 billion, or $1.36, a year earlier. Sales decreased 27 percent to $12.7 billion.

Boeing rose 2 cents to $43.24 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 44 percent in the past 12 months.

Six planes on order were canceled last year and 110 were deferred, affecting about 3 percent of Boeing’s backlog, McNerney said. That figure will be “somewhat” higher in 2009, spokesman Blecher said after the call, declining to be more specific.

The cancellations will likely just reduce the company’s so- called overbookings, the CEO said. For example, there are about 15 percent more orders for the 737 than the company can produce.

Profit may be $5.05 to $5.35 a share this year, Boeing said today, trailing the average estimate of $5.70 in a Bloomberg survey of analysts and also Boeing’s own forecast from July of $6.80 to $7. The company didn’t issue a forecast in the third- quarter results because of the strike and the global recession and credit crunch that were taking hold.

Dreamliner and Strike

Earnings also are being weighed down by development costs on the delayed 787 Dreamliner, which is now due to reach the first customer in early 2010, about two years later than planned. An eight-week machinists strike that ended Nov. 2 added to the delays for the 787 and other new programs and stripped $1.8 billion from full-year earnings.

A customer who asked to remain unidentified recently canceled all 15 of the 787 Dreamliners it had on order, more because of the business environment the customer faced than because of the delays, McNerney said. More of the 895 remaining orders could be canceled this year, he added.

“Despite a modest level of orders churn, we are confident in the 787’s value to our customers,” he said.

Boeing shipped 50 aircraft in the quarter, 70 fewer than planned, hurting revenue by $4.3 billion and setting it further behind Airbus SAS, the only larger commercial-plane maker.

Delivery Forecast

Boeing said today it plans to deliver 480 to 485 planes this year, less than its July estimate of 500 to 505, and may have to provide $1 billion in financing to customers who can’t find funding elsewhere. It shipped 375 planes last year, below its earlier plan of at least 475.

“Obviously we can do more than a billion dollars, and we’ll have to see on a case-by-case basis what makes sense,” Chief Financial Officer James Bell said on the call. He said he expects production rates to remain stable throughout Boeing’s forecasting planning period, though “the out-years are less certain.”

New orders will probably be lower than deliveries this year, McNerney said.

Job Reductions

McNerney told employees in November that Boeing would cut jobs and reduce costs to help offset expenses from aircraft program delays and to brace for possible order cancellations amid slumping air travel.

Boeing announced 4,500 job cuts in the commercial business on Jan. 9, mainly at its manufacturing hub in Washington state. Boeing, which has a record $279 billion backlog of plane orders to fill, said then that the dismissals would start in February and focus on areas not directly associated with production.

The charges and savings involved with the lost jobs are included in the company’s forecast, McNerney said today.

Through yesterday, U.S. companies had announced more than 519,895 job cuts since Nov. 1, according to Bloomberg data. Newly elected President Barack Obama has proposed a plan to create as many as 4 million jobs to boost the economy.

This pretty much assures that Boeing will be gifted the USAF tanker contract even though the 767 is an inferior platform. Of course, the US government will have to print more money to order these planes in the first place. I hope this cash crunch kills the F-35 program.

Singha · Post by **Singha** » 29 Jan 2009 09:18

A customer who asked to remain unidentified recently canceled all 15 of the 787 Dreamliners it had on order, more because of the business environment the customer faced than because of the delays, McNerney said. More of the 895 remaining orders could be canceled this year, he added.

two years back Boeing fanbois where kawing all over the internet about
the A380 delays and the record orders for 787 vs the redesign of A350 forced by unhappy clients.

ajay_ijn · Post by **ajay_ijn** » 29 Jan 2009 09:20

but shivani if US spends on tankers, why would they cancel F-35. i mean just like ww2 brought back US economy, may be massive US military build up would help the economy today and F-35 is definitely a big program, killing it would only add to job losses and pain. its only in these bad times, companies depend on govt spending and defence is a major part of that.

SriniY · Post by **SriniY** » 29 Jan 2009 11:58

Full text of Putin's Speech at Davos. Posting snippets from this. A very clear analysis of the economic slowdown. Real worth reading the full article.

Putin is a true patriot.

http://www.weforum.org/pdf/AM_2009/Open ... rPutin.pdf

There is a certain concept, called the perfect storm, which denotes a situation when Nature’s forces converge in one point of the ocean and increase their destructive potential many times over. It appears that the present-day crisis resembles such a perfect storm.
...
I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasised the US economy’s fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism. The time for enlightenment has come. We must calmly, and without gloating, assess the root causes of this situation and try to peek into the future.

This primarily concerns disproportions between the scale of financial operations and the fundamental value of assets, as well as those between the increased burden on international loans and the sources of their collateral.

The entire economic growth system, where one regional centre prints money without respite and consumes material wealth, while another regional centre manufactures inexpensive goods and saves money printed by other governments, has suffered a major setback.{Taking a dig at the US here}

And, finally, this crisis was brought about by excessive expectations. Corporate appetites with regard to constantly growing demand swelled unjustifiably. The race between stock market indices and capitalisation began to overshadow rising labour productivity and real-life corporate effectiveness.
Unfortunately, excessive expectations were not only typical of the business community. They set the pace for rapidly growing personal consumption standards, primarily in the industrial world.This amounted to unearned wealth, a loan that will have to be repaid by future generations. This pyramid of expectations would have collapsed sooner or later. In fact, this is happening right before our eyes.

* * *

We must not revert to isolationism and unrestrained economic egotism. The leaders of the world’s largest economies agreed during the November 2008 G20 summit not to create barriers hindering global trade and capital flows. Russia shares these principles. Although additional protectionism will prove inevitable during the crisis, all of us must display a sense of proportion. Excessive intervention in economic activity and blind faith in the state’s omnipotence is another possible mistake.

True, the state’s increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent. The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.

In the 20th century, the Soviet Union made the state’s role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.
Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.{Hmmm, very interesting of Putin to say this.}

In our opinion, we must first atone for the past and open our cards, so to speak.
Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. In effect, our proposal implies that the audit, accounting and ratings system reform must be based on a reversion to the fundamental asset value concept.

Third. Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model. {If the US dollar collapses,...}

This means that a system based on cooperation between several major centres must replace the obsolete unipolar world concept.

The only way to ensure truly global energy security is to form interdependence, including a swap of assets, without any discrimination or dual standards. It is such interdependence that generates real mutual responsibility.

I propose we start laying down a new international legal framework for energy security. Implementation of our initiative could play a political role comparable to the treaty establishing the European Coal and Steel Community.

It is necessary to return to a balanced price based on an equilibrium between supply and demand, to strip pricing of a speculative element generated by many derivative financial instruments.

To guarantee the transit of energy resources remains a challenge. There are two ways of tackling it, and both must be used. The first is to go over to generally recognised market principles of fixing tariffs on transit services. They can be recorded in international legal documents. The second is to develop and diversify the routes of energy transportation. We have been working long and hard along these lines.

However, unlike many other countries, we have accumulated large reserves. They expand our possibilities for confidently passing through the period of global instability.

The crisis has made the problems we had more evident. They concern the excessive emphasis on raw materials in exports and the economy in general and a weak financial market. The need to develop a number of fundamental market institutions, above all of a competitive environment, has become more acute.
We were aware of these problems and sought to address them gradually. The crisis is only making us move more actively towards the declared priorities, without changing the strategy itself, which is to effect a qualitative renewal of Russia in the next 10 to 12 years.

The world has lately come to face an unheard-of surge of violence and other aggressive actions, such as Georgia’s adventurous sortie in the Caucasus, recent terrorist attacks in India, and escalation of violence in Gaza Strip. Although not apparently linked directly, these developments still have common features.
First of all, I am referring to the existing international organisations’ inability to provide any constructive solutions to regional conflicts, or any effective proposals for interethnic and interstate settlement. Multilateral political mechanisms have proved as ineffective as global financial and economic regulators.
Frankly speaking, we all know that provoking military and political instability, regional and other conflicts is a helpful means of distracting the public from growing social and economic problems.

ChandraS · Post by **ChandraS** » 29 Jan 2009 12:12

Apologies if this was posted before:

Some excerpts from FBI saw mortgage fraud early

"We knew that the mortgage-brokerage industry was corrupt," the first of the retired FBI officials told the Seattle P-I. "Where we would have gotten a sense of what was really going on was the point where the mortgage was sold knowing that it was a piece of dung and it would be turned into a security. But the agents with the expertise had been diverted to counterterrorism."

Seems like the US economy was the biggest casualty in this War on Terror. They went to Eye-Rack looking for the smoking gun but never realized it was in their backyard all along.

markos · Post by **markos** » 29 Jan 2009 12:58

Blaming the mortgage broker for mortgage meltdown is akin to blaming the corner-shop selling cigarettes as the root cause of lung cancer.

Broker is just one of the channels for distribution of mortgage product. Mortgages originated by brokers were CLOSED by big banks like Citi, Countrywide, WaMu etc. These banks failed in doing the due diligence. With technology and automated underwriting tools, doing due diligence (income/asset/job verification) is a relatively easy task. As a matter of fact, they wanted more of these liar loans and encouraged the brokers to originate more such loans by turning a blind eye so that they can be packaged and sold as securities in wallstreet for ever higher bonuses. Then they released money from their reserves to show even more profit (instead of reserving more money because of booking questionable loans).

The commission received by brokers on these mortgages pales compared to the fititious profits booked by investment banks by pooling those mortgages as complex opaque securities. Yet, they are getting bailed out....

Vipul · Post by **Vipul** » 29 Jan 2009 20:12

SriniY wrote:Full text of Putin's Speech at Davos. Posting snippets from this. A very clear analysis of the economic slowdown. Real worth reading the full article.

Putin is a true patriot.

A Speech full of sour grapes.All he has done throughout the speech is to ask the whole world to dump the US stranglehold on the world economy and give other countries(ofcourse including Russia) if not an Equal Equal, atleast some share in shaping the future economic order.

He is too drunk on power and is advising the world on what to do,he is instead advised to broadbase the shallow Russian economy.Russia is fast loosing its Foreign exchange reserves( almost 30% in one month) which are based solely on Oil Prices and nothing else.A few more months of low Gas prices and all this Bravado will be gone.

svinayak · Post by **svinayak** » 30 Jan 2009 00:40

Clinton: We'll Make Money the Old Fashioned Way

http://m.apnews.com/ap/db_8518/contentd ... d=bbs5Zptw

•Prospects for U.S. Recovery Dim as Home Sales, Durable-Goods Orders Slump
http://www.bloomberg.com/apps/news?pid= ... refer=home

LBO Firms Face Lending Drought as ‘Adult Supervision’ Returns
http://www.bloomberg.com/apps/news?pid= ... refer=home

New-Home Sales in U.S. Drop to Lowest Level on Record as Lending Dries Up Sales of new homes in the U.S. fell in December to the lowest level on record, creating an unprecedented glut of unsold properties that casts doubt on any recovery in the industry this year.

http://www.bloomberg.com/apps/news?pid= ... er=economy
Fed Says World Economy Weakening `Significantly,' Warns of Deflation Risk Federal Reserve officials warned of a prolonged global economic slowdown that may push the U.S. to the brink of deflation.

http://www.bloomberg.com/apps/news?pid= ... er=economy
Europe Confidence Drops to Record Low, Adding to Arguments for Lower Rates European confidence in the economic outlook fell to the lowest on record in January as the region faces its worst recession since World War II, adding to arguments for the European Central Bank to cut interest rates further.

abhischekcc · Post by **abhischekcc** » 30 Jan 2009 19:49

Singha wet dream has come true.

High paid wall street fat cats to see their bonuses shrivel like their p*nises

Vipul · Post by **Vipul** » 30 Jan 2009 20:47

Wait a few more quarters and the pecker will be gone.

ramana · Post by **ramana** » 30 Jan 2009 21:43

X-posted..
Hats off to vina for the terminiology of the sub-prime market primary setting off the secondary in the TN meltdown of the global economy. Today Wh spokeman said the same thing in effect that the sub-prime crisis and housing market downturn have started affecting the whole econmy and that led to the -3.8% growth in US economy.

My view:
If one adds the inventorie replenishment which were counted as assets its more like -5.5% in tune with what the experts were suggesting. Overall the economy grew 1.5% in 2008. So in effect fourth quarter contraction was major bubble bursting say like rising pizza dough from which the air has been punched out. Its after effects will be felt this quarter too at a minimum while DC fiddles with the stimulus package which might have to be bigger closer to $1.5T in my opinion to be of any effect.

--
Vipul like Mongolian VD in the humor thread!

ramana · Post by **ramana** » 31 Jan 2009 00:33

When I look at the charts in the "Next Bubble" psoted by durgesh above, I get the feeling that some one knew the weak point and collapsed the bubble and it wasnt just incompetence and greed as the media is making out. The tipping point was the run on Lehman Bros which the Treasury chief did not bailout for his own reasons or short sightedness.

Reminds me of the story of Shiva shooting down the Tripura(Tri cities) of the rakshas when they aligned for that fractional moment. US was happy growing larger and larger and letting Europe behind.

Yes stimulus, bailout all are needed to put the pieces together again but need to ensure it was a black swan and not a black adder.

Vipul · Post by **Vipul** » 31 Jan 2009 02:03

IMF finalising $100-bn loan from Japan.

New York: The International Monetary Fund is finalising a USD 100-billion loan from Japan and is considering issuing bonds for the first time in its history, as part of an effort to double the financial resources it has to fight the deepening global recession.

The IMF isn't in danger of running out of money, the 'Wall Street Journal' quoted Deputy Managing Director John Lipsky as saying, though the fund has made commitments to lend about USD 50 billion in recent months to Pakistan, Iceland and a clutch of Eastern European countries, and is talking to others.

But the organisation has wanted for months to double its lending ability to about USD 500 billion from USD 250 billion, to bolster confidence that it could handle other borrowers amid the crisis, the paper said.

Asked whether the Western European countries, outside tiny Iceland, might turn to the IMF for loans if the crisis worsens, Lipsky said, "in the current circumstances, the right approach is 'never say never.'" The IMF's executive board is expected to discuss potential sources of funding next month.

The plan of a USD 100-billion loan from Japan is moving forward even as Japan announced on Thursday that it has been in a recession for more than a year, the Journal said.

But Japan still has one of the world's largest foreign-currency reserves and because plunging global demand for its exports is Japan's biggest single economic problem, shoring up the rest of the world's spending ability could help Japan's recovery too, it added.

In the past, the US and Europe have blocked attempts by the IMF to issue bonds, figuring that it would make the IMF too independent of their direction, former IMF chief economist Michael Mussa was quoted as saying.

The IMF now depends on loans from its member nations for financing, unlike the World Bank.

svinayak · Post by **svinayak** » 31 Jan 2009 03:48

Roubini Sees Global Gloom After Davos Vindication (Update1)
http://www.bloomberg.com/apps/news?pid= ... 3xzPt6sIMU

By Simon Kennedy

Jan. 30 (Bloomberg) -- At the World Economic Forum two years ago, Nouriel Roubini warned that record profits and bonuses were obscuring a “hard landing” to come. “I really disagree,” countered Jacob Frenkel, the American International Group Inc. vice chairman and former Israeli central banker.

No more. “Roubini was intellectually courageous, and he called the shots correctly,” says Frenkel, whose AIG survives only on the basis of more than $100 billion of government loans. “He gained credibility, and he deserves it.”

This week, New York University’s Roubini returned to the WEF and the Swiss ski resort of Davos as the prophet of the worst economic and financial crisis since the Great Depression - - joining the ranks of previous “Dr. Dooms” who made their names through contrarian calls that proved correct.

Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says.

“The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. “I don’t know what some people are smoking.”

‘Catastrophic’

As long ago as February 2007, Roubini was writing on his blog that “the party will soon be over,” and warning of “painful consequences for the U.S. and the global economy.” By last February, his tone had become apocalyptic, raising the specter of a “catastrophic” meltdown that central banks would fail to prevent, triggering the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities.

The next month, Bear Stearns Cos. failed, to be taken over by JPMorgan Chase & Co. in a government-backed deal. Then, in September, Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital. The U.S. took over AIG, Fannie Mae and Freddie Mac, and the Standard & Poor’s 500 Index suffered its worst year since 1937.

“I was intellectually vindicated,” Roubini says. “But I was vindicated by having an economic disaster which has political and social consequences.”

Predecessors

Roubini’s predecessors in the role of economic nay-sayer include some well-known names: Joseph Granville, publisher of the Granville Market Letter, who forecast the stock-market declines of 1976 and 2000; Henry Kaufman, who as a managing director at Salomon Brothers projected rising interest rates that led to a U.S. recession in the early 1980s; Marc Faber, publisher of the Gloom, Boom & Doom Report, who predicted the 1987 stock crash; and Yale University’s Robert Shiller, a former colleague of Roubini’s, who forecast the end of the dot-com bubble in his 2000 book “Irrational Exuberance” and said in a second edition in 2005 that the U.S. housing market had undergone the biggest speculative boom in U.S. history.

Granville, 85, says the key to being an outlier is not to doubt your analysis.

“I don’t have anything to do with emotion,” says Granville, who’s based in Kansas City. “Keep your head, follow the numbers and ignore the rest.”

Roubini was born in Istanbul, the son of an importer- exporter of carpets, and spent his childhood in Israel, Iran and Italy. It was while living in Milan from 1962 to 1982, he says, that he became attracted to economics: “Economics had the tools to understand the world, and not just understand it but also change it for the better.”

International Economics

After a year at the Hebrew University of Jerusalem, he earned an economics degree at Milan’s Universita’ L. Bocconi and then his Ph.D. at Harvard University in 1988, where he specialized in international economics.

Jeffrey Sachs, he says, became his “role model” at Harvard by demonstrating that economists could shape public policy -- as Sachs did by lobbying for poor countries to have their debts relieved by richer governments. Sachs is now a professor at Columbia University.

“You sensed there was something beyond academia, that you have to figure out the big issues of the global economy,” says Roubini. “You have to be engaged, and can’t just be in an ivory tower.”

For much of the 1990s, Roubini combined academic research and policy-making by teaching at Yale and then in New York, while also spending time at the International Monetary Fund, the Federal Reserve, World Bank and Bank of Israel.

Joining Clinton

By 1998 he had attracted the attention of President Bill Clinton’s administration, joining it first as a senior economist in the White House Council of Economic Advisers and then moving to the Treasury department as a senior adviser to Timothy Geithner, then the undersecretary for international affairs and now Treasury secretary in the Obama administration.

Roubini returned to the IMF in 2001 as a visiting scholar while it battled a financial meltdown in Argentina. He co-wrote a book on saving bankrupt economies entitled “Bailouts or Bail- ins?” and opened his own global consulting firm, which now employs two dozen economists and publishes a popular Web site and blog.

“Nouriel has a rare combination of economics and the real world, and so has great insight because of that,” says Shiller. “He looks into the details and rolls up his sleeves.”

Roubini says working on emerging-market blowouts in Asia and Latin America allowed him to spot the looming disaster in the U.S. “I’ve been studying emerging markets for 20 years, and saw the same signs in the U.S. that I saw in them, which was that we were in a massive credit bubble,” he says.

Still a Pessimist

With that bubble now popped, Roubini remains more pessimistic than economists elsewhere. The IMF forecasts global growth of 0.5 percent this year and bank losses from toxic U.S.- originated assets of $2.2 trillion. By contrast, Roubini sees the global economy shrinking this year, and banks writing down at least $3.6 trillion -- compared to the $1.1 trillion disclosed so far.

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him.

“I’m not a permanent bear,” he says. “I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier.”

For Related News and Information: For Top Economic Stories: TOP ECO <GO> Search for central bank stories: NSE MONETARY POLICY <GO> For Global Economy Forecasts: NI ECOSURV <GO>
Last Updated: January 30, 2009 09:47 EST

ramana · Post by **ramana** » 31 Jan 2009 04:43

From Kiplinger

GDP drop in fourth quarter

GDP Declines 3.8% in Fourth Quarter of '08
Economy posts biggest drop since '82 recession and inventory buildup is huge.
By Jerome Idaszak, Associate Editor, The Kiplinger Letter

The latest gross domestic product (GDP) report highlights a growing deflation risk. The days may be short-lived when policymakers had just to focus on getting the economy back on its feet and restoring the banking sector to sound footing.

The GDP inflation yardstick fell 0.1% in the fourth quarter of 2008, mostly due to plummeting energy prices. A key measure of core inflation, which excludes volatile food and energy prices, rose 0.6%, the smallest increase in decades. Many economists feel the GDP measure of inflation should receive more attention than the Consumer Price Index, which measures price changes in a hypothetical basket of goods and services that a typical consumer might buy in a month. The GDP measure shows what consumers and businesses actually pay for goods and services.

The risk of deflation grabbing hold is the dearth of short-term solutions. Unlike slowdowns in growth, which can be combated with government spending, deflation is a damaging economic phenomenon for which governments and businesses are ill equipped to respond. The Federal Reserve made mention of the deflation risk in its Jan. 28 statement after a two-day policymaking meeting, and the central bank seems to be looking at possible strategies, which is a good first step.

Meanwhile, the "headline" GDP number looked promising because it wasn't as big as expected: a 3.8% decline in economic growth measured at an annual rate. It was still the largest drop since the 6.4% decline in the first quarter of 1982. And it would have been far larger, likely a minus 5% or more, except for a huge buildup of unsold goods that will sit on factory floors, store shelves and auto dealer lots for some time in 2009.

The slowdown seems to be just as bad for the first quarter of this year. We look for a minus 4% in the current quarter with positive growth around the fourth quarter if a timely fiscal stimulus package of spending and tax cuts clears Congress in February, which we expect. Officials, including policymakers at the Fed, are counting on that boost.

Even so, GDP for this year will contract about 1.8%, following an increase of 1.3% in 2008. There are scant signs of relief from the recession, at least for now. Layoff announcements earlier this week by once-strong exporters such as Boeing and Caterpillar underscore the weakness, not only in the United States, but around the world. Also, earlier in the week, durable goods orders in December, a forward looking signal of sales and output, fell a sharp 2.6% for the month.

The GDP report shows weakness across the board. Consumer spending, which accounts for two-thirds of GDP, declined 3.5% in the fourth quarter, while housing construction and remodeling dropped for the 12th quarter in a row, down 23.6%, combined.

Spending and investment by businesses fell, too, down 19%. Exports fell 19.7%, their first decrease since the second quarter of 2003. The major source of support came from federal government spending, up 5.8%, not as strong as the 13.8% gain in the previous quarter. State and local government spending fell 0.5%.

brihaspati · Post by **brihaspati** » 31 Jan 2009 07:01

Just a question : any thoughts on new paradigms for the economy?

I would like to see some discussion on a comprehensive policy for regeneration along the broad outline
(1) placing the monetary economy in context with quantitative commodity indices
(2) local and regional self-sufficient microeconomies
(3) agrarian-urban integrated development (food agriculture energy producing urban areas with local market exchange)
(4) for India, an excess capacity building of fibre-optic connected information network, as part of (3) aimed at becoming the global hub of information processing.

brihaspati · Post by **brihaspati** » 31 Jan 2009 07:27

X-posted...
ramana wrote:
Suraj, Vina et al, How do we use statistics after a black swan? Statistics assume tomorrow will be like yestrday. Howeve in between a catstrophe occurs and all things fall down. Yet WS experts/ANALysts keep comparing earnigs to year ago when they should re-baseline and look at today! How do these experts make their predictions?

So what Eric Janszen is saying is that we should re-baseline and go by historical trend. The $12T lost is the non-existent bubble money. By feeding bailouts we convert non-existent wealth into real debt.

Ramanaji,
a very old idea, is to base exchanges on actual commodity quantities and building exchange "prices" on weighted sums of commodity quantities, bypassing money prices. Deabtes are about the sectoral rigidities imposed. But such commodity quantity based exchanges cannot generate fictitious value.

Neela · Post by **Neela** » 31 Jan 2009 13:42

So finally, my company finally said it has no moolah. In the DRAM world, everything is unfair.
With a collective debt of $14billion and no technology of its own, Taiwanese DRAM manufacturers continue to live with state support. They continued the chronic oversupply since 2006 that led to prices crashing!

While Samsung and Micron are struggling with the 50nm designs, we on the other hand managed a 46nm product which can make money even with the current prices!

It all became to critical when we couldn't raise money from the market since December! As GD said, its not just technology that matters now. Its how good you are financially. The companies that can manage both in these hard times will become giants in the next few years!!

Singha · Post by **Singha** » 31 Jan 2009 14:28

does it start with Q ?

Neela · Post by **Neela** » 31 Jan 2009 14:30

Singha wrote:does it start with Q ?

Singha · Post by **Singha** » 31 Jan 2009 14:37

Singha radar is sharp.

Chinmayanand · Post by **Chinmayanand** » 31 Jan 2009 18:00

Could Hyperinflation Happen Again?

Could Hyperinflation Happen Again?
January 29, 2009

By Joachim Fels & Spyros Andreopoulos | London

According to Philip Cagan’s (1956) classical definition, hyperinflation is an episode where the inflation rate exceeds 50% per month. The historical examples of hyperinflation mostly occurred in the 1920s, when Austria, Germany, Hungary, Poland and Russia experienced galloping price increases. For example, Germany in 1923 recorded an astronomical inflation rate of 3.25 million percent in a single month. Since the 1950s, hyperinflations have been confined to developing and transition economies. Some recent examples include Argentina (1989-90), Bolivia (1984-85), Brazil (1989-90), Peru (1990), Ukraine (1991-94) and Zimbabwe in the past several years.

The root cause of hyperinflation is excessive money supply growth, usually caused by governments instructing their central banks to help finance expenditures through rapid money creation. Hyperinflations have mostly occurred in a context of political instability, adverse economic shocks and chronically high fiscal deficits. Hyperinflationary episodes are characterised by a general loss of confidence in the value of money, a flight into real assets and hard currencies, a surge in barter trade, and a shrinkage of financial intermediation and thus of the banking system.

An important empirical feature of hyperinflations is the high correlation of money supply growth and inflation rates. Money growth and inflation rates are also highly correlated in milder versions of high inflation episodes. Past bouts of high inflation in the UK, Italy, New Zealand and Mexico were preceded and accompanied by high growth rates of the money supply.

It is important to note that in low-inflation and low-monetary growth environments, the relationship between money growth and prices is much weaker or altogether non-existent. Average money growth rates have varied substantially between countries that have experienced relatively low (single-digit) inflation rates. However, countries with sustained high money growth rates have also experienced sustained high inflation.

Against this backdrop, could hyperinflation or high inflation happen again? Possibly yes, under certain circumstances.

First, the rapid expansion of the monetary base that the Fed, the ECB, the Bank of England and others have engineered in the last several months would have to continue and, importantly, would have to feed into a more rapid and sustained expansion of money in the hands of the general public.

Money supply M1 (consisting of currency in circulation and sight/checking deposits by non-banks) has gained momentum recently, especially in the US. We will be watching closely how this measure of money will evolve in the coming months.

Second, governments would have to face difficulties in financing rapidly rising expenditures on the various stimulus and bailout packages through taxes and selling bonds to the general public. In such circumstances, political pressures on central banks to monetise government spending would probably rise. This could be done through central bank loans to the government, central bank buying of government bonds at auction, outright unsterilised purchases of government bonds in the open market or additional lending to banks against government collateral.

Last, but not least, a combination of sustained monetary growth and high fiscal deficits would have to undermine the general public’s confidence in both the government’s ability to service the debt without taking resort to the printing press, and in the central bank’s ability or willingness to resist such pressures. A sudden surge in inflation expectations on the back of such a loss in confidence would induce people to reduce their deposits and cash holdings and pile into real assets. The velocity of money and inflation would rise, and the government/central bank would have to keep printing ever more money to finance government spending.

Clearly, this is an extreme scenario. Governments and central banks would have to jettison their commitment to long-term fiscal sustainability and keeping inflation low, and the public would have to lose confidence in their credibility. Given the reputation that central banks have built up, and given the commitment of central bankers to maintaining low inflation, a return to high inflation or even hyperinflation would seem to us to be no more than a distant possibility.

However, given the size of the current and prospective economic and financial problems, and given the size of the monetary and fiscal stimulus that central banks and governments are throwing at these problems, investors would be well advised not to ignore this tail risk, especially as markets are priced for the opposite outcome of lasting deflation in the next several years. Put differently, we believe that buying some insurance against the black swan event of high inflation or even hyperinflation makes sense and is relatively cheap currently.

svinayak · Post by **svinayak** » 31 Jan 2009 21:04

http://projects.flowingdata.com/walmart/

Check the growth of Walmart from 1962 and see the rise during the rise of Chinese economy.
There is coorelation to geo-politics and global trade in the last 30 years with the growth of Walmart

svinayak · Post by **svinayak** » 31 Jan 2009 21:10

Neela wrote: Its how good you are financially.

That is the only basis for business

ramana · Post by **ramana** » 31 Jan 2009 21:48

pandyan wrote:Has anyone tried the petite palmiers (small cookies) and madeleines (cake cookies) that costco sells in their bakery section? Both are very good.

The cover story of the latest costco connection is about this bakery and its founders(Vietnamese immigrants).

The family that bakes together - Sugar Bowl Bakery
http://www.costcoconnection.com/connect ... 902/?pg=23

Vietnamese immigarants are responmsible for the rise of small French style bakeries making croissants. petit fours and napoleons and the high consumption of expensive French Brandy (>$60/bottle).

About the latter I asked my friend and he said it was like the Indian consumption of expensive Scotch(Blue and other labels) as status symbol that they have arrived and can afford stuff like the colonial masters.

its another thing the old masters cant afford bathgtub gin!

svinayak · Post by **svinayak** » 01 Feb 2009 00:53

Global Worries Over U.S. Stimulus Spending

http://www.nytimes.com/2009/01/30/busin ... ldbusiness

By NELSON D. SCHWARTZ
Published: January 29, 2009

DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

Tony Blair, the former British prime minister, speaking at the World Economic Forum in Davos, Switzerland. Fears about surging government debt, once focused on Britain and other European countries, are now turning to the United States.

Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

Mr. Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world.

Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status.

Until now, most fears about surging government debt have focused on borrowing by European countries like Spain, Greece and especially Britain, which is also in the midst of a sizable bank bailout. That recently forced the British pound to a 23-year low against the dollar.

While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .

“There aren’t that many safe havens,” said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened.

Instead, it is the dollar’s long-term value against other currencies that is vulnerable. “At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets,” Mr. Blinder said.

While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

The stimulus was approved Wednesday by the House without Republican support, and could grow larger — mostly likely with additional tax cuts — to attract a bipartisan coalition.

American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”

To be sure, Congress and the White House will ultimately need to refill the government’s coffers, but how they might do that is barely on the radar screen in Washington at this point.

“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”

Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

“It’s huge,” Mr. Roach, the chairman of Morgan Stanley Asia, said. “President Obama has now laid out a scenario of multiyear, trillion-dollar deficits.”

The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”

Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

svinayak · Post by **svinayak** » 01 Feb 2009 03:00

http://www.nytimes.com/2009/01/31/busin ... harts.html

ldev · Post by **ldev** » 01 Feb 2009 08:27

ramana wrote:When I look at the charts in the "Next Bubble" psoted by durgesh above, I get the feeling that some one knew the weak point and collapsed the bubble and it wasnt just incompetence and greed as the media is making out. The tipping point was the run on Lehman Bros which the Treasury chief did not bailout for his own reasons or short sightedness.

The credit crunch according to Soros

Part of the stimulation is intellectual. Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”

It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.

The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.

By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond

I dont think anyone yet has the complete picture. Various people, Roubini, Soros, Niall Ferguson, Taleb et al are putting together different pieces of this catastrophe. We are all learning as we go along. Soros's definition of superbubble refers to the long term secular growth of dollar denominated debt which has held sway for the last 60 years which he believes is now over. I think one has to do some thinking over such a profound statement given that there appear to be no alternatives which can absorb remaining global wealth in the short term.

svinayak · Post by **svinayak** » 01 Feb 2009 08:42

ldev wrote:
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond

I dont think anyone yet has the complete picture. Various people, Roubini, Soros, Niall Ferguson, Taleb et al are putting together different pieces of this catastrophe. We are all learning as we go along. Soros's definition of superbubble alternates over time. At other places he has stated that he believes that the long term secular growth of dollar denominated debt which has held sway for the last 60 years is now over. I think one has to do some thinking over such a profound statement.

All the information is not out yet about the events which happened inside the Wall St in the last 3 years. There is not much information about Shadow Banking system and their details.

Who(which group) created this arcane financial instrument based on a subprime mortgage and who thought really that it was rational and reflected reality. Lot of flaws hidden under the wrap of sophisticated market.

svinayak · Post by **svinayak** » 01 Feb 2009 08:49

The game changer
http://www.ft.com/cms/s/0/49b1654a-ed60 ... ck_check=1

By George Soros

Published: January 28 2009 19:55 | Last updated: January 28 2009 19:55

In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.

For a start, the price of credit default swaps, a form of insurance against companies defaulting on debt, went through the roof as investors took cover. AIG, the insurance giant, was carrying a large short position in CDS and faced imminent default. By the next day Hank Paulson, then US Treasury secretary, had to reverse himself and come to the rescue of AIG.

But worse was to come. Lehman was one of the main market-makers in commercial paper and a large issuer of these short-term obligations to boot. Reserve Primary, an independent money market fund, held Lehman paper and, since it had no deep pocket to turn to, it had to “break the buck” – stop redeeming its shares at par. That caused panic among depositors: by Thursday a run on money market funds was in full swing.
The panic then spread to the stock market. The financial system suffered cardiac arrest and had to be put on artificial life support.

How could Lehman have been left to go under? The responsibility lies squarely with the financial authorities, notably the Treasury and the Federal Reserve. The claim that they lacked the necessary legal powers is a lame excuse. In an emergency they could and should have done whatever was necessary to prevent the system from collapsing. That is what they have done on other occasions. The fact is, they allowed it to happen.

On a deeper level, too, credit default swaps played a critical role in Lehman’s demise. My explanation is controversial and all three steps of my argument will take the reader to unfamiliar ground.

First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market. (Being long means owning a stock, being short means selling a stock one does not own.) Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks.

The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks.

The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. When an adverse development is expected, the negative effect can become overwhelming because CDS tend to be priced as warrants, not as options: people buy them not because they expect an eventual default but because they expect the CDS to appreciate during the lifetime of the contract.

No arbitrage can correct the mispricing. That can be clearly seen in US and UK government bonds, whose actual price is much higher than that implied by CDS. These asymmetries are difficult to reconcile with the efficient market hypothesis, the notion that securities prices accurately reflect all known information.

The third step is to recognise reflexivity – that is to say, the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is dependent on confidence and trust. That means that “bear raids” to drive down the share prices of these institutions can be self-validating. That is in direct contradiction to the efficient market hypothesis.
THE SOROS INVESTMENT YEAR:

Positions I took were too big for ever more volatile markets

Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.

Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.

I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.

That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.

On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras, only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.

We did get out of our strategic long position in CVRD, the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.

I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.

Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red.
Putting these three considerations together leads to the conclusion that Lehman, AIG and other financial institutions were destroyed by bear raids in which the shorting of stocks and buying of CDS amplified and reinforced each other. Unlimited shorting was made possible by the 2007 abolition of the uptick rule (which hindered bear raids by allowing short-selling only when prices were rising). The unlimited selling of bonds was facilitated by the CDS market. Together, the two made a lethal combination.

That is what AIG, one of the most successful insurance companies in the world, failed to understand. Its business was selling insurance and, when it saw a seriously mispriced risk, it went to town insuring it, in the belief that diversifying risk reduces it. It expected to make a fortune in the long run but it was destroyed in short order.

My argument raises some interesting questions. What would have happened if the uptick rule on shorting shares had been kept, in effect, but “naked” short-selling (where the vendor has not borrowed the stock in advance) and speculating in CDS had both been outlawed? The bankruptcy of Lehman might have been avoided but what would have happened to the asset super-bubble? One can only conjecture. My guess is that the bubble would have been deflated more slowly, with less catastrophic results, but that the after-effects would have lingered longer. It would have resembled more the Japanese experience than what is happening now.

What is the proper role of short-selling? Undoubtedly it gives markets greater depth and continuity, making them more resilient, but it is not without dangers. As bear raids can be self-validating, they ought to be kept under control. If the efficient market hypothesis were valid, there would be an a priori reason for imposing no constraints. As it is, both the uptick rule and allowing short-selling only when it is covered by borrowed stock are useful pragmatic measures that seem to work well without any clear-cut theoretical justification.

What about credit default swaps? Here I take a more radical view than most people. The prevailing view is that they ought to be traded on regulated exchanges. I believe they are toxic and should be used only by prescription. They could be used to insure actual bonds but – in light of their asymmetric character – not to speculate against countries or companies.

CDS are not, however, the only synthetic financial instruments that have proved toxic. The same applies to the slicing and dicing of collateralised debt obligations and to the portfolio insurance contracts that caused the stock market crash of 1987, to mention only two that have done a lot of damage. The issuance of stock is closely regulated by authorities such as the Securities and Exchange Commission; why not the issuance of derivatives and other synthetic instruments? The role of reflexivity and the asymmetries identified earlier ought to prompt a rejection of the efficient market hypothesis and a thorough reconsideration of the regulatory regime.

Now that the bankruptcy of Lehman has had the same shock effect on the behaviour of consumers and businesses as the bank failures of the 1930s, the problems facing the administration of President Barack Obama are even greater than those that confronted Franklin D. Roosevelt. Total credit outstanding was 160 per cent of gross domestic product in 1929 and rose to 260 per cent in 1932; we entered the crash of 2008 at 365 per cent and the ratio is bound to rise to 500 per cent. This is without taking into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. On the positive side, we have the experience of the 1930s and the prescriptions of John Maynard Keynes to draw on.

The bursting of bubbles causes credit contraction, the forced liquidation of assets, deflation and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.

It can be done – by creating money to offset the contraction of credit, recapitalising the banking system and writing off or down the accumulated debt in an orderly manner. They require radical and unorthodox policy measures. For best results, the three processes should be combined.

If these measures were successful and credit started to expand, deflationary pressures would be replaced by the spectre of inflation and the authorities would have to drain the excess money supply from the economy almost as fast as they had pumped it in. There is no way to escape from a far-from-equilibrium situation – global deflation and depression – except by first inducing its opposite and then reducing it.

To prevent the US economy from sliding into a depression, Mr Obama must implement a radical and comprehensive set of policies. Alongside the well-advanced fiscal stimulus package, these should include a system-wide and compulsory recapitalisation of the banking system and a thorough overhaul of the mortgage system – reducing the cost of mortgages and foreclosures.

Energy policy could also play an important role in counteracting both depression and deflation. The American consumer can no longer act as the motor of the global economy. Alternative energy and developments that produce energy savings could serve as a new motor, but only if the price of conventional fuels is kept high enough to justify investing in those activities. That would involve putting a floor under the price of fossil fuels by imposing a price on carbon emissions and import duties on oil to keep the domestic price above, say, $70 per barrel.

Paulson and Bernanke
Hank Paulson, former Treasury secretary (left), and Ben Bernanke, Federal Reserve chairman, arrive for their November testimony to Congress

Finally, the international financial system must be reformed. Far from providing a level playing field, the current system favours the countries in control of the international financial institutions, notably the US, to the detriment of nations at the periphery. The periphery countries have been subject to the market discipline dictated by the Washington consensus but the US was exempt from it.

How unfair the system is has been revealed by a crisis that originated in the US yet is doing more damage to the periphery. Assistance is needed to protect the financial systems of periphery countries, including trade finance, something that will require large contingency funds available at little notice for brief periods of time. Periphery governments will also need long-term financing to enable them to engage in counter-cyclical fiscal policies.

In addition, banking regulations need to be internationally co-ordinated. Market regulations should be global as well. National governments also need to co-ordinate their macroeconomic policies in order to avoid wide currency swings and other disruption.

This is a condensed, almost shorthand account of what needs to be done to turn the global economy around. It should give a sense of how difficult a task it is.

The writer is chairman of Soros Fund Management and founder of the Open Society Institute. These are extracts from an e-book update to The New Paradigm for Financial Markets – The credit crisis of 2008 and what it means (PublicAffairs Books, New York)

ldev · Post by **ldev** » 01 Feb 2009 08:52

Acharya wrote:All the information is not out yet about the events which happened inside the Wall St in the last 3 years. There is not much information about Shadow Banking system and their details.

Who(which group) created this arcane financial instrument based on a subprime mortgage and who thought really that it was rational and reflected reality. Lot of flaws hidden under the wrap of sophisticated market.

I have amended my post above, not that it will change anything substantially. The most significant part of the "shadow banking system" which contributed to the meltdown refers to the non FDIC insured depositors on the liabilities side of the balance sheet, primarily money market funds in the US worth USD 4Trillion who have now been bailed out by the Federal Reserve by virtue of their investments in commercial paper.

The creation of arcane financial instruments including CDS and especially offbalance sheet conduits which ultimately had to be accounted and treated as if they were real liabilities is a real scandal.

Neela · Post by **Neela** » 01 Feb 2009 16:16

Acharya wrote:
Neela wrote: Its how good you are financially.
That is the only basis for business

The point I want to make is this. As a CEO, would you hold on to cash now, go for acquisitions at dirt cheap prices or try to diversify?

Most companies that held on to cash in 2008 will find the going a little better now. Its like simple savings to go through rough times. For those companies which went into big budget acquisitions through credit , things will be different. They have to finance that somehow. Sales slump and a difficult money market is not helping!