By Gillian Tett, Capital Markets Editor
Published: June 16 2009 03:00 Financial Times
A new realisation has dawned among the most fervent advocates of financial analysis and collective investor wisdom: markets are not always rational.
For the past five decades, the Chartered Financial Analyst Institute has been teaching the tenets of analysis based on efficient markets to tens of thousands of adherents from banks, fund managers and investment houses that make up the global financial system.
Now, however, the credit crisis has forced high priests of rational market theory to question their own creed.
The British CFA recently asked members for the first time whether they trusted in "market efficiency" - and discovered more than two-thirds of respon-dents no longer believed market prices reflect all available information. More startling, 77 per cent of the group "strongly" or "very strongly" disagreed that investors behaved "rationally" - in apparent defiance of the "wisdom of crowds" idea that has driven investment theory.
The shift is significant as the assumption of efficient markets is a cornerstone of calculating the value of everything from stocks to pension fund liabilities to executive compensation.
William Goodhart, chief executive of the CFA Society of the UK, yesterday admitted the results showed a new mood of "questioning" following the financial crisis.
However, the trend appears to reflect a wider intellectual swing. In the past three decades, the global asset management industry has been dominated by the so-called "efficient markets" hypothesis, which has given birth to ideas such as the capital asset pricing model, that portrays investing as a trade-off between risk and return.
Extremities of recent market swings have sparked interest among politicians and investors in the field of behavioural finance, which asserts that markets do not behave rationally but can be driven by human emotions such as fear.
However, the CFA survey suggests the finance industry is not yet ready to rip up its creed.
Saturday, June 20, 2009
Tuesday, June 16, 2009
California's 'Gold Standard' for Higher Education Falls Upon Hard Times
By JOSH KELLERSan Francisco
Few documents in higher education have enjoyed the influence or longevity of the California Master Plan for Higher Education, the 1960 law that transformed the state's public colleges and served as a blueprint for public systems across the country.
Even today, almost 50 years after it was written, the master plan retains a mythic status in California, where it continues to provide the foundation of public debate about higher education. Californians routinely invoke the plan's promises of minimal fees and universal access as the basis for nearly any argument about the state's colleges.
Oppose tuition increases? Cite the master plan. Decry cuts in state support for student-aid programs? Cite the master plan. Support, or reject, changes in admissions policies at the University of California? Cite the master plan.
But as California grapples with one of the worst financial crises in its history, the master plan faces criticism that it is irrelevant to the needs and means of the state. Many scholars and college leaders argue that the hallowed document that has served the state so well for decades needs to be rewritten.
"There's probably only one thing that's worse than a public policy that fails, and that's a public policy that succeeds and outlives its usefulness," says Patrick M. Callan, president of the National Center for Public Policy and Higher Education, in San Jose, Calif.
By any measure, California's colleges are still some of the most diverse and highest-quality public institutions in the country. But Mr. Callan and others point to indications that the state's higher-education system, once the gold standard for institutions from community colleges to research universities across the country, is having trouble adapting to California's changing needs.
Compared with other states, California's educational capital is declining, a phenomenon that predates the current recession. In 1990, California ranked 17th in the proportion of its residents ages 25 to 34 who hold bachelor's degrees or higher. By 2007 it ranked 25th, well below other big states like New York, Illinois, and Virginia. (See box at end of article.)
In a report often cited by college leaders, the Public Policy Institute of California estimated this year that the state would fall one million college graduates short of its work-force needs by 2025. The nonprofit group's report suggested that the state's inability to move through college enough Hispanic residents, its fastest-growing group, was a key cause of the shortfall.
Those issues are a far cry from the ones California faced in 1960, when 90 percent of the population was white, the state was flush with cash, and the main challenge was designing a higher-education system that could absorb a tidal wave of new students in the baby boom. The architects of the master plan responded with a promise to provide access to higher education to all high-school graduates who could benefit from it.
Today the plan's focus on access at any cost has its downsides, says Jane V. Wellman, executive director of the Delta Project on Postsecondary Education Costs, Productivity, and Accountability. California, she says, does only a mediocre job getting the 2.7 million students who are enrolled in the nation's largest community-college system to graduate or transfer to four-year universities. Only about one-quarter of the state's community-college students who seek a degree succeed in receiving one or transferring to a university within six years, according to estimates by California State University researchers and others.
The master plan "was a good way to distribute resources and enrollment in a state that was increasing capacity and had an almost limitless pot of revenue to support it," Ms. Wellman says. "It doesn't get to the deeper issue of how to increase educational attainment. The challenge now is how do you get more kids prepared for academic success, and how do you get more students who enroll focused on attainment? And California is falling down on both of those."
As a result, she says, "the master plan has slowly become irrelevant."
Budget Pressures
Her arguments have taken on a new urgency during California's protracted budget crisis, which endangers some of the building blocks of the higher-education system. The state faces a $24-billion budget deficit between now and the middle of 2010, and Gov. Arnold Schwarzenegger, a Republican, has said steep cuts in state spending will be the only way to close the gap.
In recent weeks, Governor Schwarzenegger has proposed eliminating the state's need-based student-aid program, Cal Grants, which is among the most generous in the country and has been crucial to the master plan's promises of access. He has also proposed cutting state support for California State University and the University of California by about 20 percent in the 2009-10 budget year, and reducing funds for the state's community colleges by more than $900-million over the next 13 months.
The proposed budget cuts for colleges and universities themselves, which legislators are expected to approve, will probably decrease the number of students enrolled at state institutions on a scale not seen in at least two decades. Community-college officials estimate that the cuts would force them to reduce the system's enrollment by 250,000 students, which is equivalent to the size of California's entire college-student population when the master plan was written.
Jason Spencer, executive director of the Vasconcellos Project, a nonprofit group that advocates civic engagement, says conversations about state financing of higher education seem to happen in a vacuum, without regard to any sort of long-term goals. The master plan's prescriptions — low fees and universal access — are simply ignored when the economy is weak, he says.
"If we're going to move away from universal access, that's fine," Mr. Spencer says, "but let's have that conversation in the light of day. Let's have that conversation in public."
The Vasconcellos Project is one of several groups lining up to use the 50th anniversary of the master plan to encourage a major revision. The organization is named after a retired state lawmaker who had such influence over the state's colleges in the 1970s and 1980s that some college administrators refer to him as "the Godfather of higher ed."
Over the past 30 years, most reviews of the master plan have failed to result in major revisions. In 2002 a panel of college administrators and others issued a set of recommendations, including one that the state should work to raise the number of students who transfer from community colleges to the University of California. Those recommendations failed to make it through the Legislature.
Mr. Spencer says his group seeks to avoid that fate by working more closely with lawmakers, with a focus on setting long-term goals for higher education in the areas of affordability, access, and degree-completion rates. If everything goes well, a legislative committee aligned with the project will open hearings on the master plan in September and issue policy recommendations about possible revisions next spring.
"We believe that we can get all three segments on the same side," Mr. Spencer says, referring to the state's community colleges and two public-university systems. "What's a reasonable fee policy? How do we maximize federal Pell dollars in community colleges? Let's do the long-term planning."
A System of Factions
But getting the state's three public systems of higher education on the same side has often been difficult.
Among the master plan's most enduring features is its clear delineation of each system's scope and student population. Under the guidelines set out in the plan, the University of California must draw from the top one-eighth of the state's high-school graduates, California State University from the top third, and the community colleges from the rest.
That three-tiered structure helps to focus each system's mission, policy experts say. But they warn that competition among the systems makes it difficult for California to tackle issues, like poor transfer rates, that involve thinking about more than one system at a time.
"These systems might as well be in different states," says Mr. Callan, the policy-center president. "They solve their own problems and leave the students to find their way."
In some states, a higher-education coordinating board helps set statewide priorities and negotiates the interests of competing institutions. But California's board, the California Postsecondary Education Commission, has limited legal authority and a revolving leadership, and is widely viewed as lacking significant influence over state policy. State lawmakers are considering a proposal from Governor Schwarzenegger to eliminate the commission entirely and assign its functions to the state's Department of Education.
The lack of central state leadership on higher education works to prevent major change because each system digs in to protect its own interests, says Robert Atwell, a former president of the American Council on Education and of Pitzer College.
"Good public policy in higher ed is more than the sum total of individual institutional interests," Mr. Atwell says. "It certainly includes those interests, but you've got to have somebody who is looking at more than those individual institutional interests, and you really don't have that much more in California."
For instance, one way to increase the number of students who graduate might be to reallocate state support from the University of California to the other two systems, which have much larger student populations and cost the state less to support per student. "Of course," Mr. Atwell says, "the moment you say that, the University of California wants to crush you."
The state's disastrous financial situation may prove to be an even larger near-term impediment to serious discussions about the future of its higher-education system. In recent months, lawmakers have been preoccupied with keeping the state from going bankrupt, not with devising ambitious plans to remake some of the few major state institutions with a generally solid public reputation.
Charles B. Reed, chancellor of the California State University system, agrees that the master plan is simply "not relevant" any longer. He estimates that if the governor's proposed cuts in state support pass, the system will probably need to cut back enrollment by 40,000 students, or about 9 percent, for the 2010-11 academic year, an unprecedented number.
"There is no way to fulfill the master plan with the current financial capacity and structure that California has," Mr. Reed says.
But in the current budget environment, he says, "tinkering with the master plan is not the issue." He says he has not given much thought to how it might be amended. The real issue, he says, "is the courage of Californians to decide whether they're going to pay for higher ed or for prisons."
Ms. Wellman, of the Delta Project, says that until California gets out of its fiscal crisis and restores some ability to make intelligent policy decisions, defining new state priorities around higher education will be difficult.
But even if the master plan were revised, she says, the document carries so much baggage that it might be better to come up with a new name instead. Solutions that made sense 50 years ago, she says, are now getting in the way.
"The last generation's successes," she says, "become the next generation's problems."
Thursday, June 11, 2009
It is in Beijing’s interests to lend Geithner a hand
By Martin WolfPublished: June 9 2009 19:06 Financial Times
Creditor countries are worrying about the safety of their money. That is what links two of the big economic stories of last week: Chancellor Angela Merkel’s attack on the monetary policies pursued by central banks, including her own, the European Central Bank; and the pressure on Tim Geithner, US Treasury secretary, to persuade his hosts in Beijing that their claims on his government are safe. But are they? The answer is: only if the creditor countries facilitate adjustment in the global balance of payments. Debtor countries will either export their way out of this crisis or be driven towards some sort of default. Creditors have to choose which.
Germany and China have much in common: they have the world’s two biggest current account surpluses, at $235bn and $440bn, respectively, in 2008; and both are also powerhouses of manufactured exports. They have, as a result, suffered from the collapse in demand of overindebted purchasers of their exports. So both feel badly done by. Why, they ask themselves, should their virtuous people suffer because their customers have let themselves go so broke?
Germany and China are also very different: Germany is a highly competitive global producer of manufactures. But it is also a regional power that has shared its money with its neighbours since 1999. Its problem is that its surpluses were offset by its neighbours’ largely private excess spending. Now that the borrowers are bankrupt, their countries’ domestic demand is collapsing. This is leading to a huge expansion in fiscal deficits and pressure for easier monetary policies from the ECB. So Ms Merkel is driven towards undermining the independence of Germany’s central bank, in order to protect the still more vital goal of monetary stability.
Germany may be Europe’s pivotal economy. But China is a nascent superpower. Without intending to do so, it has already shaken the world economy. Incorporating this dynamic colossus into the world economy involves huge adjustments. This is already evident in any discussion of a sustained exit from the crisis.
A recent paper from Goldman Sachs – unfortunately, not publicly available – sheds fascinating light on the impact of China’s rise on the world economy.* In particular, it broadens the analysis of the role of the “global imbalances”, on which I (and many others) have written.
The paper points to four salient features of the world economy during this decade: a huge increase in global current account imbalances (with, in particular, the emergence of huge surpluses in emerging economies); a global decline in nominal and real yields on all forms of debt; an increase in global returns on physical capital; and an increase in the “equity risk premium” – the gap between the earnings yield on equities and the real yield on bonds. I would add to this list the strong downward pressure on the dollar prices of many manufactured goods.
The paper argues that the standard “global savings glut” hypothesis helps explain the first two facts. Indeed, it notes that a popular alternative – a too loose monetary policy – fails to explain persistently low long-term real rates. But, it adds, this fails to explain the third and fourth (or my fifth) features.
The paper argues that a massive increase in the effective global labour supply and the extreme risk aversion of the emerging world’s new creditors explains the third and fourth feature. As the paper notes, “the accumulation of net overseas assets has been entirely accounted for by public sector acquisitions ... and has been principally channelled into reserves”. Asian emerging economies – China, above all – have dominated such flows.
The huge capital outflows were the consequence of policy decisions, of which the exchange-rate regime was the most important. The decision to keep the exchange rate down also put a lid on the dollar prices of many manufactures. I would add that the bursting of the stock market bubble in 2000 also increased the perceived riskiness of equities and so increased the attractions of the supposedly safe credit instruments whose burgeoning we saw in the 2000s. The pressure on wages may also have encouraged reliance on borrowing and so helped fuel the credit bubbles of the 2000s.
The authors conclude that the low bond yields caused by newly emerging savings gluts drove the crazy lending whose results we now see. With better regulation, the mess would have been smaller, as the International Monetary Fund rightly argues in its recent World Economic Outlook. But someone had to borrow this money. If it had not been households, who would have done so – governments, so running larger fiscal deficits, or corporations already flush with profits? This is as much a macroeconomic story as one of folly, greed and mis-regulation.
The story is not just history. It bears just as heavily on the world’s escape from the crisis. The dominant feature of today’s economy is that erstwhile private borrowers are, to put it bluntly, bust. To sustain spending, central banks are being driven towards the monetary emissions of which Ms Merkel is suspicious and governments are driven towards massive dis-saving, to offset higher desired private saving.
Today, Germany wants to preserve the value of its money, while China is desperate to preserve the value of its external assets. These are understandable aims. Yet, if this is to happen, debtor countries have to stabilise their economies without another round of profligate private borrowing or an indefinite rise in government debt. Both paths will ultimately lead to defaults, inflation, or both and so to losses for creditors. The only alternative is for debtors to earn their way out. At the level of an entire country that means a big rise in net exports. But if indebted countries are to achieve this aim, in a vigorous world economy, the surplus countries must expand demand strongly, relative to supply.
China’s decision to accumulate roughly $2,000bn in foreign currency reserves was, in my view, a blunder. Now it has a choice. If it wants its claims on the US to be safe, it must facilitate an adjustment in the global balance of payments. If it and other surplus countries wish to run huge surpluses and accumulate vast financial claims, they should expect defaults. They cannot have both safe foreign assets and huge surpluses. They must choose between them. It may seem unfair. But whoever said life is fair?
Economists clash on shifting sands
By Robert Skidelsky
Published: June 9 2009 18:52 Financial Times
History is replete with famous intellectual battles. In the natural sciences, these have usually led to decisive victories, with good science ousting bad. There are few Ptolemaic astronomers left, or believers in the phlogiston theory of combustion. In the social sciences, the situation is different. There have been famous battles galore, but no decisive victories. Indeed, it is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault.
That economics is not a natural science is clear from the inconclusive engagements that have punctuated its own history. A hundred years ago the classical theory reigned supreme. This “proved” that free markets were automatically self-adjusting to full employment. They were either continually at full employment or, if disturbed by an outside shock, rapidly returned to it. The only thing capable of wrecking the workings of the market’s invisible hand was the visible hand of government interference.
Then along came the Great Depression of 1929-32 and John Maynard Keynes. Keynes “proved” that markets had no automatic tendency to full employment. This failing of the invisible hand justified government policies to maintain full employment.
For 30 years or so Keynesianism ruled the roost of economics – and economic policy. Harvard was queen, Chicago was nowhere. But Chicago was merely licking its wounds. In the 1960s it counter-attacked. The new assault was led by Milton Friedman and followed up by a galaxy of clever young disciples. What they did was to reinstate classical theory. Their “proofs” that markets are instantaneously, or nearly instantaneously, self-adjusting to full employment were all the more impressive because now expressed in mathematics. Adaptive Expectations, Rational Expectations, Real Business Cycle Theory, Efficient Financial Market Theory – they all poured off the Chicago assembly line, their inventors awarded Nobel Prizes.
No policymaker understood the maths, but they got the message: markets were good, governments bad. The Keynesians were in retreat. Following Ronald Reagan and Margaret Thatcher, Keynesian full employment policies were abandoned and markets deregulated. Then along came the almost Great Depression of today and the battle is once more joined.
Haunters of the blogosphere will know that the main ground of the current engagement is about the effect of the “stimulus”. FT readers will have caught a faint whiff of the intensity of this battle in Niall Ferguson’s column of May 30, headed “A history lesson for economists in thrall to Keynes”. Prof Ferguson and Paul Krugman, the economist and New York Times columnist, had previously locked horns at a public symposium in New York on April 30. The historian had asserted that large fiscal deficits would push up long-term interest rates. This implied they would have a zero stimulatory effect: public spending would simply “crowd out” private spending. An enraged Mr Krugman responded on his blog that Keynes had proved that such crowding-out could occur only at full employment: if there were unemployed resources, fiscal deficits would not drive up interest rates without also expanding the economy. Prof Ferguson’s ignorant remarks only confirmed that “we’re living in a Dark Age of macroeconomics, in which hard-won know-ledge has simply been forgotten”.
However, this is not a debate between economists and historians. It is a battle within the economic profession – between the New Class-ical Economists and the New Keynesians. What is fascinating is that it is an almost exact rerun of the debate between Keynes and the British Treasury in 1929-30. The Treasury view was that bond-financed public spending was bound to diminish private spending by an equal amount. Keynes replied that if this were true it would apply to any new act of private spending. “In short, the fatalistic belief that there can never be more employment than there is is altogether baseless”.
Later the Treasury retreated to a more defensible position. The danger of extra government spending, it came to argue, lay not in the “physical” crowding out of resources but “psychological” crowding out. If doubts arose about the government’s solvency – a concern Prof Krugman has acknowledged – it might lead to capital flight, which would push up the cost of government borrowing.
Are we doomed to rehearse the same arguments time and again? In this particular debate, I am on Prof Krugman’s side, but I do not agree that Prof Ferguson’s position represents a retreat to a phlogiston state of economics. This is to take economics to be like a natural science, which Keynes never believed it was, because he thought its subject matter was much too variable over time.
Keynes’s view was that we need different economic models at different times. The beauty of his General Theory of Employment, Interest and Money was that it was general enough to accommodate a variety of models applicable to different conditions. Markets could behave in ways described by the classical and New Classical theories, but they need not. So it was important to take precautions against bad behaviour. Ultimately, the Keynesian revolution was a triumph not of good science over bad science, but of good judgment over bad judgment.
Lord Skidelsky’s ‘John Maynard Keynes: The Return of the Master’ will be published by Allen Lane in September
Published: June 9 2009 18:52 Financial Times
History is replete with famous intellectual battles. In the natural sciences, these have usually led to decisive victories, with good science ousting bad. There are few Ptolemaic astronomers left, or believers in the phlogiston theory of combustion. In the social sciences, the situation is different. There have been famous battles galore, but no decisive victories. Indeed, it is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault.
That economics is not a natural science is clear from the inconclusive engagements that have punctuated its own history. A hundred years ago the classical theory reigned supreme. This “proved” that free markets were automatically self-adjusting to full employment. They were either continually at full employment or, if disturbed by an outside shock, rapidly returned to it. The only thing capable of wrecking the workings of the market’s invisible hand was the visible hand of government interference.
Then along came the Great Depression of 1929-32 and John Maynard Keynes. Keynes “proved” that markets had no automatic tendency to full employment. This failing of the invisible hand justified government policies to maintain full employment.
For 30 years or so Keynesianism ruled the roost of economics – and economic policy. Harvard was queen, Chicago was nowhere. But Chicago was merely licking its wounds. In the 1960s it counter-attacked. The new assault was led by Milton Friedman and followed up by a galaxy of clever young disciples. What they did was to reinstate classical theory. Their “proofs” that markets are instantaneously, or nearly instantaneously, self-adjusting to full employment were all the more impressive because now expressed in mathematics. Adaptive Expectations, Rational Expectations, Real Business Cycle Theory, Efficient Financial Market Theory – they all poured off the Chicago assembly line, their inventors awarded Nobel Prizes.
No policymaker understood the maths, but they got the message: markets were good, governments bad. The Keynesians were in retreat. Following Ronald Reagan and Margaret Thatcher, Keynesian full employment policies were abandoned and markets deregulated. Then along came the almost Great Depression of today and the battle is once more joined.
Haunters of the blogosphere will know that the main ground of the current engagement is about the effect of the “stimulus”. FT readers will have caught a faint whiff of the intensity of this battle in Niall Ferguson’s column of May 30, headed “A history lesson for economists in thrall to Keynes”. Prof Ferguson and Paul Krugman, the economist and New York Times columnist, had previously locked horns at a public symposium in New York on April 30. The historian had asserted that large fiscal deficits would push up long-term interest rates. This implied they would have a zero stimulatory effect: public spending would simply “crowd out” private spending. An enraged Mr Krugman responded on his blog that Keynes had proved that such crowding-out could occur only at full employment: if there were unemployed resources, fiscal deficits would not drive up interest rates without also expanding the economy. Prof Ferguson’s ignorant remarks only confirmed that “we’re living in a Dark Age of macroeconomics, in which hard-won know-ledge has simply been forgotten”.
However, this is not a debate between economists and historians. It is a battle within the economic profession – between the New Class-ical Economists and the New Keynesians. What is fascinating is that it is an almost exact rerun of the debate between Keynes and the British Treasury in 1929-30. The Treasury view was that bond-financed public spending was bound to diminish private spending by an equal amount. Keynes replied that if this were true it would apply to any new act of private spending. “In short, the fatalistic belief that there can never be more employment than there is is altogether baseless”.
Later the Treasury retreated to a more defensible position. The danger of extra government spending, it came to argue, lay not in the “physical” crowding out of resources but “psychological” crowding out. If doubts arose about the government’s solvency – a concern Prof Krugman has acknowledged – it might lead to capital flight, which would push up the cost of government borrowing.
Are we doomed to rehearse the same arguments time and again? In this particular debate, I am on Prof Krugman’s side, but I do not agree that Prof Ferguson’s position represents a retreat to a phlogiston state of economics. This is to take economics to be like a natural science, which Keynes never believed it was, because he thought its subject matter was much too variable over time.
Keynes’s view was that we need different economic models at different times. The beauty of his General Theory of Employment, Interest and Money was that it was general enough to accommodate a variety of models applicable to different conditions. Markets could behave in ways described by the classical and New Classical theories, but they need not. So it was important to take precautions against bad behaviour. Ultimately, the Keynesian revolution was a triumph not of good science over bad science, but of good judgment over bad judgment.
Lord Skidelsky’s ‘John Maynard Keynes: The Return of the Master’ will be published by Allen Lane in September
Surge in US bond yields sparks concern
By Michael Mackenzie and Alan Rappeport in New York and David Oakley in London
Published: June 10 2009 20:23 Financial Times
US long-term interest rates rose to the highest level of the year on Wednesday, threatening the “green shoots” of recovery, after the latest sale of 10-year government debt met with a tepid response from inflation-wary investors.
Concerns about the growth of government borrowing forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent – 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley. Yields on the 10-year note, the benchmark rate for US mortgages, hit a high of 4 per cent during the day, up from 3.6 per cent a week ago.
“We are seeing traders draw a line in the sand at 4 per cent” on 10-year notes, said Tom di Galoma, head of US rates trading at Guggenheim Capital Markets. In recent months, auctions have often been awarded at higher-than-expected yields, with dealers and investors being asked to buy higher amounts of debt as the US Treasury seeks to fund a growing budget deficit.
The next test of the US Treasury’s issuance program looms on Thursday with the sale of $11bn in 30-year bonds. An auction of 30-year bonds last month went badly as investors signalled their concerns about the budget deficit.
“That did not go well last time, so there is also some additional concern,” said Dominic Konstam, head of interest rate strategy at Credit Suisse.
Traders said the good news of the day was that buyers entered the market when yields reached 4 per cent. “There should be natural support for the 10-year note around 4 per cent,” said Mr Konstam. Late on Wednesday, the yield on the 10-year was 3.95 per cent, up 9 basis points on the day.
The rise in yields pressured equities and the S&P 500 index fell 0.4 per cent.
Sentiment for equities was also hurt by a disappointing Beige Book survey on the economy by the Federal Reserve. Its report on the health of the economy revealed that economic conditions “remained weak or deteriorated further” from mid-April through May.
Steven Ricchiuto, chief economist at Mizuho Securities, said the report “paints a picture of an economy still in the process of finding a bottom and not having hit one”.
Last week, Ben Bernanke, chairman of the Federal Reserve, said US exports could start to benefit if recent signs of stabilisation in foreign economic activity proved accurate.
However, several districts reported in the latest Beige Book that shipments for steel and wood products remain depressed, especially outside of Asia.
According to the Fed, five out of its 12 US districts said the prolonged downturn was showing signs of moderating, with the outlook improving for manufacturing and housing in some areas. But, it said, credit remains tight, the labour market continues to suffer from flat or falling wages and commercial property vacancy rates are rising.
Published: June 10 2009 20:23 Financial Times
US long-term interest rates rose to the highest level of the year on Wednesday, threatening the “green shoots” of recovery, after the latest sale of 10-year government debt met with a tepid response from inflation-wary investors.
Concerns about the growth of government borrowing forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent – 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley. Yields on the 10-year note, the benchmark rate for US mortgages, hit a high of 4 per cent during the day, up from 3.6 per cent a week ago.
“We are seeing traders draw a line in the sand at 4 per cent” on 10-year notes, said Tom di Galoma, head of US rates trading at Guggenheim Capital Markets. In recent months, auctions have often been awarded at higher-than-expected yields, with dealers and investors being asked to buy higher amounts of debt as the US Treasury seeks to fund a growing budget deficit.
The next test of the US Treasury’s issuance program looms on Thursday with the sale of $11bn in 30-year bonds. An auction of 30-year bonds last month went badly as investors signalled their concerns about the budget deficit.
“That did not go well last time, so there is also some additional concern,” said Dominic Konstam, head of interest rate strategy at Credit Suisse.
Traders said the good news of the day was that buyers entered the market when yields reached 4 per cent. “There should be natural support for the 10-year note around 4 per cent,” said Mr Konstam. Late on Wednesday, the yield on the 10-year was 3.95 per cent, up 9 basis points on the day.
The rise in yields pressured equities and the S&P 500 index fell 0.4 per cent.
Sentiment for equities was also hurt by a disappointing Beige Book survey on the economy by the Federal Reserve. Its report on the health of the economy revealed that economic conditions “remained weak or deteriorated further” from mid-April through May.
Steven Ricchiuto, chief economist at Mizuho Securities, said the report “paints a picture of an economy still in the process of finding a bottom and not having hit one”.
Last week, Ben Bernanke, chairman of the Federal Reserve, said US exports could start to benefit if recent signs of stabilisation in foreign economic activity proved accurate.
However, several districts reported in the latest Beige Book that shipments for steel and wood products remain depressed, especially outside of Asia.
According to the Fed, five out of its 12 US districts said the prolonged downturn was showing signs of moderating, with the outlook improving for manufacturing and housing in some areas. But, it said, credit remains tight, the labour market continues to suffer from flat or falling wages and commercial property vacancy rates are rising.
Monday, June 8, 2009
Moderate Left Flops in European Elections: Le Monde
Vague bleue sur le Parlement européen
Incapable d'incarner une alternative dans la crise, la gauche subit une lourde défaite dans la plupart des pays
La crise économique a profité à la droite. C'est le principal paradoxe de cette élection européenne : dans le contexte d'une récession sans précédent et de la mise en procès du libéralisme, on aurait attendu de la gauche qu'elle sache saisir l'opportunité qui lui était donnée de reprendre la main et de faire endosser à ses adversaires, partisans de la dérégulation et du laisser-faire, la responsabilité du marasme.
Elle n'en a rien fait. Le nouveau Parlement européen est emporté par une " vague bleue " de droite semblable à celle qui, en 2004, avait supplanté la " vague rose " de gauche. Les conservateurs qui dirigent déjà une vingtaine de pays devancent nettement leurs adversaires socialistes ou sociaux-démocrates. Les trois gouvernements socialistes survivants de l'Union européenne (UE) subissent une défaite : le Labour britannique est laminé à l'image des déboires subis par le premier ministre Gordon Brown (15,3 %, selon les résultats encore partiels), le parti socialiste de l'Espagnol José Luis Rodriguez Zapatero est battu (de 4 points), celui du Portugais José Socrates fait face à une déroute inattendue.
Les conservateurs triomphent presque partout. Les unions démocrates chrétiennes (CDU-CSU) du gouvernement d'Angela Merkel arrivent largement en tête (37,9 %). Dans les dix pays de l'ancien bloc communistes, entrés dans l'UE en 2004 et 2007, la droite prend la main. La Hongrie en offre l'exemple le plus spectaculaire avec la gifle infligée au Parti socialiste au pouvoir par le Fidesz, le parti conservateur nationaliste de Viktor Orban, qui emporte 56 % des suffrages.
Dans ce paysage sinistré, la Grèce et la Slovaquie sont l'exception qui confirme la règle. En Grèce, l'opposition du Pasok (parti socialiste grec) a triomphé du gouvernement de Costas Caramanlis, en difficulté depuis le mouvement étudiant de l'hiver. En Slovaquie, le parti SMER du premier ministre, Robert Fico, domine.
La défaite de la gauche tient d'abord à l'habileté des gouvernements de droite, qui ont vite désamorcé les reproches contre la dérégulation conduite depuis les années 1990 : dans l'urgence, ils ont dénoncé les paradis fiscaux, annonce leur volonté de réguler les marchés, nationalisé des banques, fait des plans de relance et augmenté les déficits, bref, pris les oripeaux de la gauche en la laissant à court d'arguments. " Le centre-droit a essayé (...) de trouver des solutions aux problèmes urgents, même si elles n'ont pas toujours été parfaites, dit au Monde Joseph Daul, président du groupe Parti populaire européen (PPE). Cela nous a permis de mener campagne dans les pays où nous sommes au gouvernement sans être battus. "
La défaite de la gauche tient aussi à elle-même et à sa propre pusillanimité : elle n'a pas su présenter de front uni face à la droite. Une partie des siens, ceux qui étaient au pouvoir, a soutenu pour le reconduire à la tête de la Commission le candidat du groupe conservateur de centre-droit, l'homme du " moins légiférer ", le très libéral José Manuel Barroso. De quoi apporter confusion et scepticisme chez des électeurs ne voyant dans la gauche qu'un acolyte de la droite. " Cela aurait permis de rendre le choix politique plus clair ", reconnaît, fataliste, dans un entretien au Monde, l'un des candidats non déclarés : Poul Nyrup Rasmussen, président du Parti socialiste européen (PSE).
Le deuxième paradoxe du scrutin est l'abstention massive, globalement en légère progression par rapport à 2004. Rien de surprenant : depuis trente ans que le Parlement européen est élu au suffrage universel, la participation des électeurs n'a cessé de baisser. Le phénomène n'en est pas moins paradoxal : l'institution est ignorée par les électeurs alors même qu'elle est l'instance européenne la plus démocratique, que ses prérogatives s'accroissent et que le traité de Lisbonne, s'il est ratifié, devrait lui conférer davantage de pouvoirs encore. L'abstention chronique gâche l'acquis démocratique du Parlement et risque de miner sa capacité à peser face à la Commission et au Conseil.
Si le rôle du Parlement européen reste confus et si peu visible, les dirigeants politiques en ont une part de responsabilité. Les campagnes électorales n'ont vraiment eu lieu que dans les pays où était organisé un scrutin local le 7 juin (Royaume-Uni, Italie, Belgique...). Partout, elles ont été mornes et les débats européens supplantés par des controverses strictement nationales. L'élection européenne était vécue comme le premier tour, sans grand enjeu, d'une échéance intérieure plus lointaine : en Allemagne, au Portugal ou en Hongrie.
Les électeurs, qui n'ont pas été indifférents, l'ont parfois exprimé par un vote de rejet catégorique de l'Union européenne. Aux Pays-Bas, au Danemark, en Finlande, en Autriche, en Hongrie, des listes populistes de droite radicalement europhobes ont fait des percées atteignant 15 % à 20 % des suffrages. En Italie, la Ligue du nord, antieuropéenne et xénophobe, se porte encore mieux que le Peuple de la liberté de Silvio Berlusconi dont elle est l'alliée. Au Royaume-Uni, terre d'élection de l'europhobie, la déconfiture du Labour a propulsé le groupe de conservateurs désirant rompre avec l'Union européenne : le UKIP est arrivé deuxième. Quant au BNP, parti de l'extrême droite nationaliste, il entre à Strasbourg en emportant deux sièges.
Cécile Chambraud et Marion Van Renterghem
Incapable d'incarner une alternative dans la crise, la gauche subit une lourde défaite dans la plupart des pays
La crise économique a profité à la droite. C'est le principal paradoxe de cette élection européenne : dans le contexte d'une récession sans précédent et de la mise en procès du libéralisme, on aurait attendu de la gauche qu'elle sache saisir l'opportunité qui lui était donnée de reprendre la main et de faire endosser à ses adversaires, partisans de la dérégulation et du laisser-faire, la responsabilité du marasme.
Elle n'en a rien fait. Le nouveau Parlement européen est emporté par une " vague bleue " de droite semblable à celle qui, en 2004, avait supplanté la " vague rose " de gauche. Les conservateurs qui dirigent déjà une vingtaine de pays devancent nettement leurs adversaires socialistes ou sociaux-démocrates. Les trois gouvernements socialistes survivants de l'Union européenne (UE) subissent une défaite : le Labour britannique est laminé à l'image des déboires subis par le premier ministre Gordon Brown (15,3 %, selon les résultats encore partiels), le parti socialiste de l'Espagnol José Luis Rodriguez Zapatero est battu (de 4 points), celui du Portugais José Socrates fait face à une déroute inattendue.
Les conservateurs triomphent presque partout. Les unions démocrates chrétiennes (CDU-CSU) du gouvernement d'Angela Merkel arrivent largement en tête (37,9 %). Dans les dix pays de l'ancien bloc communistes, entrés dans l'UE en 2004 et 2007, la droite prend la main. La Hongrie en offre l'exemple le plus spectaculaire avec la gifle infligée au Parti socialiste au pouvoir par le Fidesz, le parti conservateur nationaliste de Viktor Orban, qui emporte 56 % des suffrages.
Dans ce paysage sinistré, la Grèce et la Slovaquie sont l'exception qui confirme la règle. En Grèce, l'opposition du Pasok (parti socialiste grec) a triomphé du gouvernement de Costas Caramanlis, en difficulté depuis le mouvement étudiant de l'hiver. En Slovaquie, le parti SMER du premier ministre, Robert Fico, domine.
La défaite de la gauche tient d'abord à l'habileté des gouvernements de droite, qui ont vite désamorcé les reproches contre la dérégulation conduite depuis les années 1990 : dans l'urgence, ils ont dénoncé les paradis fiscaux, annonce leur volonté de réguler les marchés, nationalisé des banques, fait des plans de relance et augmenté les déficits, bref, pris les oripeaux de la gauche en la laissant à court d'arguments. " Le centre-droit a essayé (...) de trouver des solutions aux problèmes urgents, même si elles n'ont pas toujours été parfaites, dit au Monde Joseph Daul, président du groupe Parti populaire européen (PPE). Cela nous a permis de mener campagne dans les pays où nous sommes au gouvernement sans être battus. "
La défaite de la gauche tient aussi à elle-même et à sa propre pusillanimité : elle n'a pas su présenter de front uni face à la droite. Une partie des siens, ceux qui étaient au pouvoir, a soutenu pour le reconduire à la tête de la Commission le candidat du groupe conservateur de centre-droit, l'homme du " moins légiférer ", le très libéral José Manuel Barroso. De quoi apporter confusion et scepticisme chez des électeurs ne voyant dans la gauche qu'un acolyte de la droite. " Cela aurait permis de rendre le choix politique plus clair ", reconnaît, fataliste, dans un entretien au Monde, l'un des candidats non déclarés : Poul Nyrup Rasmussen, président du Parti socialiste européen (PSE).
Le deuxième paradoxe du scrutin est l'abstention massive, globalement en légère progression par rapport à 2004. Rien de surprenant : depuis trente ans que le Parlement européen est élu au suffrage universel, la participation des électeurs n'a cessé de baisser. Le phénomène n'en est pas moins paradoxal : l'institution est ignorée par les électeurs alors même qu'elle est l'instance européenne la plus démocratique, que ses prérogatives s'accroissent et que le traité de Lisbonne, s'il est ratifié, devrait lui conférer davantage de pouvoirs encore. L'abstention chronique gâche l'acquis démocratique du Parlement et risque de miner sa capacité à peser face à la Commission et au Conseil.
Si le rôle du Parlement européen reste confus et si peu visible, les dirigeants politiques en ont une part de responsabilité. Les campagnes électorales n'ont vraiment eu lieu que dans les pays où était organisé un scrutin local le 7 juin (Royaume-Uni, Italie, Belgique...). Partout, elles ont été mornes et les débats européens supplantés par des controverses strictement nationales. L'élection européenne était vécue comme le premier tour, sans grand enjeu, d'une échéance intérieure plus lointaine : en Allemagne, au Portugal ou en Hongrie.
Les électeurs, qui n'ont pas été indifférents, l'ont parfois exprimé par un vote de rejet catégorique de l'Union européenne. Aux Pays-Bas, au Danemark, en Finlande, en Autriche, en Hongrie, des listes populistes de droite radicalement europhobes ont fait des percées atteignant 15 % à 20 % des suffrages. En Italie, la Ligue du nord, antieuropéenne et xénophobe, se porte encore mieux que le Peuple de la liberté de Silvio Berlusconi dont elle est l'alliée. Au Royaume-Uni, terre d'élection de l'europhobie, la déconfiture du Labour a propulsé le groupe de conservateurs désirant rompre avec l'Union européenne : le UKIP est arrivé deuxième. Quant au BNP, parti de l'extrême droite nationaliste, il entre à Strasbourg en emportant deux sièges.
Cécile Chambraud et Marion Van Renterghem
Sunday, June 7, 2009
Down and out for the long term in Germany
By Wolfgang Münchau
Published: June 7 2009 19:03 Financial Times
Let me attempt, perhaps foolhardily, to map out a scenario of how the global economic crisis could evolve in continental Europe.
Even if we assume a recovery elsewhere, Europe’s economy may be stuck at low growth for some time. To understand why, it is perhaps best to look at sectoral balances for households, companies and the public sector.
The current account can be expressed as the difference between national savings and investments. Of the world’s 10 largest economies, the US, the UK and Spain used to run the largest current account deficits before the crisis. The US household sector has been shifting from a negative savings rate before the crisis to a positive rate of 4 per cent of disposable income now. The US corporate sector used to have a large negative savings rate, but this has almost disappeared. So far, the increase in net savings in the US private sector has been balanced by increased borrowing from the US government.
I am making three assumptions: the first is that the return to a positive US household savings rate is permanent – even under a scenario of a strong economic recovery. US households will take time to repair their balance sheets after the housing and credit disaster. Second, I also expect US companies not to return to the high level of borrowings that prevailed before the crisis. Third, I expect the US government to reduce its deficit after 2010. The recent rise in long-term bond yields should serve as a reminder that deficits cannot go on rising forever.
Taking all three factors together, the US will shift from a strongly negative current account balance towards neutrality, perhaps even a small surplus for a short period. I expect similar shifts in the UK and Spain at different magnitudes.
Among countries with large current account surpluses, the three biggest are China, Japan and Germany. I am focusing on Germany here. The German household sector will maintain its high savings rate. The German government increased its deficit during the crisis, but is now looking for a quick fiscal exit strategy. The Bundestag has recently voted through a constitutional balanced-budget clause, which requires cuts in the deficit almost right away. Japan will probably maintain its larger fiscal deficit for longer, but if we take Germany, China and Japan together, we will not see a sufficient and sustained fiscal expansion to compensate for the sectoral shifts elsewhere.
Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries.
The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest.
What about the argument that a large part of German exports goes to the rest of the eurozone? This is true, but there are imbalances within the eurozone too. Spain has been running a current account deficit of close to 10 per cent of gross domestic product. As that comes down, so will Germany’s equally unsustainable intra-eurozone surplus.
Through what mechanism will this export-sector meltdown come about? My guess is that in Europe it will happen through a violent increase in the euro’s exchange rate against the US dollar, and possibly the pound and other free-floating currencies.
Exchange rate devaluation would greatly help the US and others to reduce their current account deficits, but it will impair the economic recovery in countries with large trade surpluses and free-floating exchange rates. Last week’s remarks by Angela Merkel, who criticised the Federal Reserve and other central banks for running inflationary policies, sharpened investor perceptions of transatlantic policy divergence and decoupling. Many investors are now starting to bet on a strong appreciation of the euro – the last thing Ms Merkel wants.
Neither Germany nor Japan is politically equipped to deal with an exchange rate shock. China may continue to manage its exchange rate, but the Europeans are much less likely to intervene in foreign exchange markets. For the time being, the governments of the classic export nations cling on to their export-based economic model, the model they know best. Their only strategy, if you call it that, is to hope for a miraculous bail-out from the US consumer – which is not going to happen this time.
If my predictions prove correct, Germany will be down and out for a long time with a huge and still unresolved banking crisis, an overshooting exchange rate and lower net exports, presided over by politicians who panic about domestic inflation. This will not end well.
Published: June 7 2009 19:03 Financial Times
Let me attempt, perhaps foolhardily, to map out a scenario of how the global economic crisis could evolve in continental Europe.
Even if we assume a recovery elsewhere, Europe’s economy may be stuck at low growth for some time. To understand why, it is perhaps best to look at sectoral balances for households, companies and the public sector.
The current account can be expressed as the difference between national savings and investments. Of the world’s 10 largest economies, the US, the UK and Spain used to run the largest current account deficits before the crisis. The US household sector has been shifting from a negative savings rate before the crisis to a positive rate of 4 per cent of disposable income now. The US corporate sector used to have a large negative savings rate, but this has almost disappeared. So far, the increase in net savings in the US private sector has been balanced by increased borrowing from the US government.
I am making three assumptions: the first is that the return to a positive US household savings rate is permanent – even under a scenario of a strong economic recovery. US households will take time to repair their balance sheets after the housing and credit disaster. Second, I also expect US companies not to return to the high level of borrowings that prevailed before the crisis. Third, I expect the US government to reduce its deficit after 2010. The recent rise in long-term bond yields should serve as a reminder that deficits cannot go on rising forever.
Taking all three factors together, the US will shift from a strongly negative current account balance towards neutrality, perhaps even a small surplus for a short period. I expect similar shifts in the UK and Spain at different magnitudes.
Among countries with large current account surpluses, the three biggest are China, Japan and Germany. I am focusing on Germany here. The German household sector will maintain its high savings rate. The German government increased its deficit during the crisis, but is now looking for a quick fiscal exit strategy. The Bundestag has recently voted through a constitutional balanced-budget clause, which requires cuts in the deficit almost right away. Japan will probably maintain its larger fiscal deficit for longer, but if we take Germany, China and Japan together, we will not see a sufficient and sustained fiscal expansion to compensate for the sectoral shifts elsewhere.
Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries.
The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest.
What about the argument that a large part of German exports goes to the rest of the eurozone? This is true, but there are imbalances within the eurozone too. Spain has been running a current account deficit of close to 10 per cent of gross domestic product. As that comes down, so will Germany’s equally unsustainable intra-eurozone surplus.
Through what mechanism will this export-sector meltdown come about? My guess is that in Europe it will happen through a violent increase in the euro’s exchange rate against the US dollar, and possibly the pound and other free-floating currencies.
Exchange rate devaluation would greatly help the US and others to reduce their current account deficits, but it will impair the economic recovery in countries with large trade surpluses and free-floating exchange rates. Last week’s remarks by Angela Merkel, who criticised the Federal Reserve and other central banks for running inflationary policies, sharpened investor perceptions of transatlantic policy divergence and decoupling. Many investors are now starting to bet on a strong appreciation of the euro – the last thing Ms Merkel wants.
Neither Germany nor Japan is politically equipped to deal with an exchange rate shock. China may continue to manage its exchange rate, but the Europeans are much less likely to intervene in foreign exchange markets. For the time being, the governments of the classic export nations cling on to their export-based economic model, the model they know best. Their only strategy, if you call it that, is to hope for a miraculous bail-out from the US consumer – which is not going to happen this time.
If my predictions prove correct, Germany will be down and out for a long time with a huge and still unresolved banking crisis, an overshooting exchange rate and lower net exports, presided over by politicians who panic about domestic inflation. This will not end well.
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