Posts from — December 2008

The Weekly Wrap-Up appears each Friday on YoungMoney.com as the column “Top Ten Economic Stories.” I’m taking a break for the holidays. See you on January 9, 2009.

Top Ten Economic Stories: December 19, 2008
By Lisa Montanarelli

NATION

Fed Slashes Key Interest Rate to Near Zero

On Tuesday, the Federal Reserve cut the rate that banks charge each other for overnight loans to its lowest on record: a range of zero to 0.25 percent. In effect, the central bank is cutting the cost of money, so banks will profit more and—hopefully—start lending again.

Investors could see this as a cause for hope: the Fed is determined to un-crunch credit by any means necessary to avoid Great Depression Take Two. This may mean that stocks have struck bottom and are on the rebound. (Standard and Poor has climbed 21.4 percent since November 20, and global markets have been jerkily rising.) People saving money might consider moving cash into stocks, because banks will likely lower their yields on savings certificates even further.

Borrowers will get a break, because the Fed’s rate cut allows banks to lower their lending rates for individuals and businesses. Mortgage rates are also dropping. Some homeowners will be able to refinance their mortgages, but millions won’t qualify. The government has to help homeowners in foreclosure to get at the root of the economic crisis.

He “Made Off” With a Mint

Investors worldwide are reeling from allegations that Wall Street money manager Bernard Madoff ran a $50 billion Ponzi scheme for more than a decade. Madoff was supposedly a hedge fund manager—meaning that he dealt only with clients who had more than $5 million to invest, and like a chef with a secret recipe, he didn’t tell his clients how he was investing their money. He didn’t have to, because hedge funds are largely unregulated. Thus Madoff could do anything he wanted with his clients’ money, and it seems as if he wasn’t investing at all. Instead, he engaged in a Ponzi scheme—paying his investors’ “dividends” with funds coming in from new investors who entrusted their cash to his care. The Securities and Exchange Commission failed to investigate Madoff, despite warnings dating back to 1999.

According to financial historian Niall Ferguson, money isn’t metal, it’s a matter of faith—a relationship between a lender and a borrower, in which the lender trusts the borrower to repay him. Madoff’s alleged fraud has rattled the trust of investors large and small. If Bernie Madoff, the epitome of a respectable Wall Street investment manager, can’t be trusted, anyone could be a fraud. Atheists and theists alike have chided our consumer culture for treating money like a deity. Perhaps we’re finally witnessing the death of God.

War Crimes

No wonder Illinois Governor Rod Blagojevich thought he could get away with selling a Senate seat, when our top officials have eavesdropped on US citizens without their knowledge and subjected detainees in US custody to torture. Last Monday, Vice President Cheney spoke openly and unapologetically about his crimes against humanity. In an interview with ABC News reporter Jonathan Karl, Cheney admitted that he had approved the CIA’s use of waterboarding, which has been recognized as a form of torture since the Spanish Inquisition. Cheney’s statements followed upon the Senate Armed Services Committee’s report that former Defense Secretary Donald Rumsfeld and other senior Bush administration officials authorized the use of abusive interrogation methods at Abu Ghraib, Guantánamo Bay, and secret CIA prisons.

The Bush administration has no intention of indicting Cheney or Rumsfeld, so it’s up to the Obama administration to restore the rule of law.

Hoover Forever

Last Friday, Senate Republicans shot down the $14 billion bailout for automakers—putting three million American jobs at risk. In a rare inspired moment, Vice President Cheney rushed to Capitol Hill and warned Senate Republicans that if they refused the rescue plan, “we will be known as the party of Herbert Hoover forever.” In the early 1930s, Hoover cut spending and balanced the budget—hurling the economy into further collapse. Right now, we’re at half the Great Depression’s highest unemployment rate. Roughly 10 million are jobless; another 10 million have stopped looking or are working fewer hours than they’d like. One in 10 US jobs depend on the auto industry.
Senate Republicans killed the bill because UAW president Ron Gettlefinger wouldn’t agree to concessions starting in 2009—even though the union has recently accepted deep cuts in wages and health benefits. (Rachel Maddow smartly notes that white-collar workers at financial institutions weren’t asked to take pay cuts or blamed for the failure of Lehman Brothers.) In terms of cash wages, Big Three autoworkers make on average several cents less than Toyota’s employees, though Detroit workers make more in benefits. Senate Republicans seem to be using this crisis as an opportunity for union-busting, but the union is already broken, and the Republican caucus couldn’t have picked a worse moment to make an ideological point.

Bush to the Rescue: Yikes! (For the latest update at 3:30pm on December 19, see Bush Gives Loan to Automakers)

On Wednesday Chrysler announced that it’s shutting down its North American factories for at least a month, while the Bush administration mulls over how to bail out the Big Three. The White House is thinking about using what remains of the first half of the $700 billion TARP package. (TARP stands for Troubled Asset Relief Program, though so far none of the money has been used to purchase “troubled assets.”)

Out of $350 billion, only a little more than $14 billion remains. That’s enough to tide over the automakers, but if another financial giant goes south before January 20, Treasury will have to ask Congress for the second half of the TARP. This will be difficult, since the Bush administration has already spent its TARP allowance irresponsibly and Congress is displeased.

Oil Prices Sinking

On Thursday, oil prices sunk below $40 a barrel—their lowest since 2004. Last July, they peaked at $145 a barrel. According to AAA, a gallon of gas in the US now averages $1.67, down from $4.11 five months ago.

WORLD

Worldwide Lay-Offs

NPR reports that one of the world’s largest mining companies, British-Australian Rio Tinto, will lay off 14,000 workers. Sweden’s SKF, the world’s largest manufacturer of roll and ball bearings, will lay off 2,500 people employees from its US and European automotive businesses. The National Football League is cutting more than 10 percent of its staff, roughly 150 people.

London Calling All Socialists

Former British Prime Minister Tony Blair walked a centrist path between the rival Labor and Conservative Parties. Now Prime Minister Gordon Brown is turning back toward Labor’s socialist roots—fighting the financial crisis by borrowing, nationalizing banks, aiding industry, and taxing the rich. NPR reports that this strategy is dividing Parliament and Britain along more traditional left/right lines.

Poverty For All

Before this fall’s global economic meltdown, Argentina’s highly industrialized farm industry was flourishing with rising demands from Asia and Europe. Now the industry is hurting, and many farmers claim the government doesn’t support them. Earlier this year, thousands of farmers protested tax increases. Nestor Jose Forti, a farmer in tiny Alfonzo, told NPR, “The government says it wants to redistribute wealth… but what is being distributed is poverty.”

Carbon Cuts

The United Nations climate summit in Poznan, Poland marked the midway point in a two-year program striving for a Kyoto-style deal in which industrialized nations commit to stricter carbon cuts by 2020, and all countries agree to longer-term restrictions. BBC News reports that while western delegates left feeling encouraged, many groups fighting for environmental protection and poverty relief were disappointed that rich nations didn’t promise sufficient cuts, and poorer countries didn’t receive the funds they need to shield their people and economies from the impact of climate change.

Check out www.lisamontanarelli.com.

My weekly column for YoungMoney.com

Top Ten Economic Stories: December 12, 2008

By Lisa Montanarelli

NATION

1. Senate Seat for Sale
Seeing that this is Young Money, I’m supposed to reel off the Top Ten stories about money—or, in these doleful days, the lack thereof. (Ten is an arbitrary number, so please don’t take it personally if I don’t choose your favorite news.)

Since Tuesday, the media has been feasting on Illinois Governor Rod Blagojevich’s scheme to auction off Obama’s vacant Senate seat and trumpeting Blagojevich’s lofty sentiments: a Senate seat, states the governor, “is a f**king valuable thing, you don’t just give it away for nothing,” and Obama, Blago opines, is a “motherf**ker,” because the president-elect and his team are “not willing to give me anything except appreciation” in return for offering the seat to their ally. Old-style Chicago machine politics live on, in case we had any doubts. Al Capone was supposedly a sweet momma’s boy before neuro-syphilis drove him to beat his rivals over the head with baseball bats. Some wonder if the Illinois governor is undergoing a similar disease progression.

As one of the millions who campaigned for Obama and teared up over his victory, I hope this nastiness doesn’t besmirch his good name. So far, the president-elect isn’t implicated, and he asserted on Thursday that he and his aides have zilch to do with Blagojevich’s wheelings and dealings. But the scandal’s tentacles brush such a broad pantheon of Illinois politicos that the FBI could be prowling the White House interviewing the First Puppy for years to come.

2. Economic Innuendoes
“With all the talk about how to stimulate it, you’d think that the economy is a giant sex organ,” writes Barbara Ehrenreich in her latest essay collection, This Land Is Their Land. If so, the economy may be in for a hot date next year. On Saturday, Obama promised to devise the largest public works program since Eisenhower instigated the construction of the interstate highway system.

The president-elect’s stimulus package includes investing in infrastructure to repair roads and bridges, improving broadband access, and introducing more green jobs that cut carbon emissions.

Fiscal conservatives caution against vast expenditures that will balloon the federal deficit to over one trillion dollars. But according to economist James K. Galbraith, a higher deficit is inevitable. The government has two choices: it can take action and spend money to create jobs and stabilize the economy, or it can let unemployment soar—in which case taxpayers will earn less and pay less in taxes, and the government will still have to borrow. Luckily, Uncle Sam has excellent credit. Since everyone covets U.S. Treasury bonds, our government can borrow for 20 years at 4.3 %—the same rate at which it could borrow for 20 years at the tail end of the Eisenhower administration.

Galbraith believes the U.S. is better equipped than the EU to weather the current crisis because the institutions of the New Deal—such as a central bank and social security—are still in place. Europe never had a New Deal and lacks a central bank.

3. Unemployed and Paycheck Challenged
By the way, does anyone have a job for me? This weekly column doesn’t pay the rent, you know. I can do most things except operate large farm machinery. Don’t put me behind the wheel of a tractor trailer, and I’ll be OK.

Unfortunately, I’m not alone in the quest for gainful employment (or in lack of motor coordination). On the morning of December 5, the U.S. Department of Labor announced that unemployment climbed from 6.5 to 6.7 % in November, as a whopping 533,000 people lost their jobs. The jobless rate hasn’t risen so sharply in a single month since 1974.

The unemployment rate doesn’t count those who have stopped job-hunting or those working fewer hours than they’d like. (You’re considered employed even if you only work one hour a week.) If you add the discouraged and underemployed, the rate rockets to 12.5 %.

The Department of Labor posts the previous month’s employment statistics on the first Friday of the month—after I’ve already turned in my weekly column. (I’ve tried to get them to tell me on Thursday, but they say I’m not important enough—due to my measly income.) You can check the most recent stats at http://www.bls.gov/cps/. While you’re at it, drop them an email. Ask if they have any job openings, and tell them I mentioned them in my column.

4. Big Three Make Better Impression in Hybrid Cars

On Wednesday night, the House passed a $14 billion rescue package for G.M., Chrysler, and Ford, after the Big Three CEOs poo-pooed their private jets and made a second trip to Washington in hybrid cars. The Big Three bailout would be a cost-effective stimulus, because it often costs less to save jobs that already exist than to create new ones. As of Thursday, it looked as if Senate Republicans had doomed the bill.

5. Workers Not to Blame for Big Three Bankruptcy
The media has recently been broadcasting $73 per hour (or $150,000) per year as the average pay of a Big Three autoworker. On Wednesday, the New York Times corrected this figure: unionized workers at G.M., Ford and Chrysler earn an average of $40 an hour in cash payments and $15 an hour in fringe benefits. The total of $55 an hour is a little more than double the average U.S. worker’s wages and benefits. Honda’s and Toyota’s non-unionized workers earn roughly $45 an hour in cash payments and benefits—mostly because they receive less generous benefits than the Big Three workers.
In sum, unionized workers aren’t to blame for bankrupting the Big Three. As the Times reports, “If we had wanted to preserve the Big Three, we would have bought more of their cars.”

WORLD

6. Armageddon? Not Quite.
On Tuesday, the World Bank forecast that global economic growth will shrink from 2.5% this year to 0.9% in 2009. While emerging economies’ growth may slow from 7.9% in 2007 to 4.5%, China’s will drop from 11.9% in 2007 to 7.5% in 2009, and India’s from 9% to 5.8%. “We know that the financial crisis now is likely to be the worst since the 1930s,” said the World Bank’s chief economist, Justin Lin.

Despite this bleak picture, developing nations still have excellent long-term growth prospects. The Bank also predicts that world poverty will decline from 25% living on less than $1.25 per day in 2005 to 15% in 2015. Sub-Saharan Africa’s poverty rates will fall more slowly: 37% will still survive on $1.25 per day in 2015.

7. Carbon Bigfoot Threatens World
To avert hazardous climate change, the Malaysia-based Third World Network warns that the developing world must cut greenhouse gas emissions by 60% per capita—even if rich nations downsize their carbon footprint. Meanwhile the Global Climate Network cautions that the EU and U.S. President-elect Obama haven’t promised enough to halve emissions by 2050.

“The figures are very grim,” said Third World Network director Martin Khor, “They’re grim if we go for a 50% [global] cut by 2050, and we may need more—I think we only went for a 50% figure so as not to scare politicians.”

8. Billion Dollar Handouts Worldwide
On Sunday, India’s prime minister announced a $4.1 billion stimulus package to boost the nation’s ailing economy.

“It’s an important move in a nation where millions live below the poverty line. Hundreds of millions in the subcontinent and throughout Asia live on less than a $1.25 a day. A U.N. official warns that if their economic problems are ignored, the risk of widespread social unrest will increase.”
9. Factory to the World Faces Closure
Over the past 25 years Chinese factories have been exporting products and American consumers have been buying them. This relationship has been one of the lynchpins of economic globalization. According to NPR, the current worldwide economic crisis might change China’s role as “factory to the world.” Right now China is trying to boost its economic sector to avoid unemployment and social unrest.

10. Inflation in the Time of Cholera
As Zimbabwe’s ruthless dictator Robert Mugabe clings to power, the country is suffering a deadly cholera outbreak due to the meltdown on infrastructure and the public health system. The government has declared a state of national emergency and the United Nations has reported 13,000 Cholera infections and 600 deaths. Meanwhile, Zimbabwe is about to set the world record in hyperinflation. Grocery stores are only accepting U.S. dollars because the national currency is losing value faster than businesses can spend it.

Want to hire Lisa Montanarelli? Visit www.LisaNY.com

Read this column on YoungMoney.com. “Top Ten” is an arbitrary number, so don’t take it personally if I miss your favorite news.

Top Ten News Stories of the Week

By Lisa Montanarelli

12/05/2008

Recession
On November 31, 2008, the National Bureau of Economic Research—the nonprofit that officially defines our nation’s business cycles-declared that we’ve been in a recession since December 2007. The newspapers usually define a recession as two straight quarters (six months) when the GDP (the nation’s total output of goods and services) declines. The NBER considers a wider range of factors, including employment, incomes, manufacturing and retail sales, as well as GDP. This recession will be the longest since the Great Depression if it lasts past April 2009.

If you’re in your early-to-mid-twenties, you’re witnessing the first recession of your adult life: shriveling home values, rampant job loss, empty stores, consumer confidence at an all time low. But a recession doesn’t affect everyone equally. It will be harder to find work, and those of us who don’t hold senior positions are at higher risk of layoff than those with secure jobs.

Employment
President-Elect Obama is developing a stimulus plan that would generate 2.5 million new jobs by 2011. Nobel Laureate economist Joseph Stiglitz states that this plan is “too modest,” because nearly four million workers—including those fresh out of college—will enter the work force in the next two years. Eminent economists also argue that more than half of the stimulus plan’s funds should go toward repairing highways, schools, and other public infrastructure, funding food stamps and similar aid, and subsidizing state governments.

Housing Crisis
Thinking of buying a home? Not so fast. On December 4, word leaked out that the Treasury is contemplating cutting mortgage rates to 4.5 percent—the lowest in more than 50 years. But this is strictly for homebuyers, not for homeowners who need to refinance their mortgages. How effective will this be? We can’t solve the financial crisis without fixing the root of the problem—the rising numbers of homeowners facing foreclosure. Banks are failing because millions of homeowners are defaulting on their mortgages—a form of trickle-up poverty. The more people foreclose, the more banks will fail. The credit bureau TransUnion predicts that delinquent mortgages will almost double in the next year.

Bailout
Obama insists that the bailout must help homeowners. He stressed this at a December 3 press conference, where he announced New Mexico Governor Bill Richardson as his commerce secretary.

In a recent interview, Elizabeth Warren, who chairs the Congressional panel overseeing the bailout, told the Times that the government seems to be bumbling from one maneuver to the next with no coherent plan.

The TARP (Troubled Asset Relief Program) legislation explicitly states that some of the bailout money should be used to stem foreclosures. But so far, Treasury Secretary Henry Paulson has pumped almost half the $700 billion into financial institutions—supposedly to help the banks start lending again. Paulson didn’t properly restrict how the banks used the money, and the banks are spending it recklessly—buying up other banks instead of extending credit.

One wonders what Fed chairman Ben Bernanke has learned from the current crisis. In a story titled “Officials Warn That Economy Will Remain Weak,” the Times quotes him as saying, “’The government should intervene in markets only in exceptional circumstances.’” We’ve seen how Lehman Brothers’ failure threatened our whole financial system. If the failure of an institution like Lehman Brothers can sink the whole system, these institutions should be regulated even during good times to prevent crises, rather than only rescued when they’re collapsing.

Big Three
On December 3, the United Auto Workers offered to renegotiate its contracts with Ford, GM and Chrysler to help the Big Three secure government loans. One wishes the CEOs would sell their private jets to help fund healthcare and unemployment benefits for laid-off workers.

(Most Disturbing) Environmental
In its last days, the Bush administration is scrambling to change federal rules and grant big gifts to big business. On December 2, the Environmental Protection Agency passed new regulations permitting coal-mining companies to dump their waste in rivers and streams. This pollutes the water and threatens wildlife and public health.

World
In China, hundreds of thousands of migrant workers who left family farms for higher-paying urban-industrial work are now losing their jobs, according to the Wall Street Journal. China has experienced ten years of rapid economic growth partly due to low-cost labor supplied by these workers.  Now many are returning to rural regions where they won’t be able to earn enough to feed their families.China is worried about social unrest. Protests are already beginning in China’s cities.

Last week’s terrorist attacks shut down India’s commercial center, Mumbai, but India was already suffering an economic slump. Its high-tech companies are laying off thousands of workers. “The downturn is exposing a deeper concern,” the Times reports. “India has become the world’s front office, handling customer service calls, and its back office, helping to process payments and run accounting and other computer systems. But it has not yet become the head office — making major new products, pioneering marketing techniques or helping to shape corporate strategy.” It just goes to show that no one is benefiting from the current global economic crisis, not even countries offering low cost labor.