Thursday, January 31, 2008
Wednesday, January 30, 2008
An update of the key WEO projections
January 29, 2008
Following strong growth through the third quarter of 2007, the global economic expansion has begun to moderate in response to continuing financial turbulence. Global growth is projected to decelerate from 4.9 percent in 2007 to 4.1 percent in 2008, a markdown of 0.3 percentage point relative to the October 2007 World Economic Outlook.1 Risks to the outlook remain tilted to the downside.
Recent data suggest that global growth slowed markedly in the final quarter of 2007 in the face of significant headwinds from the financial sector, following a stronger than expected third quarter. As discussed in the accompanying GFSR Financial Market Update, the financial market strains originating in the U.S. subprime sector—and associated losses on bank balance sheets—have intensified, while the recent steep sell-off in global equity markets was symptomatic of rising uncertainty. Economic growth in the United States slowed notably in the fourth quarter, with recent indicators showing weakening of manufacturing and housing sector activity, employment, and consumption. Growth has also slowed in western Europe, and confidence indicators have generally deteriorated. In Japan, growth has been dampened by a tightening in building standards, while consumer and business sentiment has weakened. Despite some slowing of export growth, emerging market and developing economies have thus far continued to expand strongly, led by China and India. These economies have benefited from the strong momentum of domestic demand, more disciplined macroeconomic policy frameworks, and for commodity exporters, from high food and energy prices as well.
Headline inflation has increased since mid-2007 in both advanced and emerging market economies. Core inflation has also drifted upward. In the United States, the Federal Reserve has been cutting interest rates in response to increasing downside risks to activity, while policy has been on hold in the euro area and Japan. Meanwhile, central banks have continued to tighten monetary policy in many emerging market economies, where food and energy represent a higher share of consumption baskets and overheating is more of a concern.
Against this background, global growth is projected at 4.1 percent in 2008, down from 4.9 percent in 2007 (Table 1). The projections for the advanced economies have been reduced significantly. Projected growth in the United States in 2008 has been lowered to 1.5 percent on a year-on-year basis, down from 2.2 percent in 2007. The annual growth figure for the U.S. economy in 2008 reflects the carryover from 2007. Projections on a fourth-quarter-on-fourth-quarter basis thus give a better sense of the slowing growth momentum. On this basis, growth is projected at 0.8 percent in 2008, compared to 2.6 percent over the same period in 2007. For the euro area, growth has been lowered to 1.3 percent, again on a fourth-quarter-to-fourth-quarter basis, compared to 2.3 percent during 2007.
Growth in emerging market and developing economies is also expected to ease, moderating from 7.8 percent (on an annual basis) in 2007 to 6.9 percent in 2008. In China, growth is projected to decelerate from 11.4 percent to 10 percent, which should help alleviate overheating concerns.
The overall balance of risks to the global growth outlook is still tilted to the downside. The main risk to the outlook for global growth is that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies and create more significant spillovers into emerging market and developing economies. Growth in emerging market economies that are heavily dependent on capital inflows could be particularly affected, while the strong momentum of domestic demand in some emerging market economies provides upside potential. In addition, a number of other risks also remain elevated. Monetary policy faces the difficult challenge of balancing the risks of higher inflation and slower economic activity, although a possible softening of oil prices could moderate inflation pressures. There are also concerns about continuing large global imbalances, in the context of heightened financial volatility.
1 The global and regional growth aggregates in this Update use country weights calculated from the new PPP data published by the International Comparison Program in December 2007. This has resulted in a downward revision of the estimates of global growth during 2005-08 of around ½ percentage point a year relative to the estimates in the October 2007 World Economic Outlook. See http://www.imf.org/external/pubs/ft/survey/so/2008/RES018A.htm for more details.
Tuesday, January 29, 2008
Newsweek: "The Road to Recession",
"The U.S. Economy Faces the Guillotine" and
"Goodbye to the Bulls?"
Nouriel Roubini Jan 28, 2008
The cover page on Newsweek magazine this week is titled "The Road to Recession". The fact that this cover story title is written without even a question mark is a signal of how far the consensus has moved towards the recognition of an unavoidable recession that has actually already started.
And if the cover title was not clear enough the title of the cover story in the magazine is "The U.S. Economy Faces the Guillotine". In this cover story the author not only discusses how a US recession is now unavoidable; he also dismisses the hypothesis that the rest of the world can "decouple" from this US hard landing. The fact that yours truly is cited throughout the magazine is no surprise.
Indeed, as I expressed and fleshed out all week at the Davos' WEF:
"The debate today is not any longer on whether we will experience a soft landing or a hard landing in the US; it is rather on how hard the hard landing will be. In other terms on whether the current recession will be relatively mild - say lasting two quarters until the middle of 2008 - or rather be much longer, deeper and uglier and lasting at least four quarters. My view is that the recession will be protracted and painful as a shopped-out, saving-less and debt-burdened consumer is on the ropes and now faltering; while the financial system is on the verge of a systemic crisis that will cause a severe credit crunch...
Indeed the delinquencies and losses in the financial system are spreading from subprime to near prime and prime mortgages; to credit cards and auto loans; to commercial real estate loans; to leveraged loans that financed reckless LBOs; to the losses of the monolines that are effectively bankrupt and at risk of spreading furher massive losses to money market funds and other financial institutions once they get properly downgraded; and soon enough to corporate defaults and junk bonds that will in turn trigger massive losses on credit default swaps; eventual losses in the financial system may add up to more than $1 trillion...
As for decoupling there is no way that the rest of the world can decouple from a US recession. When the US sneezes the rest of the world catches the cold; and unfortunately this time the US will not experience just a case of a mild common cold; it will rather suffer of a painful and protracted episode of pneumonia; thus the real and financial contagion to the rest of the world will be serious...
The Fed will ease aggressively but whatever it does now is too little to late; this easing will not prevent a recession as monetary policy can deal with illiquidity problems but it cannot resolve the deep credit and insolvency issues that plague the US economy; also when there is a glut of capital goods - in 2001 tech capital goods, today a glut of housing, consumer durables and autos the demand for these goods becomes relatively interest rate inelastic; it takes years to clean up this glut and monetary easing does not work as it is like pushing on a string...
U.S. and global equity markets will enter a serious bearish market as a US recession and sharpl global economic slowdown take a toll on investors' risk aversion and firms' earnings and profitability...all risky assets will be under serious pressure in 2008".
Newsweek also asked 15 leading economists to comment on the likelihood of a recession and the recent market turmoil under the title "Goodbye to the Bulls? Fifteen key economists, policymakers and strategists weigh in on a week of volatility and economic turmoil"
Here is my contribution to this debate that opens this survey by Newsweek:
Comparing with some recent financial crises, I think it's worse than 1987, when we just had a stock-market crash. It's worse than the savings and loan crisis of the late 1980s, because the contagion then was generally limited to the savings and loan thrifts and commercial real-estate sectors. It is much worse than the Long Term Capital Management crisis of 1998. That was a liquidity problem. Today we have insolvency problems. It is much worse than the tech bust of 2000 and 2001, when most of the problems were confined to the tech sector and we had a mild recession. You have to go back to the Great Depression for something comparable. We are, of course, far short of a Great Depression now, but in terms of systemic risk and the risks of a financial meltdown, you almost have to go back that far to find a good analogy.
Monday, January 28, 2008
Atravessamos um tempo de pessimismo generalizado, global. De manhã, antes das sete, ouvimos que as bolsas cairam na Ásia e estão a começar a cair na Europa; daí a sete horas, começará a cair Wall Street. Os que sabem do assunto, ou passam por isso, dizem que a economia mundial não vai arribar no primeiro semestre, outros que, provavelmente, ainda sabem mais, dizem que em 2008 vai ser sempre a descer. Não há revisão digna desse nome que não seja em baixa. No meio do coro desafina o governo português, e sobretudo o seu chefe, assobiando o cochicho. Caiem-lhe em cima a oposição e a suposição mas ninguém demove Sócrates da desafinação.
A mim, parece-me bem a desafinação de Sócrates. Alguém ganharia alguma coisa com a afinação de Sócrates com o coro lamentativo? Duvido. E alguém ganhará? Provavelmente.
Um francês, que terá arribado a estas paragens em dia soalheiro e deparado com um grupo de gente simples terá ficado surpreendido com o ar satisfeito que viu à volta, ainda que mais à volta o cenário não fosse risonho, salvo o Sol, e terá concluído que "les portugais sont toujours gais" e a observação tornou-se a lenda. Conclusão errada porque a maior parte dos portugueses anda geralmente com cara de quem carrega com todas as desgraças do mundo às costas. A maior parte anda deprimida, e para confirmar esta tendência para o pessimismo crónico, estão as sondagens à opinião pública que, persistentemente, dão conta deste angustiado estado de alma da generalidade dos portugueses.
Sunday, January 27, 2008
Why the Stimulus Shouldn't Stimulate You
By Steven E. LandsburgSunday
As a general rule, economic policies command bipartisan support only when they're incoherent. Take, for example, the fiscal stimulus package now bulldozing its way through the legislative process. It's poorly conceived, it's unlikely to work, and it's sure to do a lot of collateral damage.
Investment and consumption are natural rivals.
Investment means converting resources into machines and factories; consumption means converting those same resources into TV sets and motorboats. In anything but the very short run, more of one means less of the other.
Metade do público abandonou a ópera de Emmanuel Nunes na estreia no Teatro de São Carlos
Saturday, January 26, 2008
"A fraude é o maior pesadelo de qualquer gestor". O desabafo é de John Thain, presidente executivo da Merrill Lynch. "Se qual for o sistema de segurança, é impossível prevenir a fraude", lamenta Thain.
Apostas secretas de um empregado do Société Générale, Jerome Kerviel, de 31 anos, vão custar ao banco francês 4,9 mil milhões de euros. A noticia deixou os empresários presentes em Davos em estado de choque.
"Não podia ter acontecido em pior altura. Todos esperavam perdas devido ao ‘subprime’ mas não uma fraude. Os bancos estão sob pressão por tantos motivos, que isto era a última coisa que esperavam", disse Bill Browder, presidente executivo da Hermitage Capital Management.
"Há dois dias as conversas era dominadas pela queda dos mercados financeiros, hoje só se fala em auditorias", comentou Steve Forbes, CEO da Forbes. "É um assunto muito mais interessante, embora o Société Générale não ache", brincou o gestor.
"Como é que aconteceu uma coisa destas?", pergunta Angel Gurria, secretário geral da OCDE. "Como é que alguém com a posição de Kerviel pode ter tanta responsabilidade? Isto revela um problema muito sério", disse Gurria.
Jean-François Theodore, CEO da NYSE Euronext, afirmou esta fraude foi possível, porque o "mercado é cada vez mais difícil de controlar". "Possivelmente os instrumentos financeiros ficaram demasiado complexos", disse.
Friday, January 25, 2008
Thursday, January 24, 2008
U.S. Markets Continue to Rally; European Stocks Up
By Howard SchneiderWashington Post Staff Writer Thursday, January 24, 2008; 10:41 AM
The U.S. markets continued their dramatic recovery early this morning -- and so did European and Asian indexes -- as efforts to shore up the U.S. economy helped begin to calm a volatile climate for global stocks.
All three major U.S. indexes opened higher today, although the solid gains were partially shaken shortly after 10 a.m. when the National Association of Realtors reported that sales of existing single-family homes fell in December. By 10:30 a.m., the Dow Jones industrial average had gained 29 points and the Standard & Poor's 500-stock index was up more than 1 point. The Nasdaq composite index was up 17 points.
The gains followed a stunning reversal of the U.S. markets yesterday. They had traded down nearly all day, but by late afternoon began a quick rise. The Dow, which made a 5.4 percent swing, closed yesterday up 2.5 percent.
Wall Street's recovery followed both the Federal Reserve's most recent interest-rate reduction and news that regulators, investors and policymakers were working on efforts to ensure that bond insurance companies remain solvent.
Analysts said today's gains also could be partly attributed to solid earnings reports from Xerox and Lockheed Martin Corp., which were higher than originally estimated.
The new housing numbers, however, suggest that problems are continuing in that market. The realtors group reported that sales of single-family homes and condominums were down 2.2 percent in December and for the year, single-family home sales were off 13 percent, the largest decline in 25 years.
A complex of problems related to the U.S. housing market, in particular rising default rates on riskier home mortgages, has been a chief reason for recent turbulence in global credit and equity markets.
Major European exchanges were up more than 3 percent, despite a developing scandal involving billions of dollars in fraudulent trades at France's second largest bank.
Societe Generale Group announced that it had "uncovered a fraud, exceptional in its size and nature," involving a trader who had made "massive" investments beyond his authority and covered them up with a trail of fake transactions.
After investigating, the bank closed the trader's accounts, at a loss of about $7.1 billion. In announcing the losses this morning, the bank said it was also writing off another $3 billion related to mortgage and other investments in the United States, and would seek to raise an additional $8 billion in capital to strengthen its balance sheet.
Similar disclosures at U.S. banks and financial companies have added to the sense of crisis in the financial sector, but Societe Generale's announcement seemed to have little impact as investors took heart from recent moves in New York and Washington.
By late morning in Europe, the FTSE 100 was up nearly 4 percent, while Germany's DAX 30 had risen nearly 6 percent.
Several major Asian exchange also posted gains of more than percent.
Wednesday, January 23, 2008
Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It's not as if these CEOs weren't compensated in all those years. If you leave your company a shambles -- with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders -- do you deserve a gold-plated send-off? Still, the more serious problem transcends the high pay itself and goes to the wider consequences for the economy.
Tuesday, January 22, 2008
BCE e Banco de Inglaterra deverão seguir corte da FED
O Banco Central Europeu (BCE) e o Banco de Inglaterra deverão ter que seguir a Reserva Federal dos EUA e cortar as taxas de juro devido à ameaça que uma recessão nos EUA poderá significar para o crescimento global, acreditam os analistas contactados pela agência Bloomberg.
As bolsas estão a cair desalmadamente em todo o mundo. Tanto, que as medidas tomadas pela FED (que hoje cortou de emergência a taxa de juro de referência dos EUA em 75 pp, o que não fazia desde 2001, depois de a generalidade dos mercados bolsistas ter sido fortemente penalizada pelos receios de recessão nos EUA), e que deverão ser seguidas pelo BCE e pelo Banco de Inglaterra, se arriscam a desencadear outra moléstia no debilitado sistema financeiro internacional: as reduções das taxas de juros podem não não ser suficientes para evitar a recessão mas poderão despoletar estímulos inflacionistas incontroláveis a curto prazo, gerando o pior cenário, o da estagflação.
O crescimento moderado da inflação como forma de estímulo da economia é uma tentação que está a atrair muitos que não descortinam outras medidas descontaminadas. E, inquestionavelmente, para alguns essa será uma via de resolução de alguns problemas bicudos.
Sabe-se, porém, que há sempre uma factura a pagar à inflação mas nunca se sabe a quanto se elevará o seu montante. Para muitos, a quem estas turbulências da bolsa nada dizem, a vida tornar-se-á ainda mais difícil de viver, porque para eles o preço da inflação nunca será moderado.
Monday, January 21, 2008
Sunday, January 20, 2008
Há quem continue à espera que ele volte um dia destes, há quem esteja convencido que ele já chegou. A cada qual o seu Sebastião privativo.
Saturday, January 19, 2008
Friday, January 18, 2008
Why regulators should intervene in bankers' pay
By Martin Wolf
You really don't like bankers, do you?" The question, asked by a former banker I met last week, set me back. "Not at all," I replied. "Some of my best friends are bankers." While true, it was not the whole truth. I may like many bankers, but I rather dislike banks. I recognise their necessity, but fear their irresponsibility. Worse, they are irresponsible partly because they know they are necessary.
My attitude to the banking industry is not a prejudice. It is a "postjudice". My first experience with out-of-control banking was when I watched the irresponsible lending that led to the devastating developing-country debt crises of the 1980s.
The world has witnessed well over 100 significant banking crises over the past three decades. The authorities have even had to rescue important parts of the US financial system - on most counts, the world's most sophisticated - four times during the same period: from the developing country debt and "savings and loan" crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitised-credit crisis of 2007-08.
No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials - particularly, central bankers - fail to come at once to their rescue when they get into (well-deserved) trouble.
Yet they are right to expect rescue. They know that as long as they make the same mistakes together - as "sound bankers" do - the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.
Nor is it all that difficult to understand the incentives at work. I gave the broad answer in my column, "Why banking is an accident waiting to happen" (Financial Times, November 27 2007).
It is the nature of limited liability businesses to create conflicts of interest - between management and shareholders, between management and other employees, between the business and customers and between the business and regulators. Yet the conflicts of interest created by large financial institutions are far harder to manage than in any other industry.
That is so for three fundamental reasons: first, these are virtually the only businesses able to devastate entire economies; second, in no other industry is uncertainty so pervasive; and, finally, in no other industry is it as hard for outsiders to judge the quality of decision-making, at least in the short run. This industry is, in consequence, exceptional in the extent of both regulation and subsidisation. Yet this combination can hardly be deemed a success. The present crisis in the world's most sophisticated financial system demonstrates that.
I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important - the political legitimacy of the market economy itself - across the globe. So it is time to start thinking radical thoughts about how to fix the problems.
Up to now the main official effort has been to combine support with regulation: capital ratios, risk-management systems and so forth. I myself argued for higher capital requirements. Yet there are obvious difficulties with all these efforts: it is child's play for brilliant and motivated insiders to game such regulation for their benefit.
So what are the alternatives? Many market liberals would prefer to leave the financial sector to the rigours of the free market. Alas, the evidence of history is clear: we, the public, are unable to live with the consequences.
An alternative suggestion is "narrow banking" combined with an unregulated (and unprotected) financial system. Narrow banks would invest in government securities, run the payment system and offer safe deposits to the public. The drawback of this ostensibly attractive idea is obvious: what is unregulated is likely to turn out to be dangerous, whereupon governments would be dragged back into the mess.
No, the only way to deal with this challenge is to address the incentives head on and, as Raghuram Rajan, former chief economist of the International Monetary Fund, argued in a brilliant article last week ("Bankers' pay is deeply flawed", FT, January 9 2008), the central conflict is between the employees (above all, management) and everybody else. By paying huge bonuses on the basis of short-term performance in a system in which negative bonuses are impossible, banks create gigantic incentives to disguise risk-taking as value-creation.
We would be better off with Jupiter's 12-year "year", since it takes about that long to know how profitable strategies have been. The point is that a year is an astronomical, not an economic, phenomenon (as it once was, when harvests were decisive). So we must ensure that a substantial part of pay is better aligned to the realities of the business: that is, is made in restricted stock redeemable over a run of years (ideally, as many as 10).
Yet individual institutions cannot change their systems of remuneration on their own, without losing talented staff to the competition. So regulators may have to step in. The idea of such official intervention is horrible, but the alternative of endlessly repeated crises is even worse.
The big points here are, first, we cannot pretend that the way the financial system behaves is not a matter of public interest - just look at what is happening in the US and UK today; and, second, if the problem is to be fixed, incentives for decision-makers have to be better aligned with the outcomes.
The further question is how far that regulatory net should stretch. I believe it should cover all systemically important financial institutions. Drawing the line will not be simple, but that is a problem with all regulation. It is not insoluble. The question the authorities need to ask themselves is simple: if a specific institution fell into substantial difficulty would they have to intervene?
If the conflict of interest that dominates all others is between employees and everybody else, then it must be fixed. All bonuses and a portion of salary for top managers should be paid in restricted stock, redeemable in instalments over, say, 10 years or, if regulators are feeling generous, five. I understand that the bankers will not like this. Yet one thing is surely now quite clear: just as war is too important to be left to generals, banking is too important to be left to bankers, however much one may like them.
Várias vezes já, tenho reflectido aqui no Aliás acerca do assunto, e continuo a pensar que Vítor Constâncio já se deveria ter demitido. Não vai fazê-lo porque é inerente à sua reconhecida incapacidade de decisão, que, neste caso, lhe continua a garantir o enchimento da bolsa. Também não vai ser demitido porque faz parte do contrato e dos compromissos.
Banco de Portugal sabia das operações suspeitas do BCP desde 2001
O Banco de Portugal (BdP) conhecia as operações de crédito concedidas a membros dos órgãos sociais do Banco Comercial Português (BCP), bem como acompanhou os últimos aumentos de capital que recorreram a contas off-shore. O regulador deu ordens para que o banco corrigisse as situações, mas nunca penalizou os gestores do BCP. (Jornal de Negócios Online)
Tal qual o que aconteceu na praia, deserta, da Costa da Caparica: O nudista regalava o rabinho ao sol, veio o pescador guloso e deixou-se escorregar para as costas do nudista. Este, após um apreciável compasso de espera, avisou docemente o pescador:
Reconheça-se, contudo, que há uma grande diferença entre as duas anedotas: No caso do Banco de Portugal há prejudicados e mal pagos que somos nós, todos aqueles que de uma forma ou de outra pagam as favas pela indolência gosada do Governador.
Thursday, January 17, 2008
Wednesday, January 16, 2008
Tuesday, January 15, 2008
Monday, January 14, 2008
Sunday, January 13, 2008
Fears About Economy Increase
Debt Crisis Grows; Top Mortgage Firm Sold at a Bargain
By Anthony Faiola and Tomoeh Murakami Tse
New indications emerged yesterday that the spiraling subprime mortgage crisis is spreading from home loans to credit cards, potentially engulfing a far broader segment of Americans. At the same time, the U.S. trade deficit soared to a 14-month high, fueled by soaring oil prices.
And rising concern that U.S. investment houses, particularly Merrill Lynch, may yet suffer far greater losses, helped set up a wide market sell-off.
Echoing the heightened concern, Treasury Secretary Henry M. Paulson Jr. said yesterday that the U.S. economy had slowed "rather materially" at the end of 2007 and that "time is of the essence" in launching an economic stimulus package to stave off a recession.
Meanwhile, a broad shake-up of the U.S. lending industry is speeding up. Bank of America agreed yesterday to buy the troubled Countrywide Financial for $4 billion, a bargain-basement price for the nation's largest mortgage lender, which, analysts said, could have even more substantial mortgage-related losses ahead.
"There are signs" that the economy "is slowing down fairly rapidly," Paulson told Bloomberg Television. Congressional Democrats have promised to work with the Bush administration to pass a series of economic measures meant to boost consumer confidence and fend off a sharp downturn, perhaps including tax rebates for low- and middle-income Americans and tax cuts and other fiscal measures to boost investment. "If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon," Paulson said.
Some saw the rescuing of Countrywide from possible bankruptcy, as well as news that J.P. Morgan Chase is in "very early talks" with about a half-dozen regional banks, including Washington Mutual of Seattle, as evidence of a much-needed consolidation that in the long run could fortify the lending industry and eventually ease the nation's credit crunch.
At best, however, that dawn remains some ways off. Economists said the market drop yesterday signals that Wall Street is increasingly betting on a recession and failed to respond to vows by Federal Reserve Chairman Ben S. Bernanke that the central bank would act aggressively to prevent one.
The Dow Jones industrial average of 30 blue-chip stocks plunged 246.79, or 1.9 percent, to 12,606.30. The Standard & Poor's 500-stock index, a broader market measure, lost 19.31, or 1.4 percent, to 1401.02. The tech-heavy Nasdaq composite index declined 48.58, or 2 percent, to 2439.94.
"I almost feel like we're in the first innings of a bear market," said Jim Herrick, director of equity trading at Robert W. Baird. "It's really hard to see the light at the end of the tunnel."
Jitters were also stirred by a New York Times report that Merrill Lynch may take a $15 billion write-down when it reports earnings next week, exceeding the $12 billion that had been predicted. In addition, American Express shares shed 10.1 percent of their value after the company warned that it would take a charge of $440 million in the fourth quarter, in part to cover higher delinquencies.
As companies continue to be squeezed in the credit crunch, the landscape for financial institutions has increasingly become a matter of survival of the fittest. Wobbling mortgage lenders are searching for bailouts, and banks relatively unscathed by deteriorating mortgage assets are cautiously looking for discounted takeover targets.
Bank of America, at least on paper, is getting Countrywide on the cheap -- picking up the lender at a mere 31 percent of its book value. Yet even at that price, analysts fretted that Bank of America may still be taking on too much risk and exposing itself unnecessarily to what could be a far deeper cache of bad debt on Countrywide's books.
Other factors that will determine whether the United States is able to avoid a recession, or at least blunt its pain, are developments in the labor market, whether consumers continue to tighten their purse strings, and how much money financial institutions will be losing in the months to come as the shake-out continues.
Joe Brusuelas, chief economist at the research firm IdeaGlobal, said the magnitude of these losses may be staggering.
"We haven't even scratched the surface of what the losses will be," Brusuelas said. "I don't think we're anywhere near the end. Rather, we're still at the beginning of this."
On the plus side, some economists said, U.S. institutions are moving to deal with a bad situation far faster, for instance, than Japanese banks did after the collapse of that nation's real estate market in the early 1990s. Major U.S. financial institutions have written off $68 billion as they come to grips with the depths of their troubles.
"This all signals that we're moving in the right direction," said Art Hogan, chief market analyst for Jefferies & Co. "But we're going to have more bumps in the road ahead, especially next week, when many financial institutions will report their earnings and probably more write-offs."
Economic concerns deepened yesterday after the release of data showing an unexpectedly larger U.S. trade deficit in November, $63.1 billion. Analysts had hoped that the weaker dollar would help U.S. companies export America's way to a narrower trade gap. But while exports did stage a relatively robust uptick, they were more than offset by a 16.3 percent rise in the nation's bill for foreign oil.
The widening deficit has serious political ramifications, particularly in an election year in which globalization and free trade have become popular pi¿atas on the campaign trail as a blame for America's economic woes. Critics of free trade, as well as those who have pressed the Bush administration to get tougher on China in particular, have blamed those policies for zapping millions of jobs from the United States.
Protectionist fires are likely to be fanned by more revelations yesterday that major U.S. financial institutions are searching for cash infusions from sovereign wealth funds, the investment arms of foreign governments. Such funds in Asia and the Middle East are flush from the industrial revolution in China and soaring oil and gas exports in the Persian Gulf states.
To date, sovereign wealth funds have invested nearly $30 billion in Merrill Lynch, Citigroup, UBS, Morgan Stanley and Bear Stearns. Citigroup and Merrill are to get up to an additional $14 billion combined, the Wall Street Journal reported this week. Such deals are emerging as flashpoints for some critics, who insist that it is not in U.S. interests to have the nation's key financial institutions part-owned by foreign government entities.
In addition, Congress is considering bills that would clear the way for economic sanctions on China if it continues to prop up its currency, which some analysts say is being artificially undervalued by as much as 40 percent against the dollar to ensure that Chinese exports remain cheap.
In an interview yesterday, Commerce Secretary Carlos M. Gutierrez said the trade deficit with China had actually narrowed slightly in November and warned against slipping into a new era of protectionism.
"If the discussion were to translate into isolationist and protectionist policies, I think that would be bad for our economy and bad in terms of the message that we are sending to the world," Gutierrez said.
Saturday, January 12, 2008