Despite a flourishing US economy, global momentum remains vulnerable to financial market tension that could dampen critical consumer spending and bedevil the corporate and housing sectors, analysts warn.
While the US government on Wednesday reported a surprisingly robust 3.9 percent gain in third quarter US growth, Veronique Riches-Flores, chief economist with the bank Societe Generale, put that in perspective.
“The third quarter will be good everywhere, including in the eurozone,” she cautioned.
She predicted however that “we are in for two to three quarters of negative effects” showing up in the financial results of major banks. Several of them have already disclosed big losses stemming from a collapse in the US high-risk housing market and its impact on mortgage-backed securities.
The US Federal Reserve has put the cost of the crisis in the “subprime” mortgage sector at between 100 and 150 billion dollars (69.2 billion-103 billion euros) to banks and credit institutions worldwide.
But beyond simple bottom-line losses, “the crisis in the credit market persists, with tighter lending conditions, a weakening in other segments of the economy and a rise in US unemployment,” said one banking analyst who asked not to be named.
Borrowiong costs among banks are still abnormally high, a sign that jitters continue to sap confidence at financial institutions.
As a result, according to Riches-Flores, companies are having trouble securing financing, both in the United States and Europe.
A downturn in US housing prices has also signalled an end to the “wealth effect”, which in the past few years has enabled homeowners to re-finance their properties in order to obtain ready cash.
With that option now disappearing, US consumer spending, which drives US growth, could contract.
The US labour market has so far generally resisted the slide in the housing sector, although there have lately been increases in the number of first-time applicants for unemployment compensation.
In Europe, “the effects of the subprime crisis are expected to materialise gradually,” said Eric Vergnaud, an economist at the BNP Paribas bank.
At research group Exane, analyst Jean-Pierre Petit, also noted that “the cost (to Europe) will be progressive” and said there would be no serious damage done if “the equities market rebounds and if the credit market returns to normal.”
He forecast that the global credit squeeze would shave 0.3 to 0.6 points from the world economy between mid-2007 and mid-2008. The International Monetary Fund last month reduced its growth projection for 2008 to 4.8 percent from 5.2 percent.
Petit also cited certain positive effects from the current situation, notably lower US interest rates, a delay in rate hikes in the eurozone and oil prices “that would be even higher without the crisis.”
In addition, tighter credit conditions had “put an end to the pursuit of speculative bubbles” and could thereby ensure a soft landing for the global growth pace after a five-year spurt.
A few months ago Iran uncovered the most effective anti-H.I.V medicine. I searched for news of that on the internet, but there was no single sign of it.Now, I found it among the English news: “The medicine is produced from herbs using nano technology” The link to read about it is: http://www.payvand.com/news/07/feb/1032.html
The Media are unjust. They never talk about facts!
Some interesting facts:
Iran is a pioneer in medicine and genetics, and Iranian surgeons have found lots of new methods for treating spinal defects, and many diseases (mainly the treatment for different types of cancer) and the best brain and heart surgeons are Iranian.The pioneer in heart transplants and artificiall hearts and so on and so! (I’ve put two websites below) The head of the Mars Mission in NASA is Iranian. One of the best designers of sports cars working in Germany is Iranian. Some of the best 3D animators are Iranian. Iran is one of the best countries in counter-engineering. Holds the second place in building dams and in loads of other things! It’s one of the top countries in bio-technology and nano-technology. The 4th highest tower in the world (Milad tower) is in Tehran (visit it at this link from wikipedia: http://en.wikipedia.org/wiki/Image:Milad.jpg ). 51 of the top 100 universities in the Mid-East are in Iran, and they’re among the top universities of the world as well. The champion weight-lifter, a woman the nobel peace prize are Iranian. The 6th top movie director in the world is Iranian.(Abbas Kiarostami) http://arts.guardian.co.uk/fridayreview/story/0,12102,1084266,00.html
Iranian Director’s Film Wins Spanish Festival Top Prize - VOA News (September 25, 2004) These are just small samples.I can’t put every news about Iran here.Then you should visit press TV website.
Iranian girls are famous for being terrific. We have Persian rugs and Persian literature, many Persian poets, artists and scientists that are world famous. Iranian culture is now westernized and only a little of the ancient culture has survived. According to statistics Tehran is the cheapest capital city in the world (one Dollar =about 950 Tomans! For example you can buy windows vista for 1 Dollar here instead of 700 Dollars!!!wow!) There are many other things. How many pages would you need to describe a country? Iran has nearly all the industries and technologies found in ‘developed’ countries. Oh, and we have four seasons! We get a lot of snow and there are skating rinks! lol The list is endless.
I’m gonna introduce Iran’s international news website to you (Press TV) which was established recently. It’s fully in English. In the “Sic / Tech” section you’ll always see Iran’s discoveries. The address is: http://www.presstv.ir/news.aspx Press TV news: Iranian scientists have registered more than 4800 inventions during the last Iranian calendar year of 1385 (April 21 2006-April 20, 2007). 4800 inventions in just one year!
The list of highly-respected Iranian scientists in the world: http://en.wikipedia.org/wiki/Modern_Iranian_scientists_and_engineers#T
The list of notable Iranian figures and pioneers: http://en.wikipedia.org/wiki/Contemporary_Medicine_in_Iran
An extract: Iranian medical community is a significant part of medical community in US and Europe
Some people think Iran is a desert! Well, it is, if you consider California a desert. We share the same latitude. Iran is a modern country with breathtakingly beautiful nature and lots of historic places to visit. Please take a look at the following links to see if Iran looks like what you think or not! This is a photo of Tehran (Awesome, Isn’t it?): http://upload.wikimedia.org/wikipedia/commons/7/79/Tehran-2-1600.jpg
If you like you can visit these too, hundreds of pretty photos from the cities, nature and historic places: (It’s like a free tour!)
Some people think music is forbidden in Iran. “Music of Iran and Iranian musicians have received countless awards in the course of history. Every year from 1977 to 2007.Evidence? http://en.wikipedia.org/wiki/Music_of_Iran
I send Iranian music to my American and Canadian chat friends and they all say they’re some of the best songs they’ve ever heard.
Here’s a sample of the latest hits from two official Iranian music websites.You can just right click on the links below and choose “Save Target As” to download them.I guess you’ll fall for it! Iranian music is just modern pop and the best sort of it.
1.(You know this: 2007) http://download.bia2music.com/Music/Irani/Top33/128/Neorin%20-%20To%20Ino%20Miduni.mp3
2.(Hold my hand: 2007) http://www.sarzaminmp3.com/Sarzaminmusic/Persian/128KB/Mansour%20-%20Beautiful/09_%20Dastamo%20Begir.mp3
3.(The wetness of your eyes: 2006) http://download.bia2music.com/Music/Irani/Top33/128/Ehsan%20Gheibi%20-%20Khisie%20Cheshmat.mp3
4.(I just want you: 2003) http://download.bia2music.com/Music/Irani/Mansour/Crazy/Delam%20Faghat%20Toro%20Mikhaad(www.Bia2Music.com).MP3
5.(The rain: 2007) http://download.bia2music.com/Music/Irani/Siavash%20Ghomayshi/Sunset%20to%20Sunrise/64/Siavash%20Ghomayshi%20-%20Sunset%20to%20Sunrise%20-%2005%20Baroon%20(www.Bia2Music.com).wma
6.(The window: 2005) http://www.sarzamin.org/Sarzaminmusic/Persian/128KB/Siavash%20Ghomayshi/03_%20Panjereh.mp3
7.(Keep me in your memory: 2005) http://www.sarzamin.org/Sarzaminmusic/Persian/128KB/Siavash%20Ghomayshi/07_%20Yaade%20Man%20Baash.mp3
8.(Farangis “A female name” 2007) http://download.bia2music.com/Music/Irani/Siavash%20Ghomayshi/Sunset%20to%20Sunrise/64/Siavash%20Ghomayshi%20-%20Sunset%20to%20Sunrise%20-%2001%20Farangis%20(www.Bia2Music.com).wma
9.(The distance: 2007) http://www.sarzaminsong.com/Sarzaminmusic/Persian/128KB/Siavash%20Ghomayshi%20-%20Sunset%20to%20Sunrise/03_%20Faseleh.mp3
10.(Sunrise: 2007) http://www.sarzaminsong.com/Sarzaminmusic/Persian/128KB/Siavash%20Ghomayshi%20-%20Sunset%20to%20Sunrise/04_%20Tolou.mp3
11.(Stop world:2006) http://www.sarzaminmusic.com/Sarzaminmusic/Persian/128KB/Reza%20Sadeghi%20-%20Vaysa%20Donya/01_%20Vaysa%20Donya.mp3
12.(You can’t: 2007) http://www.sarzaminmp3.com/Sarzaminmusic/Persian/128KB/Mansour%20-%20Beautiful/06_%20Nemitooni.mp3
And so on and on!
It’s now 2007 and most people still think we are uneducated people living in deserts, riding camels!
Part 2: Political info.
Let’s clarify some political issues as well: Some of the Americans think that president Ahmadinejad hates the U.S and Israel and wants to nuke them!! The Media are good at putting lying comments out there. I really don’t get the point why our politicians defame themselves by talking about things that have got nothing to do with us. The thing is that they occasionally make some statements that the media would make them controversial topics to interest its viewers! For example they pick up some specific phrases of a long speech (without refering to the main points and reasons for that speech) and put so many bad comments on that.
First of all, Iranians don’t hate anyone. If our government complains about some injustice going on in the world, it’s not bad, is it? (Although what we want from them is to shut up and not get us into trouble by talking about things that are none of our concern) We hate neither Jews nor Americans. How would our guys dream of America, want to be like them as much as possible, and hate them at the same time?! SECRET: Iranians are the only people in the Mid-East that are pro-American! Being agaisnt the U.S policies is a different story! We live basically the same lives.Don’t look at the way women dress at the public places! You’ve got to see them in other places!I’ve got to say that for Iran, Israel is not equal with Jews! Israel is a gov’t. Jews are faithful people! A few of them live here in our neighbourhood and they live just like the rest of Iranians. (20,000 Jews and lots of Christians live here! Iran’s different!) And two of Iran’s parliment members are Jews. Who says we want to force others to convert to Islam? Have you ever found a Muslim knocking at your door asking you to do so?
Christians and Jews are both God-believers and respectful to us. In Iran, religion is one of the least important factors. Where you come from and what your religion is are not important to us at all.
I wonder who Iran is really a threat to. Is it logical to say someone’s guilty because we THINK / PREDICT that he’s going to do something wrong? And they repeat the same “nuclear weapons” tosh over and over and brainwash people! Correction! It’s “nuclear energy”. Besides, how many “nuclear weapons” do they have themselves? Hundreds of thousands? Has Iran ever attacked any countries? No. Has it developed any nukes? No! That’s what nuclear agency says. Only Iran’s opponents are pulling Iran’s leg and what they say is just based on political conflicts. What we’re doing is legal. Iran is a peaceful country. Why? It’s the regional super-power and if she wanted, she could easily invade the countries in our neibourhood just like what Saddam did to our country, but as you see Iran has peaceful relations with all of them.
Some people say he said: Israel should be wiped off the map! the thing is that he exactly said: “The Imam “Khomeyni” said this regime occupying Jerusalem must vanish from the page of time.”They’ve only told you this phrase not the whole thing and it’s mistranslated intentionally. Besides, they’ve been saying such things for a long time.It’s their habit.Here’s an article.”Wiped off the map….The roumor of the century.Read how the media and the U.S newspapers have twisted it into a controvertioal topic. http://www.antiwar.com/orig/norouzi.php?articleid=11025 I don’t like the way he speaks frankly, but admit that other presidents say many terrible things too, but the media doesn’t pull their leg so much!
Now you see that you were wrong.Iran has always defended itself, but it’s not an offensive country.
Some say he’s said: “The Holocaust is a myth!” Again, this is a single phrase taken from a long speech and there are totally logical reasons for saying so. If 6,000,000 Jews were killed, that’s terrible, but 300,000 Shiite Moslems killed by Saddam aren’t important at all? Over 650,000 Iraqi people are killed and that’s not important?! When Fox News simply says that America and Israel are capable of destroying and killing Iran’s population of 69,000,000 within two weeks, it’s OK and no one says they’re threatening other countries to nuke them (I saw this with my own eyes on the Fox News website) Millions of people killed in Afghanistan, Hiroshima & Nagasaki and the Vietnam war are not considered human beings at all! Now I think you’d get the point why he’s IRONICALLY said it’s a myth. Moreover, don’t you believe in freedom of speech/mind?
Some countries are using Iran as a scapegoat to put the blame (for their own faults) on.
This part is just for Americans:
Those of you who say why Iran says “Death to America”:
1. ‘America’ to us means the U.S govt, not the people. How do you expect Iranians to mean “American people” when our media admires Americans for marching and holding up “no war” placards?! Also, I see a lot of “Let’s nuke Iran”s on YA.Isn’t that a kind of “Death to Iran”?
2. The new generation don’t say such things and if some of them occasionally march in the streets that’s because some of the stupid guys enjoy making noise and they mainly go out there to meet their girlfriends/boyfriends! Strange. Isn’t it?
3. Such mottos are not just said in Iran and as you know whatever you hear is a response to the U.S govt’s terrible actions which has made life for many people hell (You wouldn’t deny that attacking countries is a mistake. Would you?)
4. The U.S gov’t helped Saddam attack Iran and I hope you know which country gave Iraq biological weapons which killed a million Iranians.
5. America hit an Iranian airplane over the Persian Gulf and killed 200 passengers for no reason.
6. America places sanctions on Iran, promotes a false image of Iran and Iranians, scares tourists away, and harms our economy, development and credit. To what purpose?
When you call Ahmadinejad a nutcase for what he’s said, what do you call Bush for his actions? I mean it’s a good idea to consider what Bush is doing to the world with his wrong decisions and lies. Bush is powerful and influencial, but Ahmadinejad is nothing.He’s even failed to control the inflation
To those who are upset with American hostages taken for 444 days:
1. Firstly, It’s related to so many years ago and it’s almost a part of history, and don’t forget that when there’s a revolution, there’d be chaos and people may do things that they should not, moreover they’re all alive and healthy. Aren’t they?
2.The U.S has arrested Iranian diplomats in Iraq and had tortured the one who was freed. Now you decide who has the right to be upset with whom. How do you believe in their lies about politics when they hide both the most and the least important things from you considering the fact that politics is the world of lies in its nature?!!!
If you like to insist on your theory of attacking Israel, I’ll tell you our logical theory: “The moment that Iran attacks Israel, Iran will be wiped off the face of the earth by the U.S and its allies.(Thought this twisted phrase is familiar to you) and Iran is far more logical than doing such a stupid thing” So, forget about it.I’m quite sure you know that all the events and lies in the world are a part of a pre-planned scenario by major world-powers (Iran as an important country has always been a part of their plans)And the first step is to brainwash people.They excactly know what will happen even 50 years later! I think Iraq is such a good example.Attacking it with the excuse of removing Seddam while they’d put Seddam there themselves and had supported him for years! The same is true with Al Qaida if you do some research! But in this particular case Iran and the U.S were co-operating in fighting the terrorists in Afghanistan.
When we think of the U.S, we think of its greatness and its countless “positive points” not its president.When you think of other countries, you think of their presidents or a nation as a whole?! No gov’t in the world is representative for its people.Try to judge everyone righteously not just by a few things that you find as “negative points”.
Isn’t it better for both countries to forget past conflicts and to have peaceful relations? Our two gov’ts are like 10 year old children playing a stupid, harsh, rhetorical game. They don’t care about hurting people’s feelings. They just try to make our two peoples enemies to achieve their own goals. We, as the people of these countries, MUST NOT allow these conflics into our hearts. Now, what do you think? You’ll have elections soon and we’ll have one in 2009.You just vote for a Democrate and we’ll find someone who’d get along with the U.S (Our former pres is a nice bet).Deal?No matter how much they hide this fact, but if Iran and the U.S co-operate with each other, not only the Mid-East crises will be solved but also it’ll have a great positive impact on the world.I can’t wait to see both nations in peace. It’d be marvelous!
BTW, Did you find my article informative? : )
Thanks for your time
AIG was at risk of following Lehman Brothers into bankruptcy despite approval for it to borrow 20 billion dollars and as report said the Federal Reserve had asked two banks to help provide 70-75 billion dollars.
Markets, investors and savers around the world focused on AIG to see if it would be the next failure in the firestorm from the shocks on Wall Street on Monday, when another investment bank Merrill Lynch was bought out of trouble by Bank of America.
Economist Jeffrey Sachs of Columbia University warned: “There is more ahead. The US economy is definitely going into recession … There’s more financial turmoil ahead.”
Stock markets fell for a second day on widespread recognition that the financial crisis is the worst since the crash of 1929. The fall in Europe was smaller than on Monday but Asia markets plunged and bank shares everywhere were showing big losses.
AIG was in the eye of the storm as the European Central Bank, and British and Japanese central banks injected 160 billion dollars so that banks, reluctant to lend to each other, have funds.
The US Treasury, as it had done for Lehman, ruled out using taxpayer money to prop up AIG.
The Wall Street Journal, citing people familiar with the situation, reported that on Monday the US Federal Reserve asked Goldman Sachs Group and JP Morgan Chase to help make 70-75 billion dollars in loans available to AIG.
New York state has thrown the only lifeline of sorts to AIG, announcing Monday that the company can, in effect, loan itself 20 billion dollars, by borrowing against its assets.
But even that failed to reassure credit rating agencies. In blow after blow late Monday, the three main agencies — Standard & Poor’s, Moody’s and Fitch — lowered AIG’s credit score.
Bottom line: they judge the solvency of AIG, the largest US insurer, with a global reach, at risk.
As a consequence, AIG will need to raise huge amounts in new capital to survive, although it already has sought billions of dollars to keep it going.
The Wall Street Journal reported Tuesday that people close to the situation say AIG may be forced into filing for bankruptcy if it cannot raise the money by Wednesday.
“The situation is dire,” an anonymous source close to AIG told the Journal.
The three ratings agencies gave essentially the same reasons for the downgrade: the US housing crisis, to which AIG is highly exposed, and its share freefall.
On Monday AIG shares plummeted 61 percent to 4.76 dollars; they have lost 93 percent of their value in a year.
“The rating actions reflect Fitch’s view that AIG’s financial flexibility and ability to raise holding company cash is extremely limited,” Fitch said in a statement.
Standard & Poor’s Ratings Services lowered its long-term counterparty rating to ‘A-’ from ‘AA-’ and its short-term counterparty credit rating on AIG to ‘A-2′ from ‘A-1+’ according to a statement. Moody’s downgraded AIG to ‘A2′ from ‘AA3′ and Fitch lowered its rating to ‘A’ from ‘AA.’
Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default.
These products, often linked to the US real-estate market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world.
AIG alone has written down 25 billion dollars amid spiking defaults on US mortgage payments in the United States.
In a filing with US market regulator, the Securities and Exchange Commission, AIG said it would need 13.3 billion dollars to meet its CDS obligations, if S&P and Moody’s lowered its rating a notch.
Moody’s, in a dire warning, said that “further downgrades of the parent and certain operating units are likely if the immediate liquidity and capital concerns are not fully addressed. Such downgrades could amount to multiple notches.”
The stakes are high for a company that until only recently had been long considered the world’s largest insurer. In the past year it has been battered by the global credit crunch and the worst US housing slump in decades.
AIG has 74 million customers worldwide, most of them American, who would find themselves without insurance if the company goes bankrupt. It employed 116,000 people in 130 countries at the end of 2007.
According to US media reports, among the assets AIG is hoping to sell is its aircraft leasing business, International Lease Finance Corporation, which has a fleet of 1,000 planes.
http://www.msnbc.msn.com/id/22425001/vp/26735472#26735472″ frameborder=”0″ scrolling=”no”>
AP Sources: $85B gov’t bailout of AIG imminent By IEVA M. AUGSTUMS and STEPHEN BERNARD, AP Business Writers
1 minute ago
The government is expected to announce an $85 billion bailout of the huge insurer AIG, people with knowledge of the situation said Tuesday, in a bid to avoid further market upheaval. An announcement from the government about the plan was expected by 9:30 p.m. EDT, the people said.
If AIG had failed, it could have triggered a wave of problems for banks around the world and opened the ugliest chapter yet of the financial meltdown that has slashed billion of dollars from global stock markets.
The people, who asked not to be named because of the sensitive nature of the negotiations, said bankers and federal officials had decided a government bailout of American International Group Inc. was the best solution to save it from collapsing.
The people said the Federal Reserve would receive warrants that could be exchanged for an ownership stake in the company in return for its $85 billion loan. The ownership stake could total close to 80 percent of the New York-based insurance company, one of the world’s largest.
Earlier, Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government’s option.
Bernanke and Paulson left the meeting without commenting.
“At the administration’s request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration’s views on the deepening economic turmoil and shared with us their latest proposals regarding AIG,” Reid told reporters. “The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets.”
On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours. Still, no deal emerged.
The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn’t make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week’s collapse of the investment bank Lehman Brothers.
The worries were triggered after Moody’s Investor Service and Standard and Poor’s lowered AIG’s credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.
“It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions,” said Timothy Canova, a professor of international economic law at Chapman University School of Law. “If Lehman Brother’s failure could help trigger AIG’s going down, who knows who AIG’s failure could trigger next.”
New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said “they are solvent and have the capability to pay claims.”
Published: October 9 2008 19:32 | Last updated: October 9 2008 19:32
Blame greedy bankers. Blame Alan Greenspan’s careless stewardship of the US Federal Reserve. Blame feckless homeowners who took out loans they could never expect to repay. Blame politicians and regulators everywhere for closing their eyes to the approaching tempest.
Comment on this column - Jun-23More from this columnist - Aug-23All of the above are culpable. I am sure there are even more villains lurking out there. Sometimes, though, it is worth looking through the other end of the telescope. The wreckage of the financial system holds up a mirror to the changing geopolitical balance. It offers advice, and a warning, as to what the west should make of the emerging global order.
Until quite recently, the talk was about the humbling of America’s laisser faire capitalism. The US government’s $700bn bail-out was the price to be paid for past hubris. For reasons that still elude me, one or two European politicians seemed to delight in the troubles of an ally that still guarantees their security.
Schadenfreude comes before a fall. Solid, conservative Germany has been among the European nations forced to shore up its banks. Angela Merkel, the chancellor, has been driven to assure German voters publicly that their savings are safe.
Belgium and the Netherlands have rescued Fortis. Ireland and Greece have issued blanket guarantees to bank depositors. Others have done something similar. Most dramatically, Gordon Brown’s British government has part-nationalised all of its leading banks in a desperate bid to crack the ice of the credit freeze.
If the toxic mortgage securities and opaque credit swaps that infected the world’s financial system came with a made-in-the-US stamp, European banks were eager buyers. For the humbling of America, we should substitute the humbling of the west.
Asia, as we have seen in the markets this week, is not immune from the shocks and stresses. Japan, which has only quite recently emerged from the long twilight of its 1990s banking collapse, has now been hit anew by the global storm. China felt compelled this week to follow western central banks in cutting interest rates. So did a host of smaller Asian countries. Recession in the US and Europe will slow the growth of Asia’s rising economies.
Standing back, though, two things mark out this crisis as unique. First, is its sheer ferocity. I am not sure how useful it is to make comparisons with the 1930s. History never travels in a straight line. What is evident is that governments and central banks have had no previous experience of coping with shocks and stresses of the intensity and ubiquity we have seen during the past year.
The second difference is one of geography. For the first time, the epicentre has been in the west. Viewed from Washington, London or Paris, financial crises used to be things that happened to someone else – to Latin America, to Asia, to Russia.
The shock waves would sometimes lap at western shores, usually in the form of demands that the rich nations rescue their own imprudent banks. But these crises drew a line between north and south, between the industrialised and developing world. Emerging nations got into a mess; the west told them sternly what they must do to get out of it.
The instructions came in the form of the aptly-named Washington consensus: the painful prescriptions, including market liberalisation and fiscal consolidation, imposed as the price of financial support from the International Monetary Fund.
This time the crisis started on Wall Street, triggered by the steep decline in US house prices. The emerging nations have been the victims rather than the culprit. And the reason for this reversal of roles? They had supped enough of the west’s medicine.
A decade ago, after the crisis of 1997-98 wrought devastation on some of its most vibrant economies, Asia said never again. There would be no more going cap in hand when the going got rough. To avoid the IMF’s ruinous rules, governments would build their own defences against adversity by accumulating reserves of foreign currency.
Those reserves – more than $4,000bn-worth at the present count – financed credit in the US and Europe. There were other sources of liquidity, of course, notably the Fed and the reserves accumulated by energy producers. It also took financial chicanery to turn reckless mortgage lending in to triple A rated securities. But as a Chinese official told my FT colleague David Pilling the other day: “America drowned itself in Asian liquidity.”
Owning up to the geopolitical implications will be as painful for the rich nations as paying the domestic price for the profligacy. The erosion of the west’s moral authority that began with the Iraq war has been greatly accelerated. The west’s debtors cannot any longer expect their creditors to listen t
Is that a possibility of what could happen with the US to China?
And what exactly would happen if China stopped lending credit to the US?
The world’s economy has been in growth mode at least since 1991. China has been in growth mode since 1979. The American economy had a sharp recession in 1991. Asia had a financial crisis in 1998. America had a very brief, very shallow recession in 2001. The Federal Reserve System pumped in money at an accelerating rate after mid-2000 through 2004, and did not go to tight money until the month Bernanke took over: February 2006. Inflation overcame the recession of 2001, and it overcame the crisis of 9/11, but it created the housing bubble and the commodity bubble.
The housing bubble has popped. This is going to take the price of housing in the United States lower than it is today. I think 20% lower is a conservative figure. We are nowhere near the end of this popped bubble.
The commodity bubble is still in full force. It is a worldwide bubble. The price of energy and the price of rice and other food commodities have received most of the attention.
Federal Reserve policy since early 2006 has been one of relatively stable money. There is a lot of chatter to the contrary, but if we look at the two most significant monetary indicators, the adjusted monetary base and M1, we see that there has been very little growth in either. This is why the United States is now either in a recession or is facing one in the next few months. When a period of monetary inflation ends, economies go into recession. The American economy is slowing down, and it will continue to slow down.
Both China and India have expanded their money supplies dramatically for a decade. Both countries are now facing a crisis of rising prices. Price inflation is a major threat to the continued prosperity of both countries.
China’s government has begun to impose selective price controls. This is creating shortages and production bottlenecks. India’s government is considering doing the same thing. What both governments need to do is to tell their central banks to cease buying all government debt and all assets of any kind. The central banks need to stop inflating the money supply. But if the banks do this, both countries will experience major recessions. The governments do not want to have major recessions, but they also do not want to experience the effects of monetary inflation: price inflation. So, both of them are tempted to go back to the traditional policy of imposing price controls. This always creates shortages, and it always reduces the rate of growth of the economy. China and India are trapped.
AN INTERNATIONAL TRAP
The United States is in the same trap. The headlines scream of the skyrocketing costs of energy and food, but the broader consumer price indexes indicate slow increases: maybe 3% a year. This is because families are readjusting their budgets. As the prices of gasoline and food rise, families are forced to cut back expenditures in other areas. So, the general price indexes are not rising dramatically, but families are struggling with their budgets.
This struggle will get much worse this winter, when the price of heating oil rises. This will exacerbate the existing economic slowdown. Furthermore, the rising price of oil means a rising balance of payments deficit for the United States. Oil-exporting countries are the main beneficiaries of the rising price of oil. This means that foreign sellers of oil will get the lion’s share of the increase of the price of oil. American producers will pay for the prosperity of the oil exporting countries. They will pay in the form of reduced demand for their products.
The world is facing simultaneous recession. Meanwhile, the American financial system has absorbed hundreds of billions of dollars of IOUs from home buyers who cannot possibly pay off their debts. They are in the process of defaulting to the lenders. This has created a crisis for America’s largest banks, and for several major European banks.
We all know the story by now, but psychologically, most Americans have not adjusted to the new economic reality. Most investors have not adjusted. Yes, the American stock market is down by 20% since last October. But still they think a recovery is just around the corner. The media keep saying this. American investors still have faith that the economy is essentially healthy, that there will not be a continuing fall in the stock market, and that the economy will not go into recession and stay in the recession for two or more years.
So far, I am giving you the good news. The good news is there is going to be an international recession, rising corporate bankruptcies, bank failures, and retrenchment by consumers because they can no longer pay the rising cost of energy.
Why is this good news? Because this recession is going to put a cap on the rising cost of energy. Commodity prices will fall during the recession; this includes the price of oil.
NO MORE FISCAL WIGGLE ROOM
Americans have steadily stopped saving over the last 28 years. In 1981, they saved over 11% of their discretionary income. Today, they save nothing. They are now in full spending mode. They have borrowed money against their future income, against their home equity, and on simple promises to pay (signature loans: credit cards). They have stretched themselves thin with respect to debt.
If oil goes to $400 a barrel, or $500 a barrel, and stays there for a year, American consumers will be in panic mode. They will have to cut their budgets, and they have forgotten how to cut their budgets. They have forgotten how to save.
The strategy of the optimists is to tell us that the worst is over economically. This is the government’s official position. Chairman Ben Bernanke does not say this. He keeps hinting of more trouble to come. He keeps telling us that the Federal Reserve System is monitoring events. He keeps implying that there is some sort of rabbit still remaining in the Federal Reserve System’s hat which they can pull out if the banking system moves into paralysis mode. But he doesn’t tell us what these rabbits are, or under what conditions the FED will pull them out of its hat.
The good news regarding the economy in general is not backed up by anything specific. The government tells us that the worst is over, but there are almost no indications that the worst is over. The housing market is still in decline. Foreclosures are still rising rapidly. The lenders are not selling foreclosed properties at market prices. Instead, they keep buying back the properties. There is a growing inventory of unsold properties on the books of the lenders. Meanwhile the two major sources of liquidity for the housing market, Fannie Mae and Freddie Mac, are verging on bankruptcy. On Wednesday, July 9, the stock price of Freddie Mac dropped by 23%. Yet its stock price was down over 50% since January. These two stocks have continued to fall.
Everywhere we look on the horizon of the domestic economy, there is bad news. There is no sector of the economy that is improving, unless it is heavily funded by the Federal government. Health care has not slumped, because health care as funded by Medicare and other state and local government programs.
This means that the Federal deficit is going to get worse in any recession. Medicare and Social Security are non-discretionary spending items. The revenues will fall. So, the supposed strength sectors of the economy are in fact guarantees of a government fiscal crisis. If the general economy slumps, the Federal deficit is likely to go over $500 billion a year.
When the recession hits, commodity prices will fall. If the recession does not hit, commodity prices will continue to rise. But rising commodity prices will force bankruptcies in those firms that are not in a position to pass on increased costs to their consumers. This means industries associated with discretionary spending. If your company is dependent upon discretionary spending by the public, your job is at risk. If the recession hits, your company will suffer. If the recession doesn’t hit, rising commodity prices will squeeze your company. Consumers will spend their money for gasoline and heating oil, not on the products or services your company produces.
The boom economy has not been based primarily on non-discretionary income. The boom has come at the margin: those areas of the economy in which consumers do have the option of spending their money rather than saving it.
So far, I have been giving you the good news. The good news is there is going to be an international recession, rising corporate bankruptcies, bank failures, and retrenchment by consumers because they can no longer pay the rising cost of energy.
THE BAD NEWS
The bad news is that the State of Israel is increasingly likely to launch an air strike on suspected Iranian nuclear weapons production facilities.
I have discussed this before. If this happens, the price of oil will skyrocket. This will force massive readjustments of family budgets in every country on a permanent basis. This is going to force producers to fire people out of fear of bankruptcy. Consumers are going to stop buying much in the area of discretionary income. That is, those items that can be cut back will be cut back.
This could mean you.
If the State of Israel launches an attack on Iran, the economic news will get really bad really fast all over the world. So, the most important question today is whether or not the Israeli Air Force will attack Iran. From an economic standpoint, this is the crucial question.
Here, too, the mainstream media have generally promoted optimism. They suggest that the Israelis will not attack Iran. The problem is, they can’t point to anything specific that officials in the State of Israel have said that indicates that there will not be an attack. On the contrary, officials there keep saying “no comment.”
Something else is really ominous. The political leaders in the countries over which Israeli bombers will have to fly are deadly silent. They are not telling Israel in full public view that if Israel sends planes over their airspace, they will go to war with Israel. They are not saying that they are preparing right now to shoot down every Israeli plane that flies over their airspace. They are saying nothing. Why? I think the main reason is that they will not back up their words with deeds. They will not shoot down Israeli planes. They say nothing in public because they will do nothing if the overflights take place. If they go public with bellicose threats today, their own people will turn on them if they fail to back up their words with deeds if the flights take place. “You said you would do something. You did nothing. Get out!” This could start internal revolutions in the overflown countries. Silence is golden. It’s yellow, but it’s golden.
This tells me that the overflight countries’ leaders think the attack may take place. They would prefer to be accused of having been caught flat-footed by the Israeli Air Force than unwilling to back up a threat.
American officials are offering the bipartisan line: “We must settle this through diplomacy.” (To which Israeli government officials can respond, Tonto-like: “Who you mean we, paleface?”) They are not saying anything about what sanctions against the State of Israel that America will impose as soon as Israeli jets bomb Iran. That is because there will be no such sanctions.
Admiral Mullen supposedly sent Israel a statement in early July saying that the United States has not issued a green light for an Israeli attack on Iran. This supposedly means something important in itself. It means nothing in itself. What it means is the United States has not issued a red light against an Israeli attack on Iran. This means that there is no stop sign. There is no red light, so the absence of a green light means nothing.
Of course no one has said that the United States will help Israel in such an attack. So what? Israeli officials are not asking for a public offer of American help. If the United States and those governments over which the Israeli Air Force must fly are not issuing public statements at this time warning that there will be significant negative sanctions imposed on the State of Israel as soon as the attack is launched, then this is an implied green light.
Do we imagine that senior decision-makers in the Israeli government care a whit about the lack of an official American green light to their attack on Iran? They are as unconcerned about the lack of a green light as Iran is unconcerned about President Bush’s threat of sanctions if Iran does not comply with all requirements announced by the Bush administration. Iran knows what Israel knows: the Bush administration is terminal. It will end on January 20, 2009. It has no teeth. Lame ducks don’t bite. They merely squawk.
Why should we think that either Iran or Israel gives a fig about the red light/green light debate? American pundits may think this debate is important, but why should anyone with common sense think it’s important?
Iraq has announced that the United States must pull out its troops. It is demanding dates for this withdrawal. The Bush administration is pooh-poohing all this, and will not under any circumstances announce such a timetable, but so what? There is a timetable for the Bush administration’s withdrawal: January 20, 2009.
This means that the United States is going to be pressured by Iraq’s government to leave Iraq from now on. Most of the troops will be forced to leave Iraq unless things change dramatically. Then what will be done with the 14 major military bases that have been built?
As the pressure increases to force us to leave Iraq, and as the pressure from the Taliban increases in Afghanistan, and as the pressure from voters increases to get our troops out of both countries, and as the likelihood of the election of Obama increases, decision-makers in the State of Israel are caught between the proverbial rock and a hard place.
If the United States pulls out of the region, the State of Israel will be left high and dry. But there is another possible scenario. If Iran’s surrogate Shia forces in the region take on the United States troops in reaction to an Israeli attack on Iran, American public opinion will swing in favor of keeping the troops there, no matter what. “Who do those Iranians think they are? We issued no green light to the Israelis. It’s not our fault.” If Iran begins to supply weapons to Shia forces in Iraq and Afghanistan, and the American death rate goes up, then American voters will switch back to a pro-war position. At least, this is a possibility. Americans do not like to be pushed around.
Any escalation of war in the region will create havoc for the supply of oil. The world economy is moving into recession already; it may go into a true depression if oil goes to $500 and stays there. So, the stakes are enormous.
The outcome is no longer in the hands of the United States, Europe, Asia, or any of the other outsiders to the Middle East. The outcome, or at least the trigger, is completely in the hands of the decision-makers in the State of Israel. They hold the gun.
Unless the United States and Western Europe tell the decision-makers in the State of Israel that Europe and the United States will impose significant negative sanctions after an attack on Iran, then decision-makers there are going to make a decision based on the self-interest of the ruling party, not the self-interest of American or European voters. They are going to take care of their perceived problem, exactly as we would expect any other national political leaders would take care of their problem.
That’s why all talk about war being a threat to the self-interest of the whole makes sense only if the Israelis conclude that the economic crisis will be so severe that it will take them down in the whirlpool of economic collapse. They are not afraid of military retaliation from Iran. They are also not afraid of the United States, Europe, Asia, or any other coalition that does not have the backbone to say in advance that there will be major sanctions placed on the State of Israel if there is an attack on Iran.
This is why I am concerned about the threat of an Israeli attack on Iran. I am in no way calmed by statements attributed to Admiral Mullen. When Admiral Mullen holds a press conference and says publicly that there is no green light for an attack by the Israeli Air Force on Iran, and that any flyover of Iraq by Israeli planes will lead to shoot downs of Israeli planes by American planes, then I will stop worrying about the threat of an attack on Iran by the Israeli Air Force. How likely do you think such a press conference is?
We must face reality: the decision to go to war with Iran is 100% in the hands of Israeli decision-makers. It is not in the hands of the United States, Europe, or Asia. In other words, the economic fate of the West over the next decade is now in the hands of decision-makers who are concerned about the long-term survival of their own country. They are concerned because they do not want to have Iran in the possession of nuclear weapons. Both candidates for President have said the same thing.
We have seen saber-rattling by the Iranians with the film-doctored test of the missiles this week. These missiles are militarily useless as weapons against the Israelis. They are as irrelevant militarily as Germany’s V-2 missiles were in 1945. They cannot inflict enough damage to make a difference, unless they are used against Saudi Arabian oil fields. But, if they had a nuclear warhead, that would make all the difference. The Israelis know this. So, they are going to make their decision in terms of this long-term threat.
The main inhibition against an attack is the possible collapse of the Western economy, which buys Israeli-produced goods. This threat may be sufficient to keep them from attacking. I dearly hope that it is. But it is naïve to believe that they are going to make their decision because of worries about whether Admiral Mullen has issued a green light or not.
When you invest your money, do not ignore the worst-case scenario. Set aside some of your money on the assumption that the worst-case will come true. This is what any military strategist does. He makes his decisions in terms of what the enemy can do, not what it would be convenient for the enemy to do.
I suggest that you be aware of this threat. I suggest that you sit down with the family budget and outline what your response would be if the price of gasoline were $10 a gallon or $15 a gallon or $20 a gallon. What would you do? I know what you would do. You would drive less.
Ignore the happy-face assessments of the geopolitical strategists. Ignore the happy-face assessment of the Secretary of the Treasury, Henry “Goldman Sachs” Paulson. These assessments are being issued to keep panic from spreading.
I am doing my best to encourage people to take rational steps with some of their liquid assets: to hedge themselves against the possibility that there will be an attack on Iran before January 20, 2009. This doesn’t mean that I think such an attack is a sure thing. Decision-makers in the State of Israel are going to have to live with $400 oil, just like all the rest of us. They may decide that this risk is too great. They may decide to put up with the threat of a future nuclear-armed Iran. I won’t bet all of my money on this. I don’t think you should either.
July 12, 2008
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com.
Why is the financial fall global and not centralized to the United States? I know we are all interconnected financially, however the problem here & everywhere else seems to generally be the credit market (not the republican or democrat credit market. Just the credit market)
Since everyone (as in every major country) seems to be having serious financial issues, how can you logically chalk it up to one party being more responsible than another? I understand how you can say one party may be more responsible than the other in very minor aspects, but it seems to me everyone was at a wonderful lavish party, and now the party is over.
Is the person you are voting for a person who you think will be able to effectively be diplomatic enough to assist in getting this issue under control nationally & internationally, or is the person you are voting for in your mind ‘less’ responsible for this crisis than another?
*Just a side note in terms of health care, if Europe for example has Universal Health Care & they are in the same pile of sh*t as we are, then how come some people think that Universal Health Care in the United States would be the cause of our downfall when our markets are doing nearly equally as poor?
Published: February 22, 2009
BERLIN — The leaders of Germany, Britain, France and other European nations called Sunday for the resources of the International Monetary Fund to be doubled, to $500 billion, to help head off new problems in countries already hit hard by the global economic and financial crisis.
And in a statement clearly aimed at hedge funds and other big private pools of capital, the leaders said that “all financing markets and participants” must be regulated in the future. They also vowed to press for sanctions against tax havens.
The leaders met in an effort to hammer out a common European position ahead of the April meeting of the Group of 20, the group of industrialized economies and developing countries, in London. The meeting on Sunday also included leaders from Italy, Spain, the Netherlands and the Czech Republic, the current holder of the European Union’s rotating presidency.
Eyeing a contagion that is rapidly spreading to Eastern Europe and even countries that use the euro, the leaders highlighted the crisis-prevention role of the monetary fund, an institution whose relevance to the global economy seemed in doubt only a few years ago.
In Germany, a growing unease that the crisis is about to strike close to home has contributed to a shift away from a reluctance to bankroll efforts to ease the financial crisis — whether in the form of bank bailouts or stimulus packages — for fear of paying for other countries’ mistakes.
German officials appear to have concluded that their own economy, underpinned until recently by booming exports, cannot stay afloat if its neighbors crash. Also, international officials from the I.M.F. and the World Bank have argued strongly in private to German officials that Berlin has underestimated the extent to which the crisis has torn at the hard-fought economic integration of Europe.
In Eastern Europe, currencies have tumbled sharply against the euro as financial markets have bid up the odds of an all-out collapse along the lines of Asian countries in the late 1990s. Already, Hungary and Latvia, both European Union members that do not use the euro, have gotten rescue packages from the monetary fund and the European bloc. And among the countries that use the euro, particularly Greece and Spain, financial chaos has meant that government borrowing costs have grown in relation to stalwarts like Germany.
The French president, Nicolas Sarkozy, endorsed support for fellow European countries on Sunday, while warning that those in need of help would have to revamp their policies.
“If someone needs solidarity, they can count on their partners,” Mr. Sarkozy said at the conclusion of the economic summit meeting here. “Their partners also need to count on them to follow certain basic rules.”
Last week Peer Steinbrück, the German finance minister, suggested that Germany would help finance rescues if necessary. Those developments foreshadow difficulties this year for countries that must borrow on international capital markets to refinance old debt and raise fresh cash.
Between expressions of solidarity and a newfound emphasis on the I.M.F., the European leaders appeared to be corralling the resources, both political and financial, that would allow bailouts of additional European countries if needed. Daniel Gros, director of the Center for European Policy Studies in Brussels, said the shift in Berlin and Europe more generally “opens the door to German dominance” of politics in the 27-nation European Union since its financial heft is likely to become vital as the crisis drags on.
Leaders in Berlin also made calls to study the creation of a common bond issue among the 16 countries that use the euro, a move that would partly extend Germany’s sterling credit rating to its shakier neighbors.