The New Economy
The Monitor's Money editor, Laurent Belsie, blogs about the economic changes now under way in the U.S. and around the globe.
Traders on the New York Stock Exchange sent shares tumbling Tuesday after Treasury Secretary Tim Geithner offered a vague outline of his bank bailout plan. (Richard Drew/AP)
With few bailout details, Dow plunges 381 points
Outlining an aggressive-sounding but vaguely detailed financial bailout plan, Treasury Secretary Tim Geithner sent markets tumbling Tuesday morning. After that, nothing could lift Wall Street's gloom.
Not Senate passage of the stimulus package. Not Mr. Obama speaking about the package in Fort Myers, Fla. Not Fed Chairman Ben Bernanke testifying on Capitol Hill.
The Dow finished Tuesday down 381.99 points to 7888.88 – moving within 350 points of the lows set in November.
Deep skepticism
Why so glum? Partly, perhaps, because investors worry that the plan doesn't go far enough; but mostly because the outline is too vague to alleviate deep concern about the fragility of the system and skepticism that government has its hands around the problem.
Compared with the rescue efforts last fall, "our challenge is much greater today because the American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has -- to this point -- used taxpayers' money in ways that will benefit them," Mr. Geithner said in his Tuesday morning speech. "This has to change."
Geithner was speaking about the public but he could have been talking about investors.
Investors key part of plan
Yet these investors will be key to recovery. The administration hopes to leverage federal dollars with a much larger investor response – some $1.5 trillion of private-sector money.
Since Day 1, the Obama administration has been talking about the need to move speedily.
The market is saying: Enough already, show us the plan!
The coming days will determine whether the administration has gotten the message.
Addressing a town-hall meeting in Elkhart, Ind., on Feb. 9, President Obama got some of his biggest applause when he talked about green energy. (Jim Young/Reuters)
Obama inspires Elkhart. But can it build solar RV?
President Obama came to Elkhart, Ind., to highlight the bad economy and push his stimulus package. But some of the biggest applause at his town-hall meeting came when he talked about green energy.
It's a sign that, even in the RV-manufacturing capital of the world, "green" is in.
"I want to make sure that we're investing some money every year in the development of new energy technologies that will drive those costs down over the long term," Mr. Obama told the assembled residents at Concord High School. "The country that figures out how to make cheaper energy that's also clean – that country is going to win the economic competition of the future. And I want that to be the United States of America."
There was a roar of applause. Never mind that half the town seems to be tied to building America's biggest noncommercial vehicles. Or that the average RV has the carbon footprint of a Third World nation.
Primed for change
No, the people of Elkhart sounded like they were ready for change. Now, can they go solar?
So far, the prospects don't look promising.
"We're running dream companies right now that are employing American people on our soil and keeping jobs here," Bill Keith, president of an solar attic-fan company in St. John, Ind., told the president at the Elkhart gathering. But "there's no real incentive for us to do what we're doing. We're doing it out of passion right now."
Indiana might not become the next Silicon Valley of solar panels. Even many of the companies that build solar systems to run RV appliances are located elsewhere.
Wind and hope
But the state may benefit from an emerging corridor of wind-energy manufacturers that stretches from Texas to Minnesota. (Click here for a story and a map.) Last year alone, wind-energy manufacturers built or expanded some 55 facilities in the corridor. In Indiana, there are nine facilities that have transitioned at least some of their business from other manufacturing to wind energy, according to the American Wind Energy Association.
Wind Alley, if it takes off, could create a center of growth and innovation and jobs for an economy looking to move in a new direction.
President Obama waves upon his arrival in South Bend, Ind., Monday, en route to talk about the economy in Elkhart, Ind. (Charles Dharapak/AP)
Obama in Elkhart: Will he give hope a chance?
They came bundled against the freezing weather, blankets, sleeping bags, and lawn chairs marking places in line as residents of Elkhart, Ind., waited for tickets to see President Obama on Monday.
Four hours before the Mr. Obama's scheduled town-hall meeting, the line stretched longer than a football field, the Elkhart Truth reported, and was growing quickly. Students at Concord High School had to move around the lines to get to their morning classes.
Behind the star power
People come to see presidents for all sorts of reasons: for the aura, the history, and sometimes for hope. In wintry Elkhart, nursing the nation's fourth-highest unemployment rate (15.3 percent) in America's most manufacturing-dependent state, many must be looking for hope.
Realistically, there's not a lot a president can do to reverse Elkhart's fortunes. His $820 billion stimulus package won't fund all the local shovel-ready infrastructure programs that Mayor Dick Moore predicts would create more than 2,000 jobs. Obama can't bring back the recreational-vehicle industry on which the city's economy depends or make the unemployment lines go away.
A brighter tomorrow?
What he can do is inspire. Instead of the somber tone he's adopted since taking on the presidency, he can infuse his calls for responsibility with a sense of optimism about the future.
He's mouthed those words. But presidents like Reagan made many Americans feel it during a recession that was about as bleak as today's downturn. It's what Franklin Roosevelt did when things were far worse.
On his first Inauguration Day, when Roosevelt gave his "nothing to fear but fear itself" speech, Secret Service agent Edmund Starling recalled feeling "an injection of adrenalin" in the public's attitude. There would be seven more years of economic stagnation. But "so far as the spirit of the thing was concerned, the Depression ended right there," Mr. Starling wrote.
The people of Elkhart – and the rest of the nation – could benefit from a similar sense of certainty and hope about the future.
In a bad economy, people begin to look to Washington – not just for aid but for government jobs. (Manuel Balce Ceneta/AP)
While US job losses plunge, government grows
Want a stable future? Get a government job, especially a federal government job.
Good pay. Better benefits. And so far in this recession, a good place to park yourself, since every other employer seems to be passing out pink slips.
Government employment rose by 6,000 in January compared with December, the Labor Department reported Friday. That makes the public sector an island of calm in a raging economic sea that washed away a net 598,000 jobs last month. Only one other sector of the economy also escaped the storm – education and health services, which hired 54,000 more workers.
Publicly hip
No wonder government jobs are suddenly "in" – and not just in the United States. Queensland, Australia, has seen so many jobs cuts that applications for fire and ambulance jobs have nearly doubled from a year ago. In Miami, a week ago, hundreds of applicants camped out, some for three days, to apply for 35 firefighting positions. (Click here for a photo.)
Governments are not immune to recessions, but they cut more slowly and less sharply than the private sector during hard times. (California just gave this Friday off to more than 200,000 of its employees – without pay.)
Go Washington, young man
Don't settle for any government job, though. Go federal. From November to December (the latest figures available), federal employment grew a little while local government took a small 0.4 percent trim and state government suffered a bigger whack of 1.3 percent.
Such month-to-month comparisons may not say a whole lot, because the numbers aren't seasonally adjusted. But here's the point: Last year, under President Bush, government employed a record 22.5 million people, double the level of 1966 and, in percentage terms, the highest share of the workforce since 2004.
Room to grow?
Under President Obama, that share looks likely to rise. He has room to expand, since government overall only employs 16.4 percent of the workforce, which is not so far from the five-decade low of 15.4 percent set back in 1959.
The peak of the last half century? That was 19.2 percent set in 1975 during the Ford administration, when the US was coming out of one of its sharpest postwar recessions.
One of the sharpest, that is, until now.
Today's steep recession is making government "cool" again, at least for those who work there.
Home-improvement retailer Home Depot announced Jan. 26 that it would cut 7,000 jobs as it restructures in the midst of the steep US recession. (AFP/Newscom/File)
The yin and yang of US productivity rise
The US became more productive last quarter – posting a better-than-expected 3.1 percent rise – but this is no way to grow an economy.
The nation's output actually fell at an annualized rate of 5.2 percent, the worst dip since the recession of 1982, the Bureau of Labor Statistics reported Thursday morning. The only reason productivity grew was that workers' hours fell even more – 8.1 percent, the worst performance since the first quarter of 1975.
That the US economy is now mimicking the performance of two of its worst postwar recessions is a dramatic illustration of the fix we're in.
Tough, but needed
It's also a necessary fix that's typical of downturns. When orders fall, companies cut their staffs and become leaner and more productive. That prepares them to profit handsomely when business picks up again.
"This is a classic bad news/good news story," writes Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Mass., in an analysis of Thursday's numbers. "The bad news is that output is plummeting.... The good news is that productivity growth remains robust."
Pickup not in sight
The upturn won't happen soon, many analysts say. Businesses are releasing generally dismal earnings reports. More often than not, they're revising downward their expectations for the coming months.
The contraction is probably worse than the 3.8 percent decline that the Commerce Department reported last week, Mr. Behravesh writes. But the slimming down by companies "means that at least one of the underlying fundamentals of the US economy is very positive."
It's a brick, not a pretty one, in the foundation of a rebuilding economy.
'What gets people upset, and rightfully so, are executives being rewarded for failure,' President Obama said Feb. 4 in announcing salary caps for CEOs who accept bailout money. (Charles Dharapak/AP)
US enters new era with CEO pay caps
The United States is moving closer to dictating executive pay -- and its impact on corporate America could be huge (click here for an analysis).
On Wednesday morning, President Obama announced that corporations receiving new federal bailout money will have to limit their CEO compensation to $500,000.
If the rules had been in place last fall, when the Bush administration was handing out the first half of the TARP (Troubled Assets Relief Program), the CEOs would have howled. The CEO of Bank of America would have had to take a 97.9 percent cut in total compensation before the bank would have received its $45 billion in TARP money. The head of Citigroup would have seen his compensation fall 98.4 percent.
Limits on stock options
Sure, the chief executives can get company stock in addition to their half million. But it must be "restricted," which means they don't see a penny from their stock until the government has been paid off -- with interest!
Since the chances of that happening are on par with, say, Rod Blagojevich being reelected governor of Illinois, the Obama administration is offering those suddenly "poor" CEOs another out. After "a specified period," which so far is unspecified, they could cash in their stock if someone, presumably the administration, judged that the company "protected taxpayer interests or met lending and stability standards" or "other factors."
It's not exactly the "golden handshake" a lot of these corporate chieftains have come to expect.
Reward success, not failure
"This is America," Mr. Obama said in announcing the new caps. "We certainly believe that success should be rewarded. But what gets people upset, and rightfully so, are executives being rewarded for failure, especially when those rewards are subsidized by US taxpayers, many of whom are having a tough time themselves."
Will CEOs with troubled financial institutions agree to such drastic action? They may have no choice if failure or a government are the only other options.
Caps beyond TARP recipients
The new $500,000 cap on executive salaries extends beyond corporations receiving any new TARP money. The same limit applies to CEOs whose companies would be receiving what the administration calls "generally available" funds -- money aimed at industries, with predetermined limits on the amount, that is supposed to keep credit flowing.
So the CEO of such a company would have to accept a $500,000 limit, too, unless the company publicly disclosed his compensation package and allowed shareholders to have a nonbinding vote on that package. That's what many corporate reformers have been pushing for. (For more on "say on pay" efforts, click here.)
Up to now, disclosure has been the main thrust of refomers' efforts and much of the legislation on executive compensation. The exceptions are moves in the past two decades that have limited how much corporations could deduct from their taxes when they handed out stock options or OK'd golden parachutes for departing executives.
FDR demurred
Even in the 1930s, when the Roosevelt administration created the Securities and Exchange Commission and conducted an aggressive rhetorical campaign against big business, it did not move to set pay limits on CEOs.
But it is a new era of responsibility, as Obama puts it, and real anger over CEOs' failures, which have put the economy at risk.
So the least they can do is take a pay cut in which they still earn nearly 10 times the median US household income.
Whistleblower Harry Markopolos, a former financial executive who warned federal regulators about Madoff's alleged fraud in 2000, testified Wednesday before a House panel. (Jason Reed/Reuters)
SEC needs old hands to catch the next Madoff
If the Securities and Exchange Commission is going to nab the Bernie Madoffs of the future, it needs to hire some people with gray hair.
That’s what whistleblower Harry Markopolos believes, anyway. Mr. Markopolos – who for years tried to alert the SEC to problems in Mr. Madoff’s financial operations – told Congress on Feb. 4 that too many government financial regulators are too young, and lawyers to boot.
What the SEC really needs, Markopolos said, are people who have been around long enough to understand the schemes money managers can dream up. That means people with math skills, instead of law degrees, and experience in financial markets. Years of experience.
“The SEC needs people with gray hair. Or no hair,” Markopolos said.
House panel investigating
A securities industry executive and independent fraud investigator, Makopolos was the star witness at a hearing of a House Financial Services panel that was not-so-gently titled “Assessing the Madoff Ponzi Scheme and Regulatory Failures.”
Madoff, a prominent Wall Street financier, was arrested this past December and charged with running a $50 billion pyramid fraud, in which early investors are paid off with cash from later ones, and trading profits are nonexistent.
First warning in 2000
Markopolos first took his suspicions about Madoff to the SEC’s Boston office in 2000. It was mathematically impossible for Madoff to produce his claimed returns, Markopolos told regualtors at the time. They were too steady, and too large, among other things.
But no one paid attention. Or, at least, no regulator paid enough attention to pursue the case.
Now Madoff is under house arrest, and individual investors, charities, universities, and others who trusted him with their money are facing unprecedented losses.
Not impressed with SEC
Unsurprisingly, the man who tried to warn the SEC now has a low opinion of the agency’s investigative skills.
“If you flew the entire SEC staff to Boston, and set them in Fenway Park for the afternoon, they would not be able to find first base,” said Markopolos, a self-professed Red Sox fan.
As a congressional witness, Harry Markopolos had something of an air of mystery about him. A former Army Special Operations officer, he said that at times he and his staff had been worried about safety during their lengthy investigation of the Madoff operation.
“We feared for our lives if he discovered we were tracking it,” said Markopolos.
Links to organized crime?
Markopolos also alleged that there has been extensive investment by drug cartels and Russian crime figures in some of the offshore “feeder funds” that invested heavily with Madoff. And he described an incident in which he tried to slip a copy of his Madoff file, anonymously, to then-New York Attorney General Eliot Spitzer.
“I used gloves” to ensure there were no fingerprints on the file, said Markopolos.
Markopolos said he assumed at the time that Spitzer, through his family, was likely to be invested in Madoff funds. That turned out to be the case.
The whistleblower said that he privately warned many investors and investing firms he knew to stay away from Madoff – and they stayed away.
As to Madoff’s victims, “they want someone to clean house with a very wide broom,” said Markopolos.
Besides a more senior staff, the SEC should establish a central clearinghouse to look at whistleblower tips, said Markopolos. And it should offer financial incentives for its own staff to bring and win big fraud cases.
SEC can't answer
A panel of SEC officials followed Mr. Markopolos to the witness table. They insisted that they remain committed to bringing Madoff to account in a court of law.
But as to why they ignored years of warnings about Madoff’s action, they said that ongoing legal actions meant they must decline to answer.
“We cannot answer as to the specifics,” said Lori Richards, director of the SEC’s Office of Compliance Inspections.
– Contributed by staff writer Peter Grier in Washington.
US auto sales plunge, may have hit bottom
Don't look now but the auto industry may have touched bottom.
It's dark and deep. Unsustainably deep. The sharp plunge in auto sales hit domestic automakers particularly hard, according to their announcements Tuesday. Ford's sales plunged 40 percent in January compared with January 2008; GM's fell 49 percent and Chrysler's sunk a whopping 55 percent.
Fewest sales since the last big recession?
The decline could mean that January auto sales fell below 10 million vehicles -- the lowest number since August 1982.
The only bright spot is that the numbers look worse than they actually are. Fleet sales to rental companies were abysmal, but they were caused by plant closings and other factors. The more typical retail sales looked basically unchanged from a month earlier.
Ford, for example, has seen three months of roughly equal retail sales.
"What we're looking for at this point is stabilization," said Emily Kolinsk Morris, senior US economist for Ford, in a conference call with analysts. There are "faint signals" that US car sales may be bottoming out, she added.
Bottom isn't official, yet
"It's a little early to call an official bottom," said Jesse Toprak, Edmunds.com's executive director of industry analysis, in a conference call with reporters. "If February [sales] are around the same rate, it will be safer to call November a bottom."
Even if sales have stabilized, they are nowhere near the level they need to be for auto companies to survive.
"If the [seasonally adjusted annual sales] rates of 10 million lingers for a long time, this is not a sustainable level -- not just for domestics but for any automaker," Mr. Toprak said.
Japanese see smaller declines
Japanese automakers' US sales also fell dramatically from a year ago, led by Toyota (down 32 percent). Nissan's sales fell 30 percent and Honda's, 28 percent. Only Subaru, up 8 percent, and Hyundai, up 14 percent, bucked the trend among the major automakers.
Hyundai's marketing coincided perfectly with the mood of the times. If customers lost their job within 12 months of buying a Hyundai, they'd get their money back.
"The core of the problem right now is consumer confidence," Toprak said.
Sold signs, like this one in Palo Alto, Calif., are beginning to pop up more frequently across the US, a new report says. (Paul Sakuma/AP)
Affordability of US homes reaches new record
US homes are now more affordable than at any time since the National Association of Realtors began tracking affordability in 1970.
The finding, announced Tuesday morning by the National Association of Realtors (NAR), means that family incomes are high enough and mortgage rates and real estate prices are now low enough that homeownership is within the reach of a record number of Americans.
First sales upturn since August
This combination of events has sparked the first nationwide upturn in housing sales since August 2008, according to the NAR's index of pending home sales, also released Tuesday morning. The index jumped from a record low of 82.5 in November to 87.7.
The biggest jumps were in the South (up 13 percent from the previous month) and the Midwest (up 12.8 percent). The West and Northeast saw small declines.
The index suggests that sales of existing homes should also see an increase in one to two months.
Caution ahead
While welcome, the bounce is modest, the NAR warned in a statement, and offers no guarantee that home prices won't continue to fall.
“Significant uncertainty still clouds the housing market despite improved affordability conditions," Lawrence Yun, NAR chief economist. "For a sustainable housing market recovery and, hence, sustainable economic recovery, we need a significant housing stimulus and mortgage availability for qualified borrowers.”
Senate minority leader Mitch McConnell is proposing that the stimulus package jump-start the housing market by pushing mortgage interest rates down through government purchases of private mortgages.
But a continued decline in housing prices could swamp such efforts, many analysts say.
No quick turnaround?
"You can't take a downturn this severe and expect it to turn around" quickly, says Andrew Caplin, a professor of economics at New York University. "This will be a problem that will be with us for some years. And we should settle in for the medium term."
Instead, he proposes that government target homeowners with troubled mortgages, writing their loans down immediately but with the provision that the government would share in any appreciation when the homeowner sells the property.
Jose Sanchez Jr. makes a deposit to his savings account at the Citibank branch in San Ysidro, Calif. (Newscom/File)
Americans start to become savers again
When bad times hit, people save more, which is good individually. But it hurts the overall economy, because when people spend less the weakened economy declines more.
It's called the paradox of thrift.
So what should Americans do: spend or save?
Consumers cut back 1 percent
It's clear what they are doing: They're cutting spending -- by about 1 percent in December, according to Commerce Department figures released Monday. That's the sixth straight monthly slide in consumer expenditures and the biggest decline since 1974.
The silver lining is that Americans are beginning to save again. Despite an 0.24 percent decline in their incomes between November and December, they still boosted their savings rate from 2.8 to 3.6 percent over the same period.
If that rate held annually, it would be the highest savings rate since 1998 and far better than the record low of 0.4 percent in 2005.
A cut that rivals stimulus?
Here's the sobering news: If December's savings rate holds for all of 2009, then the 3.2 percentage point rise (0.4 percent to 3.6 percent) would outdo any increase in the run-up to previous postwar recessions. Even a 1 percent drop from last year would mean consumers spending some $200 billion less in 2009 at a time when retailers are already reeling from a plunge in sales.
The savings rate is so low that a return to more normal levels of, say, 7 percent in 1990 would pull even more money out of the economy. Everything else being equal, it would mean another $700 billion cut in spending. That would amount to $900 billion less in consumer expenditures -- roughly the amount of stimulus that the Obama administration and Congress are trying to pump back into the economy using tax dollars.
So the future of the new economy lies in the hands of individual Americans who are conflicted.
First, fix your finances
Those who have too much debt are beginning to pare debt and boost savings. And they should. The long-term health of their own balance sheet demands it, even though it hurts the economy in the short term.
"Save and pay down debt, the safest investment with the highest return," Allen Sinai, president of the economics firm Decision Economics, writes in an e-mail. "Take on new credit only if absolutely necessary."
Those Americans who have saved all this time can loosen their purse strings. It's not necessarily a moral obligation. But there are great deals to be had out there.
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