Investors Fear Europe’s Woes May Extend Global Slump

The New York Times - Just as America’s recession begins to ebb, trouble is brewing in Europe that may prolong a downturn on the Continent and ricochet through the global economy as it struggles toward a recovery.

A rout in stock markets that began in Europe spread to Wall Street on Thursday and around the globe to Asia on Friday, amid fears that Europe may be the world’s next financial flashpoint. Pressure has been mounting across the Atlantic as Greece, Portugal and a handful of struggling countries that use the euro scramble to pay off mountains of debt accumulated from years of profligate spending.

The Dow Jones industrial average slid 2.61 percent, or 268.37 points, to 10,002.18 Thursday, after briefly falling below 10,000 for the first time since November, as American investors grew more uncertain about Europe’s economy.

Stock markets across Europe slumped as much as 6 percent, and worries that the troubles might push even big European nations like Spain into a financial crisis drove the euro to $1.37, a seven-month low against the dollar.

Markets in Europe slipped further on Friday, after a sharp sell-off in Asia, amid continued worries about government debt in several European countries and about the state of the U.S. labor market.

Related Story: 
http://www.nytimes.com/2010/02/06/business/global/08euro.html?ref=europe

Lee Fisher commentary: Third Frontier is key to nurturing Ohio recovery

In the midst of a punishing recession, Ohio's Third Frontier program has been a rare bright spot and a critical driver of economic growth across our state. Since the bipartisan economic-development program was enacted under former Gov. Bob Taft, state grants have helped create more than 41,000 jobs and $6.6 billion in economic activity through 2008. That was a $10 return on every dollar invested by the state.
And yet, despite the undisputable success of this effort to nurture home-grown, high-tech companies, some Republicans in the legislature oppose a robust renewal of this vital program. The Ohio House has passed a measure to extend the program for five years at a cost of $950 million, while the Republican-controlled Senate has proposed a far smaller effort of $500 million over the same time frame.

http://www.dispatch.com/live/content/editorials/stories/2010/01/31/fisher31.ART_ART_01-31-10_G5_GHGES52.html#story-continues

Wall Street, the Depression and the Lords of Finance

These six books — about financial history and how economics went astray — are informative and enjoyable.

What follows is my list of six for 2009, books that I found informative and enjoyable this year. Three of the books cover aspects of financial history, including one on the greatest capitalists ever and two on the era that led to the Great Depression. The other three deal with how economics went astray.

'Fastest Dying Cities' Meet for a Lively Talk

Wall Street Journal - DAYTON, Ohio -- Here's an idea for saving Rust Belt cities: Tell bloggers and radio stations to stop calling your town a basket case.

That was one suggestion from representatives of eight of the 10 cities labeled last year as America's fastest dying. They met at the Dayton Convention Center last weekend to swap ideas about how to halt the long skid that's turned cities like Detroit, Cleveland and Buffalo, N.Y., into shorthand for dystopia.

The city representatives lunched on $6 sloppy Joes and commiserated through Power Point strategy sessions: Lure back former residents, entice entrepreneurs and artists, convert blighted pockets into parkland.

What emerged was a sense of desperation over the difficulty of rebounding from both real problems -- declining populations, dwindling tax bases -- and perceived woes.

Valarie McCall expressed frustration at marketing a city that still echoed the image of the polluted Cuyahoga River catching fire. "That was 1969," said Ms. McCall, Cleveland's chief of governmental affairs. "Come on, I wasn't even born then."

Last year, Forbes.com used long-term trends of unemployment, population loss and economic output to devise a list of "America's Fastest Dying Cities." A few months later, Peter Benkendorf was eating chicken tacos when he hatched the idea for the symposium.http://online.wsj.com/article/SB125011106498326993.html

State Budget Woes Are Poised to Get Worse

The Wall Street Journal - State budgets look bad now, but they are set to get worse.

The bulk of funds from the federal government's stimulus package will be allocated by 2011, but tax collections aren't likely to be enough to take their place -- even if the economy is recovering.

The drop in tax revenue is set to be deeper and last longer as collections have become more sensitive to business cycles in recent years. At the same time, states face growing health-care costs and the need to replenish pension programs funded by decimated investments. And some of the stimulus funds expand programs that will require state money to sustain them after the federal largesse runs out.http://online.wsj.com/article/SB124398568837379031.html

Economists See Long Road to Recovery

Economists in the latest Wall Street Journal survey see an end to the recession by autumn, but say it will take years for the economy to fully recover.

"In general, I think it will be a subdued recovery," said Paul Kasriel of The Northern Trust Corp.

On average, the 52 economists who participated in the survey project that the recession will end in August. They expect gross domestic product to contract 1.4% at a seasonally adjusted annualized pace in the current quarter, compared with the 6.1% drop recorded in the first quarter. Slow growth is expected to return by the third quarter, with the economy expanding more than 2% in the first half of 2010.

Kelly Evans and Phil Izzo discuss the findings of the latest WSJ economist survey, which found that while economists have stopped being pessimists, some still see at least one more quarter of negative growth.

The survey was conducted before the Commerce Department's report this week that retail sales fell 0.4% in April from the previous month, which left some economists questioning whether consumer spending is ready to rebound. Initial unemployment claims released Thursday brought more gloomy news: Seasonally adjusted claims in the week ended May 9 increased 32,000 to 637,000 from a revised 605,000 in the preceding week. Most of the losses can be chalked up to Chrysler LLC's 27,000 layoffs following its April 30 bankruptcy filing.http://online.wsj.com/article/SB124223735808916011.html#mod=testMod

Along With New Money, IMF Gets Politically Perilous Tasks

International Monetary Fund officials were nearly giddy in early April when they learned that leaders at the G-20 summit backed a fourfold increase in fund resources to $1 trillion. During a press briefing, IMF Managing Director Dominique Strauss-Kahn used the phrase "the IMF is back" six times.

But at the IMF's spring meeting this past weekend, reality set in. In exchange for the money, the IMF has been handed tough assignments in fighting the global recession and staving off another one. The work will require a political dexterity and willingness to stand up to powerful IMF members that the fund has rarely shown in the past.

"There's been a huge expansion of IMF resources and huge attention to the IMF, but nothing has been done to make members fear IMF surveillance" or oversight, says Adam Posen, deputy director of the Peterson Institute for International Economics, a Washington think tank.

The new facility has won plaudits from some developing countries, but the IMF will still have to make tough political calls. Only nations ranked highly by the IMF can qualify for credit line. The IMF often forces other borrowers to cut spending or raise interest rates even if that deepens a downturn, though the IMF has taken steps to protect some programs for the poor.

The disparate treatment has prompted complaints in Turkey, Pakistan, Eastern Europe and elsewhere that the IMF is playing favorites, and it may lead to pressure on the fund to ease its standards. The World Bank has tried to reduce the effect of the budget cuts by financing infrastructure projects that otherwise might be jettisoned.

Pressure on the IMF will ramp up when it must decide whether to renew the credit lines after their one-year terms. Saying "no" would undermine a country's economic standing; saying "yes," if the country's policies don't warrant it, would undermine IMF credibility.http://online.wsj.com/article/SB124078041608357051.html#mod=todays_us_page_one

About $500 billion of the new funds are earmarked for the IMF's main job of bailing out troubled countries. The IMF has introduced a credit line that doesn't require borrowers to make the kinds of painful economic changes -- cutting spending, slashing subsidies -- that have turned the IMF into political poison in much of Latin America and Asia. Mexico, Poland and Colombia have signed up for the credit line.

Roots of $3 Billion Fraud Case Lie in DVD Players, Not CDOs

MINNEAPOLIS -- Bernard Madoff bilked the public with fictitious securities transactions. Tom Petters, prosecutors allege, gulled his victims with nonexistent DVD players and flat-screen TVs.

Among the spate of alleged scams that have come to light in recent months, the $3.5 billion one that Mr. Petters is charged with is among the most unusual. The Minnesota businessman promised fat returns to investors who lent him money to buy surplus merchandise and resell it to famous retailers like Wal-Mart Stores Inc.

"In fact, there were no such purchases or resales," says a federal indictment. It says both were faked. Mr. Petters denies the charges.

Two months before Mr. Madoff burst onto the public stage last year charged with a Ponzi scheme, authorities here accused Mr. Petters, a gregarious 51-year-old appliance wholesaler, of running a multibillion-dollar fraud of his own. http://online.wsj.com/article/SB124035239814540625.html

When an Economic Cure Fights Itself

The New York Times - ALMOST every day, a few letters arrive, saying that a group in some city or town is about to have a “tea party.”

The gist, in case you haven’t received any of these invitations, is that President Obama’s taxing and spending plans are far too lavish. The United States will be burdened with immense debts, the protesters say. Taxes will be far too high for comfort, and we will decline as a nation. The tea parties are aimed at stopping all that.

These tea parties strike me as off-base, in some respects, though they evoke a certain principle that rings true, or at least possibly true.

First, I don’t quite get the taxation uproar. As far as I know, no new taxes of any size have been enacted. The only new tax I can spot immediately in front of us is the “cap and trade” levy on carbon emissions, which would be a tax on energy consumers. And even that, based on a questionable idea, doesn’t seem imminent.

When the recession ends, though, we will be facing very large budget deficits, even under the best projections. Unless the Federal Reserve is just going to print money — usually a dangerous road to inflation — how will we pay for government, except through taxes? And who has the money to pay, except the rich? So unless I am missing something, don’t we have to tax the rich, defined in some sensible way?

That’s just arithmetic. I wish that lowering spending were an option, but it’s not. Politicians talk about cutting spending and going through the budget, line by line, looking for waste. It never happens — except that sometimes, the military budget is cut, which is the last thing we should cut in a world as dangerous as ours. And right now, over all, the military budget isn’t being cut, although some programs are being reduced while others are expanding.http://www.nytimes.com/2009/04/12/business/economy/12every.html

Bernanke Says Stimulus Will Provide Economic Bo

The Wall Street Journal - WASHINGTON -- U.S. Federal Reserve Chairman Ben Bernanke on Tuesday appeared to back the White House's efforts to stimulate the economy, saying aggressive action is needed now to avoid an economic calamity.

"By supporting public and private spending, the fiscal package should provide a boost to demand and production over the next two years as well as mitigate the overall loss of employment and income that would otherwise occur," Mr. Bernanke said in prepared testimony to the Senate Budget Committee. (Read the remarks.)

President Barack Obama recently signed a $787 billion stimulus mixing infrastructure spending, aid to states and tax cuts. Approval came almost entirely without Republican support in Congress, making Mr. Bernanke's supportive comments noteworthy since he served for a time as President George W. Bush's top economist in 2005 before becoming Fed chairman.

Mr. Bernanke's latest comments come amid signs that the recession which began in December 2007 is deepening. Gross domestic product plunged at a 6.2% rate last quarter, the Commerce Department said last week, the steepest slide since the early 1980s. And the recent bloodbath on Wall Street brought the Dow Jones Industrial Average to levels not seen in a dozen years on Monday.http://online.wsj.com/article/SB123609244895319071.html#mod=testMod

Economy Dreadful, But Worse Elsewhere

The New York Times - If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.

In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.

Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.

Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.

Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.http://www.nytimes.com/2009/02/20/business/economy/20norris.html

Economists' U.S. Outlook Dims

The Wall Street Journal - Prospects for an economic recovery this year are fading.

Economists in the latest Wall Street Journal forecasting survey, while still mostly projecting growth in the U.S. gross domestic product by the third quarter, largely agree that a "second-half recovery"—a scenario that has been a common feature of most 2009 outlooks—is looking much less likely now than it did a few months ago. Recent data showing just how sharply growth in the U.S. and abroad has declined in the final months of 2008 have cast a deepening shadow over 2009.

As recently as September, economists, on average, thought the U.S. would see annualized GDP growth of 1.2% in the first three months of this year; now, they see a 4.6% decline. Forecasts for the second quarter, the April-June period, have seen a similar shift, from a 1.9% growth forecast to a 1.5% decline, based on the 52 economists who participated in the Journal's February survey.

The average forecast now sees growth in the third quarter at 0.7%, less than half the rate expected last fall. The fourth-quarter picture has also darkened, but just slightly, to growth of 1.9% from the 2.1% seen in November. Five economists see growth declining through the fourth quarter of 2009; they say the current consensus outlook, which says the recession will end in August as GDP growth returns positive, is far too optimistic.http://online.wsj.com/article/SB123445757254678091.html

The Big Fix - How Will The Economy Grow?

The New York Times - The economy will recover. It won’t recover anytime soon. It is likely to get significantly worse over the course of 2009, no matter what President Obama and Congress do. And resolving the financial crisis will require both aggressiveness and creativity.


In fact, the main lesson from other crises of the past century is that governments tend to err on the side of too much caution — of taking the punch bowl away before the party has truly started up again. “The mistake the United States made during the Depression and the Japanese made during the ’90s was too much start-stop in their policies,” said Timothy Geithner, Obama’s choice for Treasury secretary, when I went to visit him in his transition office a few weeks ago. Japan announced stimulus measures even as it was cutting other government spending. Franklin Roosevelt flirted with fiscal discipline midway through the New Deal, and the country slipped back into decline.

Geithner arguably made a similar miscalculation himself last year as a top Federal Reserve official who was part of a team that allowed Lehman Brothers to fail. But he insisted that the Obama administration had learned history’s lesson. “We’re just not going to make that mistake,” Geithner said. “We’re not going to do that. We’ll keep at it until it’s done, whatever it takes.”

Once governments finally decide to use the enormous resources at their disposal, they have typically been able to shock an economy back to life. They can put to work the people, money and equipment sitting idle, until the private sector is willing to begin using them again. The prescription developed almost a century ago by John Maynard Keynes does appear to work.

But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention — and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?http://www.nytimes.com/2009/02/01/magazine/01Economy-t.html?partner=permalink&exprod=permalink

Chinese Premier Blames Recession on U.S. Actions

The Wall Street Journal - Chinese Premier Wen Jiabao squarely blamed the U.S.-led financial system for the world's deepening economic slump, in the most public indication yet of discord between the U.S. government and its largest creditor.

Leaders in China, the world's third-largest economy, have been surprised and upset over how much the problems of the U.S. financial sector have hurt China's holdings. In response, Beijing is re-examining its U.S. investments, say people familiar with the government's thinking.

Mr. Wen, the first Chinese premier to visit the annual global gathering of economic and political leaders in Davos, Switzerland, delivered a strongly worded indictment of the causes of the crisis, clearly aimed largely at the United States though he didn't name it. Mr. Wen blamed an "excessive expansion of financial institutions in blind pursuit of profit," a failure of government supervision of the financial sector, and an "unsustainable model of development, characterized by prolonged low savings and high consumption."

Chinese leaders have felt burned by a series of bad experiences with U.S. investments they had believed were safe, say people familiar with their thinking, including holdings in Morgan Stanley, the collapsed Reserve Primary Fund and mortgage giants Fannie Mae and Freddie Mac. As a result, the people say, government leaders decided not to make new investments in a number of U.S. companies that sought China's capital. China's pullback from Fannie and Freddie debt helped push up rates on U.S. mortgages last year just as Washington was seeking to revive the U.S. housing market.

To be sure, China's economy now is so closely intertwined with the U.S.'s that major, abrupt changes are unlikely. The U.S.-China economic relationship has become arguably the world's most important. China has been recycling its vast export earnings by financing the U.S. deficit through buying Treasurys, helping to keep U.S. interest rates low and give American consumers more spending power to buy Chinese exports.

China now has roughly $2 trillion in foreign exchange reserves, and has continued to buy U.S. government debt -- surpassing Japan in September as the biggest foreign holder of Treasurys, by one official U.S. measure. China must continue to recycle its trade surplus if it doesn't want its currency to appreciate too quickly.http://online.wsj.com/article/SB123318934318826787.html

Recession's Future Path

Leading economists discuss the impact of the recession and how long it might go. Kelsey Hubbard reports from the 2009 Global Economic Outlook, co-hosted by Dow Jones Indexes. (Jan. 21)

It's Bad, But 1982 Was Worse

The New York Times - You often hear that we are now living through the worst recession since the early 1980s, and the comparison is not wrong. But it’s ultimately unsatisfying, because it is a little too vague to be useful.

Is the economy only a little worse than it was in the last couple recessions, as some have said, and still a long way from the dark days of 1982? Or are we instead on our way toward something that may even approach the severity of the Great Depression?

Without more specifics, it is hard to judge the staggering stimulus numbers being thrown around Washington. It is hard to know how tough a task the Obama administration is facing — and whether it’s running the risk of being too timid or too aggressive.

I thought it would make sense to get some clearer historical perspective, and the economists at the Bureau of Labor Statistics were nice enough to help me do so. In the last week, they helped me put together a broad measure of the job market — one including both official unemployment and more subtle kinds — stretching back to 1970. Since the job market covers the entire economy and affects families in tangible ways, it seems to be the single best yardstick.http://www.nytimes.com/2009/01/21/business/economy/21leonhardt.html?partner=permalink&exprod=permalink

Fed Fears Long, Deep Recession

The New York Times - WASHINGTON — Policy makers at the Federal Reserve appeared almost stunned by an economy that was sinking faster than they had expected on almost every front in December, so much so that they even toyed with the idea of not announcing an official target for overnight interest rates, according to minutes of the meeting released on Tuesday.

At the meeting on Dec. 15 and 16, Fed policy makers jumped through the looking glass and slashed the benchmark federal funds rate on overnight loans between banks virtually to zero. Vowing to use “all available tools” for stimulating the economy, the Fed then outlined a radical new approach of pumping money into the economy through its own lending programs and through heavy purchases of mortgage-backed securities and possibly longer-term Treasury bonds.

Despite having already created a raft of new lending programs to financial institutions and even corporate borrowers, Fed policy makers as well as the Fed’s staff forecasters began the meeting with sharply reduced forecasts. They all expected a severe economic contraction that was likely to last through at least the first half of 2009.http://www.nytimes.com/2009/01/07/business/economy/07fed.html?partner=permalink&exprod=permalink

http://online.wsj.com/article/SB123126756338458009.html?mod=testMod

Obama Seeks Wide Support in Congress for Stimulus

The New York Times - WASHINGTON — Two weeks before assuming power, President-elect Barack Obama took his economic recovery package to Capitol Hill on Monday and worked to build a bipartisan coalition to endorse his plan of tax cuts and new spending with an urgent appeal “to break the momentum of this recession.

Mr. Obama, on his first full day in Washington since the election, held a series of face-to-face meetings with Democrats and Republicans as he began spending his political capital. He spoke of the nation’s economic condition in dark terms and urged Congress to pass the legislation within a month.

“Right now, the most important task for us is to stabilize the patient,” Mr. Obama said. “The economy is badly damaged — it is very sick. So we have to take whatever steps are required to make sure that it is stabilized.”

The meetings were a mix of symbolism and substance between the man who will be sworn in as the 44th president and the Congressional leaders who hold the fate of his agenda in their hands. The sessions, aides said, were particularly aimed at encouraging Republicans to buy into the plan and help ease resistance over a $775 billion price tag. http://www.nytimes.com/2009/01/06/us/politics/06stimulus.html?partner=permalink&exprod=permalink

Is Next Great Depression Already Underway?

The New York Times - “If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out.

We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.http://www.nytimes.com/2009/01/05/opinion/05krugman.html?partner=permalink&exprod=permalink

Recession began a year ago

Treasury Secretary Henry M. Paulson Jr. spoke at the Fortune 500 Forum in Washington on Monday.

Editor's Note - Not to brag, but I forecast nearly a year ago (last spring) that the U.S. economy had entered a recession. Appearing on Fox News, I said the numbers would sooner or later catch up with reality. See: http://www.youtube.com/watch?v=3oz1bTJqKVQ. What I didn't forecast was the depth or severity of the contraction. It looks like the current downturn is certain to be a long one. - MT

The New York Times - WASHINGTON — The United States economy officially sank into a recession last December, which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation’s business cycles.

In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones.

But private forecasters warned that this downturn was likely to set a new postwar record for length and likely to be more painful than any recession since 1980 and 1981.

“We will rewrite the record book on length for this recession,” said Allen Sinai, president of Decision Economics in Lexington, Mass. “It’s still arguable whether it will set a new record on depth. I hope not, but we don’t know.”

As if adding a grim punctuation mark to what could become the worst holiday shopping season in decades, the Dow Jones industrial average plunged nearly 680 points, or 7.7 percent, to 8,149.09.

Part of the drop may have reflected profit-taking after last week’s surge in stock prices, but it also came in response to new data showing that manufacturing activity dropped to its lowest point in 26 years.

Both the chairman of the Federal Reserve, Ben S. Bernanke, and the Treasury secretary, Henry M. Paulson Jr., vowed to use all the tools at their disposal to restore a measure of normalcy to the economy.

Mr. Bernanke, speaking to business leaders in Austin, Tex., said it was “certainly feasible” to reduce the Fed’s benchmark overnight lending rate below its current target of 1 percent, signaling that the central bank would lower the rate at its next policy meeting in two weeks.http://www.nytimes.com/2008/12/02/business/economy/02econ.html?partner=permalink&exprod=permalink