Monthly Archives: March 2009

U.S. Weighs Further Steps for Citi

The banking system in the US have been seeing detrimental times and they need help. What is now happening is the Federal Gov’t is stepping in to give these banks much needed aid. What lots of people don’t understand is that they’re not just giving money away. They are actually investing in these failing companies and becoming part owner of them. Everytime the Federal Government buys stock in these companies, the actual worth of the stock declines. At the beginning of the year, Citi was trading at $7. a share. Now its at almost $1. a share. The article from the New York times is described as very hard to read or as Yves put it, reading the article is hard because it ” is so thick that parsing it is like wading through mud.”

“Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.
Federal officials describe the discussions, which are wide-ranging and preliminary, as “contingency planning.” Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.”

First of all, this company has already been rescued 3 times!!! It now seems like the goal of the Federal Gov’t is to keep Citi alive at all costs. According to this excerpt, the Federal Gov’t is already expecting Citi to fail. One argument that can arrive from this is, Why keep bailing out Citi, if it’s done again, then it will be done another time. The issue that comes along with this that the article doesn’t explain is that everytime Citi gets bailed out, the stock holders lost their money and the Gov’t owns more and more of the bank. At this rate, how long would it actually take for Citi to become nationalized and a Government run Institution?

“Citi executives said they haven’t detected signs of corporate clients or trading partners withdrawing their business, even though the New York company’s shares are hovering near $1 apiece — closing Monday at $1.05 on the New York Stock Exchange. Citigroup says it has a strong liquidity position and that its capital levels are among the highest in the banking industry.”

Here we have Citi executives telling everyone the things they need to hear. They are giving hope to the customers that the company is still in good standing with lots of capital and share-holders although the price of the common stock doesn’t  reflect a “strong position,” it is true that Citi has lots of investors and capital, but since the Gov’t started buying up Citi Stock as a form of bailout or assistance for these companies, the value of the stock has dropped tremendously, which now has investors comparing Citi to the other financial giants that hit rock bottom last year. At this point, Citi is hoping that their customers have a sort of renewed belief that the company will prosper without any more government aid.

“Also complicating matters, U.S. officials don’t have a template for winding down a company of Citigroup’s size and complexity, which Federal Reserve Chairman Ben Bernanke made clear at a Senate hearing last week.”

This statement taken from Ben Bernanke shows the current state of the US economy in a strange way. It shows that they never had a specific plan or way with dealing with any company as big as Citi. This to me is a another shot at showing Citi shareholders that the company is simply too huge to actually fail like other institutions did. It also shows that now emergency planning is being done but its late in the game. This also shows how the Government is in the the position where they have to help the financial giant because there’s no other alternative that makes sense.

To better understand Bank Nationalization, check revolutionaryrob’s and jcajuste’s posts about what Professor Roubini talks about.

Ever since Lehman Brothers got bankrupted, serious issues related to subprime loan have caused lower income people to become homeless and squatters. Even though after the economic crisis, most of us continue to build our career, which means that we, or our parents still have enough money to afford it. However, a lot of African Americans and Latinos who live in some area like Antioch, Pittsburg, Brentwood, and Stockton had to move out because of their high rate of mortgage. In the 1960s and 1970s while racial discrimination still existed, non-white people had no right to get loans because of their lower status. During 1990s, when subprime loan became popular, real estate brokers started to offer the loan to those lower income people because they believed that they would make profits. Furthermore, residents did not take a deep consideration of what might happen if the system failed. In order for subprime loan company to make profit as much as they can, they often offered subprime rather than more stable loan.  

In an article “LIVING WITH CRISIS”, a worker from the Berkeley Public Library talks about his African-American co-workers who are seriously suffered by economic crisis.

“One of my Black co-workers moved to one of the most popular suburbs, Antioch, where she now drives over 65 kilometers and it takes at least one hour each way. It has been the same with many others of my non-white co-workers. Because of budget cuts at the level of the State of California for funding education, libraries and public parks, programs will be cut back by an across-the-board 10%. This will probably mean that either our salaries will be reduced by 10% or our hours will be cut back by the same percentage. It is the same with schools and other public facilities, affecting all the rank-and-file employees. My co-worker from Antioch is greatly stressed because if her wage is reduced, she will be unable to afford to pay her mortgage and might lose her house. Her house is clearly “underwater” meaning she owes more for than it is presently worth. Some banks will allow her to “sell short” meaning that she can sell the house for less than what she owes the bank and they will forgive the rest. But if she is underwater too deeply, her only option is either getting evicted because she is foreclosed or “walking away” from the house and letting the bank foreclose and repossess it.”

In her case, she still has job and place to live, however some people don’t. Where those people go is they go back to their houses which they technically have no possession. After they sell their houses, it seems like they gain money to find a place to live; however, the money they get by selling their houses is not enough to pay back their mortgages. If the amount of the mortgages is too high, they still have to keep paying those expenses, therefore some of them get back to where they used to have possessions and stay there under fear of being arrested. As number of squatters increased, some cities in California have renewed the regulation to make illegal to live in a place where there is no water supplies. To keep a place to stay, residents often do what ever they can, even if it is against the laws. However, it is obvious that those residents eventually get frustrated and resist those oppressive laws and they actually did so.

“While usually drawing hundreds of angry people, most of these efforts become nothing more then reformist attempts to lobby politicians to force the banks to renegotiate the mortgage loans. Cities like Oakland have intervened and are trying to pass laws encouraging banks to renegotiate ARM loans into more affordable fixed-rate ones and making it more difficult to evict people still living in their homes.”

 After cities put some efforts for their residents, they got rights to stay their home for a while and consult their loan, even after a notice of foreclosure.

            What has happened in some parts of California is only one aspect of damage caused by economic crisis. Lower class people got suffered much more than any others at this time; however, it could be anybody anytime. Lehman Brothers used to have too much influence through out the world so it was hard to imagine that they fail business that is why whole society had no idea what do with this shocking situation. And we are still processing recovering from economic crisis. In the future, hopefully we are able prevent, and prepare for economic crisis and reduce numbers of people who become homeless or squatters.

Source: Reports on Crisis

            http://sites.google.com/site/radicalperspectivesonthecrisis/struggles/wildcatreportonthecrisisincalifornia

Last year when the world was debating on what shape the recession will take they anticipated it to be a V-Shaped recession lasting about eight months or a recession even lasting longer than that. The opinions ranged from eight months to twenty-four months. Today, after fifteen months it can be easily seen that it has formed a U-Shaped recession. Further studies show that it can last up to a thirty-six month period even if the U.S. takes the necessary aggressive policy action. It won’t be until 2011 that we are able to see the growth rate reach close to two percent. And if these necessary steps aren’t taken we can see this U-Shaped recession goodbye and meet the horrible consequences of the L-Shaped recession.

An L-Shaped recession refers to a steep decline followed by a very low growth during many years. In other words it means the “deadly combination” of economic stagnation and price deflation. If America chooses the same path it is following than it is looking at an economy that will take years to redevelop. The L Shape will only cause the unemployment rate to increase, the adjustments to balance sheets will be even more painful than it is currently, the value of houses will decline further, and the U.S. current account assets will fall dramatically. The L Shaped recession will force the problems to worsen and take an even longer time to heal itself.

This L-Shaped recession occurring is not only affecting the U.S. but it is brutally hurting other nations. “The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan….” This L shaped recession will cause a depression which means no one will be able to afford a large deficit for a long time. And that would mean that the economic models of Germany and Japan will no longer work. Since these countries depend so much on exports they are falling to their doom. These countries must “undertake structural reforms that facilitate the shift towards non tradable goods.” The countries can’t see these and they chose to go down another path. Germany is obsessed with their exports and depending on them way too much.

“The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.”

The beginning of the article explains why U.S. has forced itself into this huge hole. The government is simply not taking the necessary actions of reforming the financial sector, major economies are depending on national strategies that no longer work for the economy we are presently in, and “exporters are unwilling to spend short term and reorient longer term to stimulate enough demand internally.”

Another article I found explains that the famous “Doctor Doom”, Nouriel Roubini, explains at first that the possibility of the recession being L-Shaped is only about the thirty percent which was about six months ago. Now he is saying that the possibility of this shape is about thirty percent. He implies that the world’s growth rate in 2009 will be negative 0.5 percent. Performances in the financial markets only seem to further prove this type of recession and two of the three indexes of the New York stock markets have reached their lowest levels. The ending of this article explains in simple terms what must be done. “…only when countries all over the world are aware of the gravity of the financial crisis, can they face it more bravely and adopt stronger anti-recession measures in order to pull together in times of trouble to weather hardships.”

Hi guys,

As we spoke last time about Wal-Mart, I wanted to post this article Retail Sales Slide Further, Except at Wal-Mart. After reading it, you will find the answer why people don’t see bad sites of this store.

Hi guys,

When I was reading newspaper,  I found this article very interesting Continuing Job Losses May Signal Broad Economic Shift  and I decided to post it for you. It talks about how government assures that they will build our economy however, this isn’t coming very well.

“A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Companies go bankrupts, people lose jobs, and who is going to change that? Unemployment increases so badly that now everyone tries to catch any job he/she can get.

“We are now falling at a near record rate in the postwar period and there’s been no change in the violent downward trajectory.”

“Who’s going to put me to work?” he asked. “Where’s the work at? It’s just a great big black hole.”

Therefore, our car industry used the money that government gave, and now they ask for more because they will bankrupt and lay off many people. What will happen with our economy? We can just wait and pray that someone will come with very good idea.

Over the months of these tough economic times, the government has been providing a stimulus for major U.S. companies, such as AIG, Citigroup, etc. Now this may seem like an obvious way to start rebuilding the economy, but the problem is that these companies don’t know how to manage themselves. In other words, they have corrupt and terrible management. For example, recently the government had injected into AIG some  20 billion dollars. Next thing you know, the executives are off spending that money in some fancy resort. Even Citigroup was granted a bailout, and then attempted to purchase a 50 million dollar private jet for the top executives. In my eyes, these people are sick and corrupt. How can one even think about spending a single dollar when they’re in the situation that they are in? Anyhow, besides the terrible managing skills, my next question is: If you are the government, why are you still injecting more money into these companies and banks? The other day, the government injected another $26 billion into AIG. Honestly, the same people that can’t get them out of this situation are the same people that got them in. It’s clear that these companies are not responsible. And essentially, it’s only wasting our taxpayer’s money.

Now this is what Baker means when he say’s “let’s kill all the Zombies.” The zombies are the banks that are in the same position as AIG is in. No matter how much money we keep injecting into the banks, they’re eventually going to still have problems and it will never end or it will take a really long time. In other words, they are HOPELESS. Smith believes that we should organize the banks into three groups: the healthy, the needy, and the hopeless.

As he states, “Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.”

To clarify it, there are the healthy banks, the ones who can still manage themselves right now without the government’s health. Then there are the needy banks, which are the ones that aren’t too deep and can still revive themselves with a little help by the government. Finally, there are the hopeless banks, which are the ones what are going to fail no matter how much stimulus there is. They practically are the living dead aka zombies. They are pretty much useless. However, Baker does not mean to literally get rid of these hopeless banks. Instead, he means that the government has to get rid of the current management and take over. A good example of this would be what the government did with Citigroup last week. I believed that Citigroup was hopeless, until the government came in and took over. Maybe now they might have a chance, but it will be a long process. As for AIG, even though it is not a bank, I would consider it a hopeless company. What the government did with these two companies are two different things.
And in my personal opinion, I believe that Bank of America is a hopeless bank. I think that they’re debt is too large and essentially, it will take too long for them to come back. Realistically, injecting more money into the company is no use.

Anyways, the government needs to stop injecting money because honestly it just doesn’t work. If we keep doing so, eventually after the economy gets better, the government is going to be low on money and eventually raise the taxes. This is what happened in Japan 10 years ago. The same scenario happened to the Japanese and the country’s economy collapsed. America even advised Japan to stop stimulating the banks because it’s going to damage their economy more in the long run. And now we look like hypocrites by doing the same thing. Smith even says “the US is on its way to repeating the Japanese error of propping up dud banks and creating a moribund economy as a resuly.” We should stop now before it gets worse. And even if it does get worse, it’s better than being viewed as a fool.

Our economy is going down the drain, sales are not being made and profits are being lost. People are losing their jobs, people cannot find a job and people wages are being cut down. The prices of everything is going up, except people’s salary. If everything is going up, then why is people still spending money on clothing, cars, restaurants and other unnecessary things? Well one ecologist by the name of Adam Smith explains this in his book “Wealth of Nation” by saying that we all as consumers are being led by the ‘invisible hand’ which basically is supply and demand. Demand by consumers are what make the rich companies richer because big companies supply what consumers demand. We all live in a consumer driven economy because people all demand for consumer goods. And of course retailers are going to be making and selling goods that the public demand because they only care about making their profits. Especially if demand is high and supply is low then retailers would sell their goods higher in turn making more than ever. Of course there are competitions out there among many companies that make the same items. If supply is plenty and demnd is low from consumers then retailers might be losing in profits instead of making and profit at all. But retailers are smart, this is where the media comes in and make a bigger impact on consumers. Retailers turn to advertisements to sell their goods. And of course since media appeal to alot of consumers, they actually go out and buy the goods even if they don’t need it or have the money for it. When a consumer wants something there is a way to get. Back to consumers’ demand and retailers’ supply, no one is forcing any consumer to buy goods, they are all doing it by our their self-interest. Retailers are simply supplying what customers demand. Some ecologist even agree that the ‘invisible hand’ leding people to purchase goods is a good thing because it makes the economy grow, by production and manufacturing rates go up stimulatiing GDP, having more exports and offering people work.

The simple answer is that Capitalists do operate in their own self-interest in pursuit of profits in order to stay competitive, expand their production and increase their accumulated capital. That is the object of economic activity in our system of production and distribution. Capital accumulation is the goal; profitability the driver; wage-labor the sine qua non.  Most workers know this.  The bigger question is why does that system fail periodically; and fail on a grander and more global level each time?  Greenspan’s ideology cannot explain these repeated economic crises we experience periodically; and it does not allow for acknowledgement that they are endemic to our economic system. -Cramer

Numerous investors and economists have noted that this financial crisis is just the tip-top of the iceberg.  That the problems with the underlying “real economy” have been going on for over thirty years.  They state that we have to get back to manufacturing real things, not betting on inflated financial paper with no material backing or real value. (Even Dennis Kucinich was heard to exclaim after passage of the bailout bill, “We are going backwards, from an industrial economy to a financial economy!”)  Having acknowledged the larger, underlying problem, all critics— whether radical, progressive, leftist or conservative— quickly return to gossiping about the sexy intrigues of bankers, hedge fund manages, and other irresponsible lenders accused of having built the financial house of cards.  It really does remind one of the drunk who insists on looking for his car keys under the street light, rather than were he lost them in the dark shadows. -Cramer

Today we are nearing the end of the old ideological road. Our political and economic system is undergoing radical change.  The ideological “autobahn” under construction is being built for us by a government representing the needs of the largest industrial corporations and financial institutions.  We can continue to suffer the consequences of letting them chart the way of change, or we can plan a new path forward, grounded in everyday material reality and values, designed to benefit the entire people. Seeing through the myths of “consumerism,” and the ideology of “this most perfect of all economic systems” is a necessary first step.

I am reading an interesting article from Radical Perspectives on the Crisis. Nouriel Roubini, the celebrity NYU professor of economics,  who is best known as “Doctor Doom” argues that nationalizing our failing banks temporarily is a more “market friendly solution”.

When I and others put it in the context of the Swedish approach [of the 1990s] — i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary. No one’s in favor of a permanent government takeover of the financial system.

The Swedish banking crisis response, according to a post by Anders Åslund, can be applied to our current financial crisis. In other words, the Obama administration should use the swedish approach to write off those bad debts from normal banks and transfer them to bad banks (private equity fund) that it controls. Transferring bad debts to bad banks in order to avoid contaminating good loans in cleansed banks just as selling off those assets over several years in order to avoid trading undervalued assets. As a temporary form of nationalization, the Swedish approach seems like a better alternative than the corporate bailouts under TARP (Troubled Assets Relief Program).

The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks.

Unlike the corporate bailouts, temporary nationalization seems less than a simple redistribution- taking taxpayers’ money to fill the deep pocket of corporations. Temporary nationalization ultimately minimizes costs to taxpayers, according to Thomas Ferguson, a contributing editor of The Nation. Temporary nationalization gives taxpayers temporary ownership until banks become healthy again and the public’s shareholdings can be sold back to private investors at a profit.

Between guarantees, liquidity support, and capitalization, the government has provided between $7 trillion to $9 trillion of help to the financial system. De facto, the government is already controlling a good chunk of the banking system. The question is: Do you want to move to the de jure step.

The Obama administration may have avoided using the word nationalization because of its negative connotation (a political risk) given that we are capitalist society, but I am not sure that the new administration has embraced bailouts over temporary nationalization for ideological reasons. As more people like Alan Greenspan and Republican senator Lindsey Graham (two advocates of financial deregulation) show support for temporary nationalization, the Obama administration is more likely to nationalize banks (temporarily) in the next few months according to Roubini. Another good reason for nationalizing banks temporarily

we started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. (…) You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.

Take AIG for instance, one of the world largest insurance corporations is about to receive $30 billion, which will be the fourth government rescue since September. AIG alone has already received $150 billion in government loans, yet it’s socialism when the government tries to help Main Street. How did we get into this mess?

(…) the last decade was one of self-regulation. But in the financial markets, without proper institutional rules, there’s the law of the jungle — because there’s greed! There’s nothing wrong with greed, per se. It’s not that people are more greedy now than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there’s less fear. And second, by prudential regulation and supervision to avoid certain excesses.”

Where is the “Invisible hand” when we need it? But wait! The “invisible hand” is why we are this mess in the first place.

Nouriel Roubini is a Professor of Economics at NYU, and is has been forecasting this econcomic meltdown for some time.  It has earned him the nickname of “Doctor Doom”.

To Mr. Roubini, the most interesting question isn’t the one of who got it right. Instead, he asks why we “over and over again, get into these periods of irrational exuberance, when not only is there an asset bubble and a credit bubble, but people believe these are sustainable over a long time — Wall Street, policy makers, rating agencies, academics, journalists . . . .”

This article is worth reading in its entirety, and I hope you do, but here are the key quotes that relate to Mr. Roubini’s belief that many – or maybe all? – banks will be nationalized within six months:

—“… [if] you take banks over, you clean them up, and you sell them in rapid order to the private sector — it’s clear that it’s temporary.”

—“The kind of government interference in the economy that we saw in the last year of Bush was unprecedented. The central bank — supposed to be the lender of the last resort — became the lender of first and only resort!”

—“People like [Senator Lindsey] Graham and [Former Federal Reserve Chief Alan] Greenspan have already given their explicit blessing. This gives Obama cover [to nationalize banks].  I think that we’re going to see [banks nationalized] in the next few months . . . in six months or so.”

—“We started with banks that were too big to fail, but what has happened, in the process, is that these banks have become even-bigger-to-fail. J.P. Morgan took over Bear Stearns and WaMu. BofA took over Countrywide and then Merrill. Wells Fargo took over Wachovia. It doesn’t work! You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing.”

I have seen Mr. Roubini many times on Charlie Rose, and he is usually the opinion leader on the panel as being the person who was right.  I’m not sure how to summarize any better the article than the quotes above do.  I have edited the quotes down.

In this article, Roubini faults journalists for being cheerleaders during these bubbles instead of asking tough questions.  I think that’s an excellent point.

Lastly, I would like to include this information from a different post I saw on Naked Capitalism which I believe likely plays a factor into why banks aren’t being “taken over” perhaps more quickly:

This article was found on the Radical Perspectives website.When reading this article by Rick Wolff there is one ongoing central idea. The capitalist class structure of system is the blame for our current economic problems. This article is very straightforward. The first line of the article reads “At the capitalist system’s core lies its central conflict” This conflict is between corporations and the workers/employees. The board of directors represents the corporation in this article. Wolff uses this situation as a background of the article.

He then continues to describe the conflict. This includes the fact that the corporations cut workers wages. In the other hand the workers seek to improve their income and job benefits. With the actions of corporations outsourcing and workers losing jobs Wolff suggests if workers “were workers to become their own collective board of directors, they would not likely reduce wages or outsource jobs” This would cause job retention.

Now that the background information is given, Wolff then gives examples of what the class structure has done to economy. Using past data Wolff states the class conflict has always contributed to instability economically. Wolff gets straight to the point when he says “But a taboo blocks consideration of one such cause namely capitalism’s class structure.”

I think Wolff even by his title is trying to reawaken the public and point to what is really going on. His article stresses that is not a recent problem. His analysis of post Wold War II recessions emphasizes that the class struggle needs to be revealed and analyzed for the general public. This article appeals to the worker and definitely not the corporations. It is like he is telling the reader this is common sense it’s the class struggle and nothing else. I believe this article is a conversation starter to the issues at hand with this economic crisis. However I think the article can be too black and white. This crisis is very complicated and there are much more factors then what is presented in the article.

Dhanha Bien-Aime