US student Loan Crisis, an Education Bubble?

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I started following the student loan crisis when I noted that student loans seemed to be neck and neck with health care as the primary grievances on the We Are The 99% site.  I was very lucky to get two pretty regular guest posters Alan Collinge and Tim Smith, who have written on the issue from different angles.  I was astonished to get a call from Sallie Mae asking me how they could get their side of the story onto Forbes.com.  At the risk of being prosecuted for impersonating a journalist, I did a brief interview with John Remondi, President and COO of Sallie Mae.  I’m still hoping for some guest posts from Sallie Mae, but nothing has come through yet.  Sunday, I heard from Tim Smith, who let me know that the New York Times was picking up on the issue with this piece.  I invited him to share his reaction.  Here it is.

The Education Bubble Won’t Create A Disaster, Right?

“Looking back, anyone could have predicted the housing bubble.”  This sentiment has been echoed many times, and graphs of the past housing bubble almost make it seem obvious before the bubble burst.  The education bubble?  While many acknowledge the soaring cost – especially those in the education fields – fewer agree that we’re about to see the education bubble pop and create a bigger mess than the housing bubble.  Education may have its critics, but it also has major defenders.

Student Loan Defaulter Calls For Solidarity Peter J Reilly Contributor

Why Does Congress Love Houses More Than Students? Kelly Phillips Erb Contributor

New College Grads: Just Say No to More Debt! Sheryl Nance-Nash Contributor

Cheap Stafford Loans: A Wolf in Sheep’s Clothing CCAP Contributor

However, the chorus seems to be changing.  Even the New York Times recently joined with an article that compared the education bubble to the housing bubble (this analogy has been used multiple times, but like the above graph shows, under predicts the mess that the education bubble will cause).  Even while other media players have finally seen this bubble, the warning signs were spelled out on this blog :

These warning signs would be favorable laws toward discharging student loans in bankruptcy (making it more challenging for students to receive money for education); a societal zeitgeist toward education changing (for instance, businesses preferring certification or a degree from something similar to the Khan Academy over traditional colleges); a major recession coming back to the United States, taking away more employment (making it more difficult for student with loans to pay back their loans); students becoming discouraged by negative news toward education (causing many to drop out or to avoid college).
Of course, some readers might wonder if all four signs must appear for the education bubble to pop, and the answer is “No”.

Even though the education bubble has received attention, few expect the consequences to be bad.  In fact, the Times’ article mentions that economists don’t see the consequences being similar to the housing bubble – in other words, the education bubble pops, and everything is fine.  Consider the potential reality:

1.      High student loan balances discourage future and current demand for other products and services (consider the attitude, for instance, of Natalia Antonova, who faced a debt crisis with her student loans).  This subtracts money flow from the economy to provide jobs in other areas.  Even without the bubble popping, this is the current situation.
2.      If the demand for education drops, the consequences will affect those in the education system – schools will need fewer professors, advisors and others in the education field.  This will create a terrible job hunting situation, where graduates will be placed against high-credentialed people (some of whom may have been their professors).  Remember that in order to keep these people employed, the demand for education must remain the same or rise.
3.      If the demand for education declines, the demand for educational products will decline also – textbooks, construction, and many of the expenditures that some colleges think are necessary to provide a good education.  This drop in demand will cause business, which sell products and services to educational institutions, to cut back on their staff to offset their losses.
There is one way in which economists might be right – if wages began to soar.  Like the housing bubble, Americans felt the mess because the decline in housing prices meant that debt was owed on something that had little value.  If education continues to rise, while wages stagnate or slowly rise, a college degree will be like a home, which has lost its value.  If wages soar, however, a college degree will still mean the path to prosperity.

Tim Smith blogs on the “Echo Boom”, also known as Generation Y (Americans born between 1980 – 1995). Tim has previously appeared here discussing his generation’s attitude towards homeownership and education.

I’m beginning to think that the “bubble” metaphor may not work that well for education.  In the case of the stock market and real estate people own assets that they think they can sell at any time for some minimum price.  Then something happens and everybody heads for the door at once.  At that point the seeds of the next bubble are sown, because the assets have some level of intrinsic value and somebody will buy them for something and may get rich on the next turn of the wheel.  Educational credentials, on the other hand, are not at all fungible.  They can only be cash flowed, not liquidated.  If they are not used when fairly fresh, their value erodes rather quickly.  The actual economic value of the credential will often be quickly replaced by the experience which the credential enables.

By Peter J Reilly, Forbes Contributor  Newscribe : get free news in real time

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American mounting student loans a ‘debt bomb’ waiting to explode! Inside America’s Student Loan Bubble!
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Unemployment Fuels Debt Crisis

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Job-seekers wait outside a job center before opening in Madrid, Spain. Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. Photographer: Angel Navarrete/Bloomberg

Surging unemployment rates from Spain to Italy and Greece are threatening efforts to quell the region’s debt crisis and keeping bond yields close to record premiums relative to benchmark German bunds.

Joblessness is soaring as European nations reduce spending, igniting strikes and protests from Athens to Madrid. Unemployment in Spain surged to almost 24 percent, pushing the euro-region level to 10.8 percent in February, the highest in more than 14 years. Italy’s rate is at 9.3 percent, the most since 2001, hampering efforts to spur economic growth.

Deepening recessions in Italy and Spain contributed to a five-week slide in Italian and Spanish bonds as the shrinking tax base helped lead to both countries raising their deficit targets. The yield premium investors demand to hold Spanish 10- year debt over German bunds reached a four-and-a-half-month high this week.

“The higher the jobless rate, the more that has to be spent on benefits, creating the potential for a negative spiral,” said Christian Schulz, an economist at Berenberg Bank in London and a former ECB official.

Berenberg Bank predicts euro-region unemployment will peak at 11.5 percent in September, he said.

The extra yield investors demand to hold Spanish 10-year bonds rather than similar-maturity German securities was 411 basis points yesterday, compared with an average 130 during the past five years. The rate has risen more than 80 basis points this year. The spread was 376 basis points for Italy and 1,072 basis points for Portugal.

Youth Joblessness

Spain’s jobless rate has more than doubled since 2008 after the collapse of a real estate market that fueled a decade of economic growth. The country is now home to more than one third of the euro-region’s jobless and more than half of young people are out of work.

Hundreds of thousands of Spaniards protested on March 29 in a general strike against Prime Minister Mariano Rajoy’s overhaul of labor market rules and the deepest budget cuts in at least three decades that are pushing the economy deeper into its second recession since 2009.

“Spain faces formidable challenges, especially concerning youth unemployment,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told lawmakers at the European Parliament in Strasbourg Wednesday.

Italy’s jobless rate rose to the highest in more than a decade in February and the International Monetary Fund forecast on April 17 that unemployment will reach 9.9 percent this year. Italian bonds reversed morning gains yesterday after the government cut its growth forecasts and abandoned a goal to balance the budget next year.

Estimate Revisions

Italy’s gross domestic product will contract 1.2 percent this year, more than twice the previous forecast, and the deficit will end next year at 0.5 percent, more than the 0.1 percent previously forecast. The Italian announcement came six weeks after Rajoy abandoned Spain’s deficit goal for next year.

Joblessness in both countries may worsen as the recession deepens and rigid labor market laws are overhauled. Rajoy passed in February a plan to make it cheaper for employers to let workers go, while Italy gave companies more leeway to fire workers without fear of court-ordered reinstatements.

“High unemployment means a very dissatisfied electorate and makes it difficult to get stuff done,” said Padhraic Garvey, head of developed market debt at ING Groep NV in Amsterdam. “It makes it significantly more difficult to pass austerity measures and exacerbates a difficult situation.”

Rajoy’s Challenges

Rajoy probably will face further unrest if he’s forced to implement more budget cuts to meet ambitious deficit goals. His government has now pledged to reduce the shortfall to 5.3 percent of GDP in 2012 from 8.5 percent in 2011 and by more than 2 percentage points next year to get within the EU’s 3 percent limit. Despite a raft of austerity last year, the country achieved a deficit reduction of less than 1 percentage point.

Falling joblessness in Germany underscores the widening gap between the resilience of the euro-region’s largest economy and the so-called periphery. The nation’s adjusted jobless rate slipped in March to a two-decade low of 6.7 percent, according to the statistics office. While the 17-member euro-region economy will shrink 0.4 percent in 2012, Germany’s economy probably will grow 0.7 percent, according to economists’ forecasts compiled by Bloomberg.

“The divergence between Germany and the other economies is here to stay,” said Christoph Rieger, head of interest-rate strategy at Commerzbank AG in Frankfurt. “It provides a structural reason for spreads to stay wider, regardless of what other progress is made on containing the crisis.”

Greek Elections

In Greece, where official data showed unemployment climbed to 21 percent in January, elections scheduled for May 6 may produce a hung parliament, raising questions about the nation’s ability to implement its austerity measures. The nation’s 2 percent bond due in February 2023 trades at about 25 cents on the euro.

In Portugal, where the government forecasts the unemployment rate will average 13.4 percent this year, up from 12.7 percent in 2011, Soares da Costa SGPS SA, Portugal’s third- biggest publicly traded construction company, said it’s expanding abroad and eliminating jobs at home, where it faces a slump in government infrastructure spending.

“High and rising unemployment is likely to impact at a political level and may make the reforms more difficult to undertake,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “If the political desire to reform comes in to doubt, then the market wouldn’t like that. There’s good scope for the crisis to get worse in the near term, the economies are still on pretty shaky ground and there’s a lot of political risk.”Daniel Tilles at dtilles@bloomberg.net.

American Student Loan Debt: $1 Trillion and Counting

Day 3 of the protest Occupy Wall Street in Manhattan’s Zuccotti Park. (Photo credit: Wikipedia)

Whatever happened to the American dream of going to college, landing a great job and living happily ever after? College is supposed to be about getting off to a great start, but it’s a financial noose that threatens to kill our young and everybody else too. The U.S. has the dubious distinction of now having more than $1 trillion in outstanding student loan debt.

The crisis has the full attention of the Consumer Financial Protection Bureau which in a recent blog , presented its sobering findings. “Unlike other consumer credit products, student debt keeps growing at a steady clip. Students borrowed $117 billion in just federal student loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us,” wrote CFPB’s student loan ombudsman Rohit Chophra.

Worse still, he writes, according to data from the Department of Education, federal student loan debt isn’t growing just with new originations — with so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school. Too much debt means too much risk for a generation of young people, many of whom are struggling in today’s economy.

What’s the impact? Excessive student debt slows a recovery still trying to find its sea legs. Study after study has shown that young people are delaying the traditional rite of passage of launching out on their own and starting families. With so much debt, on average about $26,000 for undergrads, and many unemployed or underemployed, they are running back home, instead of looking for their first apartment or home.

A decidedly grim picture could get worse. In July, if Congress doesn’t get its act together and takes some of the momentum of a crisis with explosive potential, a 2007 law that kept federally subsidized Stafford loan interest rates low will expire this summer, meaning the rates will double from 3.4 to 6.8 percent. This is more bad news on top of the real possibility that proposals to financial aid may become reality – the Pell Grants could move from mandatory to discretionary spending, meaning who knows what will happen, but likely none too good. There is also a bill to repeal the expanded Income-Based Repayment program, that lessens the sting of college students by letting them pay back what they own in proportion to their salaries.

The CFPB is working with the Department of Education, and launched a Know Before You Owe project , to solicit input on a “financial aid shopping sheet”. The sheet is designed to help students understand the debt implications of their college choice. CFPB is supervising private student loan providers to ensure they comply with Federal consumer financial protection laws and CFPB is providing tools for borrowers to help them navigate their student loan repayment options. A newly established student loan complaint system will help ensure that private student lenders and servicers are responsive to potential mistakes and problems that borrowers encounter. This summer, the CFPB will release the full results of its private student loan market.

Where is the outrage over the continue increase in tuition at a time when some colleges are raising salaries for their presidents?

Just this week a plan was approved to give pay raises to two university presidents in California. This comes at a time when the California State University system is grappling with a $750 million budget shortfall and is considering limiting enrollment for the spring semester.

There’s something so wrong with this picture. Students will pay the price, families will pay the price, society will feel the ramifications for some time to come.

By Sheryl Nance-Nash, Forbes Contributor  Newscribe : get free news in real time

Lloyds, Britain’s biggest mortgage lender plunges to £3.5bn loss for 2011

Rising Funding Costs Imperil Profit in 2011

Part-nationalised Lloyds Banking Group said today that it is “in a significantly stronger position than it was 12 months ago” despite unveiling total losses of £3.5 billion for last year.The losses, which compare with a £281 million profit the previous year and are driven by a £3.5 billion hit to tackle the payment protection insurance scandal, are nearly twice the size of those at fellow state-backed bank Royal Bank of Scotland

http://www.independent.ie/video/video-world-news/lloyds-makes-35bn-loss-3030959.html

By  Gavin Finch in London at gfinch@bloomberg.net

Lloyds chief executive António Horta-Osório is cutting 15,000 jobs, on top of the 30,000 already axed. Photograph: Reuters

Former Chief Executive Officer Eric Daniels said, “We achieved a step change in our financial performance despite modest economic growth.” Photographer: Chris Ratcliffe/Bloomberg

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, tumbled in London trading as the bank said rising funding costs will squeeze profit margins in 2011.

The net interest margin, the difference between what the bank pays for funds and what it charges for loans, will be unchanged in 2011, Lloyds said in a statement today. The lender is replacing government support with costlier wholesale funding.

“The numbers and outlook statement from Lloyds are a bit of a horror show,” said Ian Gordon, an analyst at Exane BNP Paribas SA in London with a “neutral” rating on the stock. “Lloyds’s second-half performance has been very weak.”

Analysts including Gordon and John-Paul Crutchley at UBS AG said they may cut estimates for 2011 pretax profit by more than 2 billion pounds ($3.2 billion), about a third. Chief Executive Officer Eric Daniels, who will be succeeded by Antonio Horta- Osorio next week, has been trying to wean Lloyds off state aid after the takeover of HBOS Plc in 2008 led to 13 billion pounds of losses and left the taxpayer owning 41 percent of the lender.

The shares tumbled 4.5 percent to 62.85 pence at the close in London, the biggest decline in more than three months.

“The knee-jerk reaction could be some disappointment,” said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “buy” rating on the stock. “The biggest negative is that the margin will stay flat in 2011.”

Net Interest Margin

Lloyds posted a full-year net loss of 320 million pounds in 2010, compared with a 2.83 billion-pound profit in 2009, the bank said in the statement. Earnings the previous year were buoyed by an 11.1 billion-pound accounting gain on the HBOS purchase. Pretax profit slumped 62 percent to 609 million pounds in the second half of 2010 from the first half.

The net interest margin rose to 2.1 percent from 1.8 percent in 2009. Lloyds cut its reliance on government aid to 96.6 billion pounds in 2010 from 157.2 billion pounds in 2009.

The shares, the second-best performing of the U.K.’s five biggest lenders last year, may struggle to repeat that in 2011 as funding costs and Irish loan losses climb and a government commission weighs whether to break Lloyds up, analysts said. The Independent Banking Commission, which is reviewing competition in the financial services industry, will report in September. Lloyds said today it also expects a “slow recovery over the next couple of years” for the British economy.

“Another extremely challenging year lies ahead,” Gordon said. “There are still very significant bumps in the road.”

Halifax, Oil Losses

Lloyds posted its first full-year pretax profit since the credit crisis today. Profit was 2.2 billion pounds compared with a loss of 6.3 billion pounds in 2009. That beat the 2 billion- pound median profit estimated by 21 analysts surveyed by Bloomberg. Provisions fell 45 percent to 13.2 billion pounds in 2010 from 24 billion pounds in 2009.

Profit was crimped by a 4.3 billion-pound charge for bad loans in Ireland and a 365 million-pound loss on the sale of two deepwater oil drilling rig businesses to Seadrill Ltd. The bank also made a 500 million-pound provision to cover payments it’s making to Halifax mortgage clients because the terms of their loans were unclear.

Lloyds follows Royal Bank of Scotland Group Plc in posting an increase in losses from the implosion of Ireland’s decade- long real estate boom. Edinburgh-based RBS posted a full-year loss of 1.1 billion pounds yesterday, missing analyst estimates as Irish loan losses almost doubled.

“We expect to see further reductions in impairment losses in 2011 and beyond,” Lloyds said in the statement.

‘Radical’ Intervention

Pretax profit at Lloyds’s consumer banking unit rose to 4.7 billion pounds from 1.4 billion pounds. Profit was bolstered as customers reverted to standard variable rate mortgages, which generate more income than fixed-rate loans, Daniels, 59, said on a call to journalists today.

“The stand-out performance in the retail division will undoubtedly raise eyebrows, adding fuel to the fire of those that view the banking behemoth as an anti-competitive force,” said Paul Mumford, a fund manager at Cavendish Asset Management in London. “Increased profits will be met by increased enthusiasm for radical regulatory intervention.”

Daniels, who has overseen a 76 percent plunge in Lloyds share price since he took over as CEO in 2003, said he was “very pleased’ with his tenure at the bank. Daniels told the BBC Radio 4 Today Programme that he hasn’t decided whether to accept his 1.45 million-pound bonus for 2010 even though the board has made an award.

The bank’s core Tier 1 capital ratio, which measures financial strength, rose to 10.2 percent from 8.1 percent as risk-weighted assets declined by 18 percent to 406.4 billion pounds. Lloyds said it expects to meet its target to cut assets by about 100 billion pounds over the next three years.

“We achieved a step change in our financial performance despite modest economic growth,” Daniels said. “While the significant decrease in impairments was a key driver in our return to profitability, we also saw a good performance in the core business.”

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How American Consumers Handle an Ever-Growing Heap of Personal Debt?

Source: Cornell University,Newswise — ITHACA, N.Y. – Got debt?

Probably. Most Americans do. Bombarded by home mortgages, college loans, credit card payments and car loans, the typical American consumer faces a mountain of financial obligations. Louis Hyman, Cornell assistant professor in the College of Industrial and Labor Relations, will speak to journalists about debt in his new book, “Borrow: The American Way of Debt,” on Friday, Feb. 10, 2012 at 10 a.m. at Cornell’s ILR Conference Center, sixth floor, 16 E. 34th St., Manhattan.

“Borrow: The American Way of Debt” is a lively, historical account of consumer debt in America, published by Vintage/Random House on Jan. 24, 2012.

In this society, debt is pervasive. Hyman says the average American owes more than $15,000 in credit card debt alone, and he provides a fresh look at the financial mess in which millions of Americans wallow. “Today’s problems are not as new as we think,” Hyman says.

“Borrow” examines how the rise of consumer credit – virtually unknown before the twentieth century – and how it has altered our culture and economy.

“My book puts today’s economy in context and helps explain how we got here, and then offers some novel solutions for today’s troubles,” Hyman says

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China says it can’t use forex reserves to save Europe

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BEIJING: Europe cannot expect China to use a big portion of its US$3.2 trillion foreign exchange reserves to rescue indebted nations, a top Chinese foreign ministry official said, Beijing‘s strongest rebuttal yet to suggestions it should bail out the eurozone.

Vice-Foreign Minister Fu Ying said at a forum the argument that China should rescue Europe did not stand and that Europeans might have misunderstood how China managed its reserves.

She did not explicitly rule out using part of China’s reserves for more targeted measures, but implied China was not going to ride in with a big chunk of its “savings” and bail out crisis-stricken Europe.

“We cannot use this money domestically to alleviate poverty,” Fu said. “We also can’t take this money abroad for development support.”

Economists estimate that Beijing has already invested a fifth of its reserves in euro assets.

While the size of China’s reserves is the largest in the world, analysts say two-thirds of that is locked up in dollar assets that cannot be sold, giving Beijing a more modest portion of about US$470bil to invest each year.

Fu said China’s reserves were akin to the country’s savings and that the 1997 Asian financial crisis taught Beijing how important reserves were to the nation.

China’s foreign ministry does not exert direct influence over how the country invests its foreign exchange reserves but can comment on that policy.

Fu said Beijing’s refusal to use its reserves to ease Europe’s debt woes did not count as a lack of support for the region, which was also China’s biggest export market.

“I say the idea that China should save Europe does not stand. What I mean is the money cannot be used this way,” Fu said. “China has never been absent from any international efforts to help Europe. We have always been an active participant, and a healthy particpant as well.”

As the owner of the world’s largest foreign exchange reserves, China is one of the few governments with pockets deep enough to buy a sizeable portion of European government debt and help pull the region from its economic malaise. – Reuters

China says it can’t use forex reserves to rescue Europe

02-Dec-11, 8:41 PM | Agence France Presse

BEIJING – China’s vice foreign minister on Friday ruled out using the nation’s vast foreign exchange reserves to bail out Europe, as the debt-laden continent tries to stave off the risk of a massive default.

“The argument that China should rescue Europe does not stand,” vice foreign minister Fu Ying told an EU-China forum.

“We cannot use foreign reserves for… rescuing foreign countries. We need to ensure safety, liquidity and profit for the foreign reserves.”

European leaders have lobbied China, the world’s second largest economy, to help struggling eurozone countries by contributing to a bailout fund, but so far Beijing has not made a firm commitment.

The Asian powerhouse, which has the world’s largest foreign exchange reserves at $3.2017 trillion, has said it is keen to seek more investment opportunities in Europe, but has held back from agreeing to contribute to the fund.

Fu pointed to China’s purchase of European bonds, increased imports and expanded investment in the continent, which would “create jobs and restore growth”.

But she insisted China was not seeking to use its considerable financial clout to exert power over the continent.

“China is no old-fashioned power or empire. China has no intention of seeking power through financial means,” she said.

China’s commerce minister Chen Deming said last month Beijing would lead an investment delegation to Europe next year, and the head of China’s sovereign wealth fund has said it is keen to invest in European infrastructure.

But some in Europe have expressed concern about the potential cost of accepting Beijing’s help.

In October, Francois Hollande, the Socialist candidate for next year’s French presidential elections, asked if China was really “riding to the rescue of the euro… without making any demands in return?”

Fu also reiterated China’s confidence in Europe, just as European leaders prepare to meet at a summit next week that some have billed as their last chance to restore the credibility of eurozone economic governance.

“We have reason to believe that Europe has the wisdom, capacity and resources to make it this time by accelerating adjustment and reform,” she said.

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Eurozone seeks bailout funds from China

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Klaus Regling: ”These are regular consultations at an early stage and there will be no conclusions”

Martin Patience BBC News, Beijing

The head of the eurozone’s bailout fund is beginning attempts to persuade China to invest in a scheme to help rescue member countries facing debt crises.

After meeting Chinese leaders, Klaus Regling said there were no formal negotiations and would be no deal now.

It is thought China may pay about 70bn euros ($100bn) into the fund, which is expected to be boosted to 1tn euros.

Meanwhile French President Nicolas Sarkozy said debt-ridden Greece’s entry to the eurozone was a mistake.

Greece was “not ready” when it joined in 2001, he said, adding that it could be rescued thanks to a new deal on the debt crisis.

European leaders worked into the early hours of Thursday in Brussels to secure an agreement aimed at preventing the crisis from spreading to larger eurozone economies.

The deal triggered a worldwide shares rally.

‘Regular buyer’

Beijing has made it clear that it will demand strong guarantees on the safety of any contribution it might make.

With more than $3tn in foreign reserves there are European hopes that China could ride to the rescue.As the EU’s biggest trade partner Beijing would also be hard hit by any downturn in Europe.

But like other investors, China will want guarantees.

And Beijing may push for other concessions, such as market economy status – a move that would make it harder for European companies to press trade complaints against Chinese rivals.

Any investment will also be fraught with political risk.

China’s fund managers have faced criticism after earlier overseas investments soured.

Despite being the world’s second economy, more than 200m Chinese live in poverty.

China’s leaders won’t want to be seen giving “charity” to countries richer than their own.

Mr Regling, who is chief executive of the European Financial Stability Facility (EFSF), said he was not negotiating with China as a potential investor but holding consultations to decide the terms for raising the money.

“Don’t expect any precise outcome of our talks,” he said, quoted by AFP news agency.

“I cannot say today, and it’s certainly far too early to say what kind of amounts might be envisaged.”

He said China had been a regular buyer of EFSF bonds in the past.

He would present the fund’s bonds as a potential commercial investment to China, he said, adding that Beijing regularly needed to find safe investments for its trade surpluses.

“I am optimistic that we will have a longer term relationship,” he said.

Chinese Vice Finance Minister Zhu Guangyao said there was work still to be done.

“We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment,” he said, quoted by AFP.

“Start Quote

If we have the ability to help them then we should, but there is no feeling of pride in that”

Xu Juan International trade firm employee in Beijing

• Why would China want to help Europe?

“We hope that all these technical and specialised arrangements can be thrashed out at an early date and can be implemented and feasible. That will be very important for the effectiveness” of the fund.

The President of the World Bank, Robert Zoellick, has said he believes China will invest in Europe only if there are incentives for it to do so.

“I don’t think that China will just come in as a white knight to try to provide money just to bail out Europeans,” he told the BBC.

But investor Jim Rogers said China was prepared to help.

“From China’s point of view, it’s cheap foreign aid. They’ll buy goodwill. I guess they’ll put up some money,” he said on BBC Radio 4′s Today programme.

The suggestion that China should use its financial clout to assist the eurozone met with mixed reactions on the streets of Beijing.

“If we have the ability to help them then we should, but there is no feeling of pride in that,” said Xu Juan – a 27-year-old employee of an international trade firm.

We need to focus on doing a good job on developing our own country.”

Wang Xiaodong, a 23-year-old univeristy student, said “With the global economy everybody prospers together or becomes weaker together, so we just have to endure this tough time together.”

The framework for the new EFSF bailout fund is to be put in place in November.

Germany, as the largest economy in eurozone, is expected to be the largest contributor.

Asian markets rose for a second day on Friday and bank stocks in Europe continued to rally, a day after the deal was reached.

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Malaysia’s public debt rises to RM407bil

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By EUGENE MAHALINGAM eugenicz@thestar.com.my

PETALING JAYA: Malaysia’s public debt level rose 12.3% to RM407.11bil in 2010 from RM362.39bil a year earlier, according to the Auditor-General’s Report 2010.

National debt grew 12% to RM390.36bil in 2010 from RM348.60bil a year earlier while foreign debt grew 21.5% to RM16.75bil from RM13.79bil in the previous corresponding period, said the report released yesterday.

In 2010, unresolved public debt both at the national and foreign level grew by RM41.76bil and RM2.96bil respectively compared with 2009.

“The national debt level totalling RM390.36bil accounts for 95.9% of the Federal Government’s total debt,” auditor-general Tan Sri Ambrin Buang said in the report.

He pointed out that the ratio of the Federal Government’s debt to gross domestic product at the end of 2010 was 53.1%, which was over 50% for the second year in a row.

The national debt level is governed by various laws that impose a debt ceiling for the Government. Under Act 637 of the Loan (Local) Act 1959, and Act 275 of the Government Investment Act 1983, it is stated that the combined loans raised domestically should not exceed a ceiling of 55% of the nation’s GDP.

Meanwhile, Act 403 of the External Loans Act 1963 limits external loan exposure to RM35bil.

The report also revealed that in 2010, the Government received revenue totalling RM159.65bil, which was an increase of RM1.01bil (0.6%) compared with RM158.64bil in 2009.

Accounts receivable for 2010 stood at RM20.37bil while the Government approved allocation amounting to RM149.06bil for operating expenditure. “However, the said allocation was insufficient to cover the expenses amounting to RM151.63bil,” said the report.

The report also revealed the implementation of a rating system based on an accountability index.

“Through this rating system, marks will be given for the compliance if regulations of six main elements in financial management, namely management controls, budgetary controls, receipt controls, expenditure controls, management of trust funds and deposits as well as management of assets and stores.

“The federal ministries and departments rated as excellent become a role model and this would motivate others to diligently improve and enhance their financial management,” it said.

The gloomy outlook takes its toll

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What Are We To Do by LIN SEE-YAN

About one-half of European Financial Stability Fund already committed or utilized

 

WITH every passing day, the shelf-life of eurozone’s rescue package is getting shorter. On July 21, eurozone leaders agreed to a second Greek bailout (see Greek Bailout Mark II: It’s a Default in this column on July 30, following the first, Greece is Bankrupt on July 2). European parliaments have yet to complete ratification to expand the 440 billion euros bailout fund (European Financial Stability Fund or EFSF). Already, talk has shifted to expanding the EFSF in the light of escalation of the crisis.

Frankly, the fund is just not large enough to halt the contagion. It’s a matter of market confidence really the larger, the better. About one-half of the fund is already committed or utilised with more demands coming on. Greece will miss the deficit targets for this year and next despite austerity, showing the drastic steps taken to avert bankruptcy are not enough. The crisis is boiling over. Eurozone ministers have since delayed the release of 8 billion euros cash scheduled for Oct 13, threatening to revisit the deal where private bondholders may be asked to take a higher “haircut”. This has rattled markets and raised fears of an imminent messy default. Estimates are that with a 60% haircut (21% now) for private bondholders, Greek banks would suffer another 27 billion euros write-down, wiping out their capital. Inevitably, the fall-out will have much wider repercussions.

The contagion

The world economy once again stands on a knife’s edge. As finance leaders gathered at end-September, they all want to look forward. But markets and investors are forcing them to peer down the precipice into the abyss as growth in advanced economies slackened sharply and emerging nations grappled with inflation in the face of a fast deteriorating eurozone debt crisis, wondering how to make the needed adjustments to restore confidence. Continuing uncertainty and worries about the global economic outlook fuelled a rush into safe assets. The eurozone is seen to be on the brink of recession. Its prospects have been hit by sharp falls in consumer and business confidence as well as fiscal austerity measures across the continent and pessimism about US growth. Germany’s slowdown is worrisome because of its role as Europe’s powerhouse.

Gathering pessimism came to a head as global equities tumbled on Sept 22 as the Federal Reserve’s (Fed) gloomy outlook (“there were significant downside risks to the economic outlook”) caused investors to sell stocks in a widespread flight to safety. UK’s FTSE (All World) Index fell by as much as 23% from its May high, signifying a bear market as it fell through the 20% threshold. US and UK stocks were not yet in bear territory but German and French equities have since been there. The sell-off was mooted by a big move into government bonds. Benchmark German 10-year bond yields hit an all-time low of 1.65%, while US Treasuries fell to 1.77%, the lowest level since 1946. On a day reminiscent of 2008, Asian stocks and currencies tumbled reflecting foreign capital repatriation, with the Indonesian stock market plunging 9%, the Australian dollar falling below US dollar parity, and the Hong Kong Hang Seng index settling at its lowest point since July ’09.

Amid market tumult, investors were left wondering what to do in October. The 3rd quarter had been painful and volatile. The Dow finished the quarter down 12.1%; the S&P’s 500 fell 14%. Many had hoped for a 2nd half rebound after spring’s “soft-patch”, only to be confronted with worries of a possible double-dip recession. There is also a new fear: weakness in emerging market economies, especially China. During the 3rd quarter, markets were tossed to and fro on a daily (even hourly) basis, reflecting developments in Europe and United States. In August and September, the Dow industrials rose or fell by more than 1% on each of 29 days; on another 15 days, the daily moves were more than 2%. The last time the market saw this was in March/April ’09. The “fear index” (Vix volatility index) reflecting market instability was up 160% over the 3rd quarter, finishing at 40% (normal 15%-20%) on end September.

The problem is Europe

The damage was worse in Europe. The main German and French stock indices both lost more than 25% of their value in the 3rd quarter, the largest quarterly loss since 2002. Asian stocks also took a pounding, experiencing double-digit losses. The Hong Kong Hang Seng index lost 21%. Even gold usually the refuge suffered a collapse in September from its record high in August. The safety was in US Treasuries, German bunds and UK gilts. Yields didn’t matter for now it’s just preservation of capital. As I see it, the sovereign risk crisis is compounded by much weaker growth among the “core” nations, and increasing market stress. In the United States, it has just managed to avoid recession, with little buffer to insulate itself from any fallout from an European event. Complications can also come from a busting bubble in the Chinese property market, rattling Chinese banks with ripple effects on world markets.

US and European stocks tumbled when markets opened in the new 4th quarter, with S&P’s 500 entering the bear market as Europe postponed a vital tranche drawing to debt-stricken Greece. Wall Street fell about 2% on Oct 3, extending decline to a 13-month low as investors feared the crisis would lead the United States into a new recession. With this drop, the benchmark S&P’s 500 had fallen past 20% putting it in bear territory. In Europe, banking stocks dived as investors slashed their exposure on worries authorities are unable to contain the debt crisis. The Stoxx Europe 600 index tumbled 2.8%, hitting its lowest since Oct ’08; Stoxx Europe 600 banks finished 4.3% lower. Euro-zone’s problem is one of market confidence rather than solvency. In Asia, most regional markets in the 3rd quarter suffered their biggest falls since the Lehman’s collapse in ’08, with Tokyo losing 11% and Hong Kong 21%. Since then, Korea dropped 3.6%, Hong Kong another 3.4%, India’s Sensex 1.8%, the Nikkei, 1.1% and Australia, 0.6%. Italy’s latest downgrade a 3-notch cut by Moody’s to A2 with continued negative outlook reflected as much euro-zone’s inability to spur market confidence, as it does Italy’s failure to promote growth. Without a comprehensive response to the crisis, the risk of a downward spiral remains. In the past days, European stocks posted hefty gains as policymakers were reported to be prepared to help recapitalise European banks, estimated at 100-200 billion euros. Priority remains with Spain and Italy which are basically solvent, but lacks credibility. The prospect of the IMF coming-in alongside EFSF to buy Spanish and Italian bonds boosted sentiment.

Default by Greece?

Greece will miss the targets set just two months ago. The 2012 approved budget predicts a deficit of 8.5% of GDP for ’11, well short of the 7.6% target. For ’12, the deficit is set at 6.8%, short of the target of 6.5% reflecting the sluggish economy. Its 8.5% target remains a challenge in the current environment. GDP is expected to fall by 5.5% in ’11 pushing unemployment to 16%, and a further GDP shrinkage of 2%-2% is in prospect. The ’11 shortfall meant Greece would need another 2 billion euros just to bridge the gap. Greece is now off-track, reflecting disappointing revenues and missed targets. On Sept 21, it acted to raise taxes, speed-up public lay-offs, and cut some pensions. Ongoing austerity measures are already deeply unpopular.

My mentor and teacher at Harvard (Marty Feldstein) believes the only way out is for Greece to default and write down its debt by at least 50%. This strategy of default and devalue is standard fare for nations in Greece’s shoes. But this hasn’t happened because “Greece is trapped in the single currency.” So why are the political leaders trying to postpone the inevitable? He offered two sensible reasons: (i) banks and other financial institutions in Germany and France have large exposures to Greek debt, and time is needed to build capital; and (ii) default would induce sovereign defaults in other countries and runs on their banks. The EFSF is just not large enough to bail out Italy and Spain. Europe’s politicians hope to buy enough time (2 years) for Spain and Italy to prove they are financially viable. As I see it, both these nations don’t have another two years to prove their worth. The markets will decide the fate of Greece (and possibly Spain and Italy), not the other way around.

The shadow of recession

International Monetary Fund’s September forecast pointed to growth in emerging economies exceeding 6% in ’11 and ’12, but with the advanced nations sliding to below 2%. On current trends, the latter prediction is perhaps closer to 1%. I think the outlook for the eurozone is deteriorating fast: at best, they are already in the throes of a severe slowdown; at worst, a relapse into recession. The European Commission recently stated growth is at a virtual standstill, with eurozone GDP rising by 0.2% in 3Q’11 and 0.1% in 4Q’11. Pain will be most intense in the south (no growth in Italy in ’11 and ’12) where the pressure of austerity is greatest. But the “core” economies are also hurting. IMF estimated German growth would slow down from 2.7% in ’11 to 1.3% in ’12. The short-term outlook is even worse. According to Markit Economics, eurozone’s factory activity fell to a 25-month low of 48.5 (a reading below 50 indicates contraction). Indications are economic conditions will deteriorate. Germany’s index fell in September with overall activity just above 50 the worst performance in two years. France’s index stood at 48.2; Italy, 48.3 both in contraction territory. Eurozone contractions reflected lacklustre domestic demand and falling export sales. More sluggish growth will make it harder to achieve fiscal targets. Rising risk of recession will damage efforts to deal with the crisis.

The Fed’s latest assessment is for the US economy to falter needs to be taken seriously. Citing anaemic employment, depressed confidence and financial risks from Europe, its chief urged Congress not to cut spending too quickly in the short-term even as they grapple with fiscal consolidation over the medium-term. The IMF expects the United States to grow by 1.5% in ’11 (less than 1% in 1H’11) and 1.8% in ’12. The short-term outlook isn’t looking better. Indeed, the business cycle monitoring group ECRI concluded last week that the US economy is tipping into a new recession. Latest data are mixed after a dismal August. US manufacturing managed to keep expanding and employment strengthened in September but the tone has not been sufficiently robust to dispel fears of another downturn. Sure, United States was not in recession in 3Q’11 but the lack of new orders remains of concern. While even sluggish job growth is welcome, the government’s belt-tightening is likely to prove a significant drag on the economy. The Fed’s commitment to ensure recovery continues will re-assure. But if Europe falters badly, there is little the Fed can do.

Housing ignored

Over the past 35 years, housing had added value to the GDP. Empirically, in the two years following most recessions, housing adds about 0.5%point to US GDP growth. So far, the contribution has been negative. This is so because: (i) home prices dropped 2.5% this year; since its ’05 peak, home prices have fallen 31.6%; (ii) United States lost US$7 trillion (close to one-half of GDP) in the value of homes they own: homeowners equity has since fallen to 38.6% of home values; (iii) home-starts are at an all time low and still falling. The housing bust weighs heavily on consumers making them more reluctant to spend. Innovative ways to unleash housing are needed.

Looks like the world remains in a bad shape. It is also a dangerous place with growing uncertainty, high volatility and increasing social unrest. Europe in particular is in a high risk gamble. I worry European politicians may learn the hard way in trying to outsmart the markets.

> Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my

Why ‘Occupy Wall Street’? Job growth fails to dent US unemployment rate!

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Why ‘Occupy Wall Street’?

 

Steve Denning, Contributor

RADICAL MANAGEMENT: Rethinking leadership and innovation

Image by AFP/Getty Images via @daylife

For people wondering why the ‘Occupy Wall Street’ movement is spreading across the country, an article earlier this year in  Bloomberg by Danielle Kucera and Christine Harper sheds some light. It discusses the continuing disconnect between the amount of pay in finance and the value generated to society:

Wall Street traders still earn much more than brain surgeons. An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated.

After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets.

“I don’t think it’s healthy for the economy to be this skewed,” said Stephen Rose, a professor at Georgetown University’s Center on Education and the Workforce. “I believe there’s some sort of connection between value added to the economy and pay. Everyone is losing sight of any fundamentals.”

Yet many bankers think they’re not paid enough

For those in middle class finding it difficult to make ends meet or for recent college graduates struggling to find a decent job, the pay numbers are truly eye-popping.

In the first three quarters of 2010, eight of Wall Street’s largest banks set aside about $130 billion for compensation and benefits, enough to pay each worker more than $121,000 for nine months of work. That’s up from the same period four years earlier — before the crisis — when the lenders set aside a total of $113 billion, or enough to pay an average $114,400 to each worker.

Calculated in dollars, average pay per employee has risen at Bank of America Corp. [BAC] Citigroup Inc. [C], Credit Suisse Group AG [CSGN] and UBS AG [UBS]and declined at Deutsche Bank AG [DBK], Goldman Sachs Group Inc. [GS], JPMorgan Chase [JPM] and Morgan Stanley [MS] since the same period in 2006.

“The bottom line is all the people in investment  banking understand that they work harder and are under more stress,” said Jeanne Branthover, a managing director at Wall Street recruitment firm Boyden Global Executive Search. “Many don’t think they’re paid enough.”

What is the basis for these financial rewards?

John Cassidy, writing in The New Yorker in an article entitled What Good Is Wall Street? asked a banker how he and his co-workers felt about making loads of money when much of the country was struggling.

“A lot of people don’t care about it or think about it,” he replied. “They say, it’s a market, it’s still open, and I’ll sell my labor for as much as I can until nobody wants to buy it.” But you, I asked, what do you think? “I tend to think we do create value,” he said. “It’s not a productive value in a very visible sense, like finding a cure for cancer. We’re middlemen. We bring together two sides of a deal. That’s not a very elevated thing, but I can’t think of any elevated economy that doesn’t need middlemen.”

The [banker] is right: Wall Street bankers create some economic value. But do they create enough of it to justify the rewards they reap? In the first nine months of 2010, the big six banks cleared more than thirty-five billion dollars in profits.

It wasn’t always this way

It hasn’t always been this way. Cassidy notes that from around 1940 to 1980 things were different.

Economic historians refer to [this as] a period of “financial repression,” during which regulators and policymakers, reflecting public suspicion of Wall Street, restrained the growth of the banking sector. They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.

Banking of course wasn’t the only factor. This was a period when oligopolies were in charge of the marketplace and could charge pretty much what they wanted, even for products that weren’t particularly good. So they could afford to offer life-time employment with good salaries.

Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence?

For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it. Even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street because what happens there, befuddling as it may be to outsiders, is essential to the country’s prosperity. Finally, dissidents are questioning this narrative. “There was a presumption that financial innovation is socially valuable,” [a critic] said to me. “The first thing I discovered was that it wasn’t backed by any empirical evidence. There’s almost none.”

True, but banking wasn’t the only factor. This was also a period in which the big companies that used to be in charge of the marketplace, found themselves struggling to cope with global competition and the new power of the customer and could no longer offer life-time employment at high salaries.

One might have hoped that the banks would have provided an element of stability in a turbulent period. As it turned out, the net effect of the financial sector has been to aggravate the instability.

Slum lords in pin-striped suits

The case for bankers, if any, rests on the argument that their activities grow the economic pie. However, most of the income comes from extracting rents in a zero-sum game. Cassidy quotes Gerald Epstein, an economist at the University of Massachusetts:

These types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.

Cassidy’s overall take? He cites with approval Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, who has described much of what happens on Wall Street and in other financial centers as “socially useless activity”:

Many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.

_____________

Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).

Follow Steve Denning on Twitter @stevedenning

And join the Jossey-Bass online conference webinar”: Sep 22-Oct 20, 2011. My session is on Thursday October 13 at noon ET. To register, go here and use discount code

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Job growth fails to dent US unemployment rate

Economy created 103,000 new jobs in September, but unemployment remained high at 9.1 per cent.

Al Jazeera and agencies

Frustrated with the ailing economy, protesters have staged #Occupy rallies in over 500 American cities [Getty]

The US economy created 103,000 jobs in September, the labour department has reported, a much stronger figure than expected but not enough to lower the unemployment rate.

Economists had expected Friday’s report to say that the economy only replaced 60,000 jobs in September.

The private sector accounted for all of the the gains, which were boosted in part by the return of 45,000 telecommunications workers who had been on strike in August.

“Job gains occurred in professional and business services, health care, and construction. Government employment continued to trend down,” the labour department said.

Meanwhile, the unemployment rate was still stagnant at 9.1 per cent for the third straight month in September.

For African-Americans, the unemployment rate is 16.7 per cent – the highest it has been in 27 years and double the rate of unemployed whites.

Al Jazeera’s Patty Culhane, reporting from Washington, explained that the number of unemployed and under-employed Americans is in the millions.

“There are still 14 million Americans who aren’t working today, even though they’d love to have a job,” she said.

“Beyond that, there are something like six million that have been unemployed for more than six months. That is a unique feature of this recession – how long people are staying out of work.”

She said there are another nine million Americans “who are working part-time jobs because, quite frankly, that’s the only job they can find”.

Growing frustration

With the underlying data still dire, Friday’s news is unlikely to dampen President Barack Obama’s calls for congress to pass a $447bn jobs bill- which he says could create 1.9mn new jobs. 

In depth coverage of US financial crisis protests

He said on Thursday said that America’s growing #Occupy protest movement reflected people’s frustration with the American financial system and the country’s declining economy.

“I think people are frustrated, and the protesters are giving voice to a more broad-based frustration about how our financial system works,” he said at the White House.

Republicans, who oppose Obama’s jobs bill, said the latest jobs figures were another indication of Obama’s mismanagement of the economy.

“There were far too few jobs created this month, which shows the need to spend less time making campaign style speeches and more time trying to work together to identify policies that we both can agree will create an environment for job creation,” Eric Cantor, the House of Representatives majority, leader said.

Al Jazeera’s Culhane said that Obama is playing “campaign politics” by “going all around the country saying blame the republicans”.

But, she points out, “no US president in recent history has ever won a second term with unemployment anything close to this high”.

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