The economic downturn is forcing a return to a culture of thrift that many economists say could last well beyond the inevitable recovery.
This is not because Americans have suddenly become more financially virtuous or have learned the error of their free-spending ways. Instead, these experts say, Americans may have no choice but to continue pinching pennies.
This shift back to thrift may seem to be a healthy change for a consumer class known for spending more than it earns, but there is a downside: American businesses have become so dependent on consumer spending that any pullback sends ripples through the economy.
Fearful of job losses and anxious over housing and stock declines, Americans are squirreling away more of their paychecks than they were before the recession. In the last year, the savings rate — the percentage of after-tax income that people do not spend — has risen to above 4 percent, from virtually zero.
This happens in nearly every recession, and the effect is usually fleeting. Once the economy recovers, Americans revert to more spending and less saving. Over the last 30 years, the savings rate has fluctuated from over 14 percent in the 1970s to negative 2.7 percent in 2005, meaning Americans were spending more than they made.
This time is expected to be different, because the forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered by the financial crisis that spun the economy into recession.
“I expect that the savings rate will end up at the end of this recession higher than it was going into it,” said Jonathan A. Parker, a finance professor at the Kellogg School of Management at Northwestern University. “It’s hard to see how it wouldn’t.”
Sustained increases in household saving would cause a difficult period of restructuring for the American economy, which has become increasingly driven by consumer spending. Such spending makes up about 70 percent of the nation’s gross domestic product.
Add the decline in consumer spending to the planned expiration of government stimulus spending, and a painful readjustment in demand for goods and services could occur, economists say. The effect would be felt here and abroad, as many developing economies also depend on America’s big-spending ways.
“If Americans cut back, as they almost have to do, what will replace that source of demand?” asked William G. Gale, director of the economic studies program at the Brookings Institution, a liberal-centrist policy research group.
“The easy answer is the Chinese consumer,” he said, but unlike their more prodigal American counterparts, the Chinese save about a quarter of what they earn. “We may cut back faster than they expand into that space, so there might be a lull.”
Why might the higher savings rate outlast the recession?
Social critics like David Blankenhorn, president of the Institute for American Values, hope that introspection about America’s “culture of consumption” will awaken Americans to the virtues of thrift, just as the Great Depression reset American financial values for a generation.
But many economists believe consumers will change their habits for more pragmatic reasons.
Consumers have lost a huge chunk of their net worth, in the housing bust and the stock market, and to resuscitate their retirement accounts or children’s college funds they will have to channel more of their paychecks toward saving — unless those asset markets soar again.
Forms of easy credit that were once prevalent, like mortgages with no down payments, also may not return, either because the government regulates them out of existence or because banks dare not venture back into such risky lending. That means if Americans want to buy a house, they will have to save more and borrow less.
Whether for reasons moral or otherwise, consumers are already thinking a bit differently about their long-term budgets. A recent Pew Research Center survey found that many more Americans had begun regarding products like microwave ovens as luxuries rather than necessities.
Such attitudes suggest that retailers will have to change their marketing strategies, said J. Walker Smith, executive vice chairman of the Futures Company, a marketing and research consultancy.
“People are realizing they can’t accumulate everything they want anymore, and they’ll have to prioritize more,” he said. “That may be hard for a lot of brands — figuring out not only how to get considered by consumers, but put at the top of their list.”
Consumers planning big purchases are also anticipating that their borrowing options will remain limited.
Last year, Aryn Kennedy and her husband, Brian Ewing, who live in Los Angeles, spent “every dollar” they earned on debt repayment and living expenses. When local housing prices began to fall, Mr. Ewing toyed with the idea of a low-down-payment mortgage.
“By the time we really started looking at buying, I knew from reading blogs that most loans like that were not really available anymore, since lenders didn’t want to take risks,” said Ms. Kennedy, who said she was suspicious of such offers anyhow.
Since then, through “windfalls” like a salary increase for Mr. Ewing, and by cutting expenses for clothing, entertainment and other items, Ms. Kennedy says the couple has begun saving about 25 percent of their take-home pay in anticipation of making a traditional down payment of 20 percent on a house.
Even after they buy, Ms. Kennedy said, the couple plans to keep saving 25 percent of their pay. A recent Gallup poll found that most Americans who have recently increased their savings believe their budget adjustments represent a “new, normal pattern for years ahead.”
Despite the immediate jolt to the economy, more personal saving would be a positive step in the long run, analysts say. More saving leads to more investment, which promotes economic growth, which leads to better living standards.
At the family level, social critics, economists and even many consumers seem to agree that a forced financial conservatism may be for the better.
Kenny Tran of Santa Ana, Calif., for example, said he had been nervous about saving enough to buy his first house — he and his fiancé have been setting aside about $800 a month for the last year and a half — but he has no regrets about not buying a home when credit was looser and saving was less of a priority.
“A couple years ago it would have been easier for us to get a loan,” despite the fact that the couple’s combined income was lower, Mr. Tran said. “But if we would have gotten a loan, and a house, a couple years ago, we’d probably have ended up in foreclosure now.”
Tuesday, 12 May 2009
Jacqui Smith's secret plan to carry on snooping
The home secretary has vowed to scrap a ‘big brother’ database, but a bid to spy on us all continues
David Leppard and Chris Williams
SPY chiefs are pressing ahead with secret plans to monitor all internet use and telephone calls in Britain despite an announcement by Jacqui Smith, the home secretary, of a ministerial climbdown over public surveillance.
GCHQ, the government’s eavesdropping centre, is developing classified technology to intercept and monitor all e-mails, website visits and social networking sessions in Britain. The agency will also be able to track telephone calls made over the internet, as well as all phone calls to land lines and mobiles.
The £1 billion snooping project — called Mastering the Internet (MTI) — will rely on thousands of “black box” probes being covertly inserted across online infrastructure.
The top-secret programme began to be implemented last year, but its existence has been inadvertently disclosed through a GCHQ job advertisement carried in the computer trade press.
Last week, in what appeared to be a concession to privacy campaigners, Smith announced that she was ditching controversial plans for a single “big brother” database to store centrally all communications data in Britain.
“The government recognised the privacy implications of the move [and] therefore does not propose to pursue this move,” she said.
Grabbing favourable headlines, Smith announced that up to £2 billion of public money would instead be spent helping private internet and telephone companies to retain information for up to 12 months in separate databases.
However, she failed to mention that substantial additional sums — amounting to more than £1 billion over three years — had already been allocated to GCHQ for its MTI programme.
Shami Chakrabarti, director of Liberty, said Smith’s announcement appeared to be a “smokescreen”.
“We opposed the big brother database because it gave the state direct access to everybody’s communications. But this network of black boxes achieves the same thing via the back door,” Chakrabarti said.
Informed sources have revealed that a £200m contract has been awarded to Lockheed Martin, the American defence giant.
A second contract has been given to Detica, the British IT firm which has close ties to the intelligence agencies.
The sources said Iain Lobban, the GCHQ director, is overseeing the construction of a massive new complex inside the agency’s “doughnut” headquarters on the outskirts of Cheltenham, Gloucestershire.
A huge room of super-computers will help the agency to monitor — and record — data passing through black-box probes placed at critical traffic junctions with internet service providers and telephone companies, allowing GCHQ to spy at will.
An industry insider, who has been briefed on GCHQ’s plans, said he could not discuss the programme because he had signed the Official Secrets Act. However, he admitted that the project would mark a step change in the agency’s powers of surveillance.
At the moment the agency is able to use probes to monitor the content of calls and e-mails sent by specific individuals who are the subject of police or security service investigations.
Every interception must be authorised by a warrant signed by the home secretary or a minister of equivalent rank.
The new GCHQ internet-monitoring network will shift the focus of the surveillance state away from a few hundred targeted people to everyone in the UK.
“Although the paper [work] does not say it, its clear implication is that those kinds of probes should be extended to cover the entire population for the purposes of monitoring communications data,” said the industry source.
GCHQ placed an advertisement in the specialist IT press for a head of major contracts to be given “operational responsibility for the ‘Mastering the Internet’ (MTI) contract”. The senior official, to be paid an annual salary of up to £100,000, would lead the procurement of the hardware and the analysis tools needed to build and run the system.
Ministers have said they do not intend to snoop on the actual content of e-mails or telephone calls. The monitoring will instead focus on who an individual is communicating with or which websites and chat rooms they are visiting.
Advocates of the black-box system say it is essential if the authorities are to keep pace with the communications revolution. They say terrorists are stateless, highly mobile and their communications are difficult to detect among the billions of pieces of data passing through the internet.
Last year about 14% of telephone calls were made using voice over internet protocol (Voip) systems such as Skype. A report by a group of privy counsellors predicts that most calls will be made via the internet within five years. GCHQ said it did not want to discuss how the data it gathered would be used.
David Leppard and Chris Williams
SPY chiefs are pressing ahead with secret plans to monitor all internet use and telephone calls in Britain despite an announcement by Jacqui Smith, the home secretary, of a ministerial climbdown over public surveillance.
GCHQ, the government’s eavesdropping centre, is developing classified technology to intercept and monitor all e-mails, website visits and social networking sessions in Britain. The agency will also be able to track telephone calls made over the internet, as well as all phone calls to land lines and mobiles.
The £1 billion snooping project — called Mastering the Internet (MTI) — will rely on thousands of “black box” probes being covertly inserted across online infrastructure.
The top-secret programme began to be implemented last year, but its existence has been inadvertently disclosed through a GCHQ job advertisement carried in the computer trade press.
Last week, in what appeared to be a concession to privacy campaigners, Smith announced that she was ditching controversial plans for a single “big brother” database to store centrally all communications data in Britain.
“The government recognised the privacy implications of the move [and] therefore does not propose to pursue this move,” she said.
Grabbing favourable headlines, Smith announced that up to £2 billion of public money would instead be spent helping private internet and telephone companies to retain information for up to 12 months in separate databases.
However, she failed to mention that substantial additional sums — amounting to more than £1 billion over three years — had already been allocated to GCHQ for its MTI programme.
Shami Chakrabarti, director of Liberty, said Smith’s announcement appeared to be a “smokescreen”.
“We opposed the big brother database because it gave the state direct access to everybody’s communications. But this network of black boxes achieves the same thing via the back door,” Chakrabarti said.
Informed sources have revealed that a £200m contract has been awarded to Lockheed Martin, the American defence giant.
A second contract has been given to Detica, the British IT firm which has close ties to the intelligence agencies.
The sources said Iain Lobban, the GCHQ director, is overseeing the construction of a massive new complex inside the agency’s “doughnut” headquarters on the outskirts of Cheltenham, Gloucestershire.
A huge room of super-computers will help the agency to monitor — and record — data passing through black-box probes placed at critical traffic junctions with internet service providers and telephone companies, allowing GCHQ to spy at will.
An industry insider, who has been briefed on GCHQ’s plans, said he could not discuss the programme because he had signed the Official Secrets Act. However, he admitted that the project would mark a step change in the agency’s powers of surveillance.
At the moment the agency is able to use probes to monitor the content of calls and e-mails sent by specific individuals who are the subject of police or security service investigations.
Every interception must be authorised by a warrant signed by the home secretary or a minister of equivalent rank.
The new GCHQ internet-monitoring network will shift the focus of the surveillance state away from a few hundred targeted people to everyone in the UK.
“Although the paper [work] does not say it, its clear implication is that those kinds of probes should be extended to cover the entire population for the purposes of monitoring communications data,” said the industry source.
GCHQ placed an advertisement in the specialist IT press for a head of major contracts to be given “operational responsibility for the ‘Mastering the Internet’ (MTI) contract”. The senior official, to be paid an annual salary of up to £100,000, would lead the procurement of the hardware and the analysis tools needed to build and run the system.
Ministers have said they do not intend to snoop on the actual content of e-mails or telephone calls. The monitoring will instead focus on who an individual is communicating with or which websites and chat rooms they are visiting.
Advocates of the black-box system say it is essential if the authorities are to keep pace with the communications revolution. They say terrorists are stateless, highly mobile and their communications are difficult to detect among the billions of pieces of data passing through the internet.
Last year about 14% of telephone calls were made using voice over internet protocol (Voip) systems such as Skype. A report by a group of privy counsellors predicts that most calls will be made via the internet within five years. GCHQ said it did not want to discuss how the data it gathered would be used.
US soldier shoots dead five comrades in Iraq
A US soldier has shot dead five of his comrades at a military base in Baghdad today.
At least two others were wounded when the soldier opened fire at around 2pm local time at Camp Liberty, a sprawling installation next to the airport.
The CNN and MSNBC television networks reported that the soldier turned his gun on himself, but apparently he did not die.
“The shooter is a US soldier and he is in custody,” said Marine Corps Lieutenant Tom Garnett, a US military spokesman.
Related Links
* US soldier who raped Iraqi girl faces death
* Iraq security at risk in militia crackdown
* Mixed emotions as British end Iraq mission
A Pentagon official said that the incident was under investigation.
Earlier this month, two US soldiers were killed by a man wearing an Iraqi Army uniform at an Iraqi military training centre in northern Iraq.
Violence had dropped sharply in Iraq, but insurgent attacks continue. Last month 13 US troops died, including five who were killed in a suicide blast by a truck driver near the police headquarters in Mosul.
The US is due to withdraw combat troops from urban bases in less than two months' time. British forces withdrew from Basra in April, handing over to the US.
Today a senior Iraqi traffic police officer was killed on his way to work by gunmen with silenced pistols in two cars, who blocked off his route then pulled up alongside, riddling his car with bullets.
At least two others were wounded when the soldier opened fire at around 2pm local time at Camp Liberty, a sprawling installation next to the airport.
The CNN and MSNBC television networks reported that the soldier turned his gun on himself, but apparently he did not die.
“The shooter is a US soldier and he is in custody,” said Marine Corps Lieutenant Tom Garnett, a US military spokesman.
Related Links
* US soldier who raped Iraqi girl faces death
* Iraq security at risk in militia crackdown
* Mixed emotions as British end Iraq mission
A Pentagon official said that the incident was under investigation.
Earlier this month, two US soldiers were killed by a man wearing an Iraqi Army uniform at an Iraqi military training centre in northern Iraq.
Violence had dropped sharply in Iraq, but insurgent attacks continue. Last month 13 US troops died, including five who were killed in a suicide blast by a truck driver near the police headquarters in Mosul.
The US is due to withdraw combat troops from urban bases in less than two months' time. British forces withdrew from Basra in April, handing over to the US.
Today a senior Iraqi traffic police officer was killed on his way to work by gunmen with silenced pistols in two cars, who blocked off his route then pulled up alongside, riddling his car with bullets.
The Next Detainee Photo Scandal: Get Ready for Abu Ghraib, Act II
Are you ready for Abu Ghraib, Act II?
Five years ago, people around the world were sickened by photographs that surfaced showing U.S. troops abusing Iraqi inmates at Abu Ghraib prison in Baghdad. Act I resulted in an avalanche of congressional hearings, 15 Pentagon probes and courts-martial. More than 400 U.S. troops - but no senior officials - went to jail or were otherwise punished. Congress passed the Detainee Treatment Act to try to prevent future atrocities.
But now a new batch of photographs, perhaps hundreds of images, of prisoners being abused is about to be made public. It comes at a time when the debate over prisoner mistreatment is still roiling America's political and public conscience. The new photographs are being made public in a victory for the American Civil Liberties Union. And the Pentagon, after fighting, and losing, three federal court reviews of the matter, has waved the white flag and is now preparing to release the pictures. Some of the photographs are official; some, like the original Abu Ghraib collection, taken informally by soldiers. "We know this could make things tougher for our troops," a senior Pentagon official says, "but the court decisions really don't leave us with any other option." (See pictures of the aftershocks from the Abu Ghraib scandal.)
Two senior Senators on the Armed Services Committee beg to differ. Democrat Joe Lieberman of Connecticut and Republican Lindsey Graham of South Carolina have written to President Obama, urging him to fight the release. "We know that many terrorists captured in Iraq have told American interrogators that one of the reasons they decided to join the violent jihadist war against America was what they saw on al-Qaeda videos of abuse of detainees at Abu Ghraib," the pair wrote Obama May 6. "The release of these old photographs of past behavior that has now been clearly prohibited can serve no public good, but will empower al-Qaeda propaganda operations, hurt our country's image, and endanger our men and women in uniform." They have urged him to reverse the Pentagon's decision, which was made with the backing of the Justice Department, and, if necessary, appeal the case to the Supreme Court. (Read about the Army Field Manual.)
The ACLU maintains that only by releasing the photographs - collected during the Pentagon's various investigations and involving a half-dozen sites - can Americans determine for themselves how widespread, and sanctioned, such abuse was. "These photographs provide visual proof that prisoner abuse by U.S. personnel was not aberrational but widespread, reaching far beyond the walls of Abu Ghraib," said Amrit Singh, an ACLU lawyer.
So the debate boils down to what's worse: the outrageous behavior by some American troops, or the prospect of angering Muslims that could endanger U.S. troops in southwest Asia. The question is especially pointed just as U.S. troop reinforcements, ordered up by President Obama, are now beginning to arrive in Afghanistan to battle Islamic Taliban forces. At the same time, his Administration is trying to keep neighboring Pakistan, and its nuclear weapons, from falling under the control of Muslim militants.
If Obama accedes to the Senators' request, he'll be accused of covering up war crimes by the Bush Administration. If he allows the photographs to be released, he'll be "needlessly endangering the lives of our brave troops," as David Rehbein, national commander of the American Legion, put it in Friday's Wall Street Journal. Pentagon officials expect Obama will allow the pictures' release. According to the deal struck between the Pentagon and the ACLU, that should happen by May 28, just in time for Memorial Day.
Five years ago, people around the world were sickened by photographs that surfaced showing U.S. troops abusing Iraqi inmates at Abu Ghraib prison in Baghdad. Act I resulted in an avalanche of congressional hearings, 15 Pentagon probes and courts-martial. More than 400 U.S. troops - but no senior officials - went to jail or were otherwise punished. Congress passed the Detainee Treatment Act to try to prevent future atrocities.
But now a new batch of photographs, perhaps hundreds of images, of prisoners being abused is about to be made public. It comes at a time when the debate over prisoner mistreatment is still roiling America's political and public conscience. The new photographs are being made public in a victory for the American Civil Liberties Union. And the Pentagon, after fighting, and losing, three federal court reviews of the matter, has waved the white flag and is now preparing to release the pictures. Some of the photographs are official; some, like the original Abu Ghraib collection, taken informally by soldiers. "We know this could make things tougher for our troops," a senior Pentagon official says, "but the court decisions really don't leave us with any other option." (See pictures of the aftershocks from the Abu Ghraib scandal.)
Two senior Senators on the Armed Services Committee beg to differ. Democrat Joe Lieberman of Connecticut and Republican Lindsey Graham of South Carolina have written to President Obama, urging him to fight the release. "We know that many terrorists captured in Iraq have told American interrogators that one of the reasons they decided to join the violent jihadist war against America was what they saw on al-Qaeda videos of abuse of detainees at Abu Ghraib," the pair wrote Obama May 6. "The release of these old photographs of past behavior that has now been clearly prohibited can serve no public good, but will empower al-Qaeda propaganda operations, hurt our country's image, and endanger our men and women in uniform." They have urged him to reverse the Pentagon's decision, which was made with the backing of the Justice Department, and, if necessary, appeal the case to the Supreme Court. (Read about the Army Field Manual.)
The ACLU maintains that only by releasing the photographs - collected during the Pentagon's various investigations and involving a half-dozen sites - can Americans determine for themselves how widespread, and sanctioned, such abuse was. "These photographs provide visual proof that prisoner abuse by U.S. personnel was not aberrational but widespread, reaching far beyond the walls of Abu Ghraib," said Amrit Singh, an ACLU lawyer.
So the debate boils down to what's worse: the outrageous behavior by some American troops, or the prospect of angering Muslims that could endanger U.S. troops in southwest Asia. The question is especially pointed just as U.S. troop reinforcements, ordered up by President Obama, are now beginning to arrive in Afghanistan to battle Islamic Taliban forces. At the same time, his Administration is trying to keep neighboring Pakistan, and its nuclear weapons, from falling under the control of Muslim militants.
If Obama accedes to the Senators' request, he'll be accused of covering up war crimes by the Bush Administration. If he allows the photographs to be released, he'll be "needlessly endangering the lives of our brave troops," as David Rehbein, national commander of the American Legion, put it in Friday's Wall Street Journal. Pentagon officials expect Obama will allow the pictures' release. According to the deal struck between the Pentagon and the ACLU, that should happen by May 28, just in time for Memorial Day.
Spanish discontent as soup kitchens spring up
Hundreds of thousands of Spaniards are facing ruin as bankruptcies and unemployment rise and the economy heads for meltdown
Graham Keeley in Madrid
Faced with losing his home if he cannot find €6,000 (£5,350) by the end of this week, Javier Martínez has resorted to desperate measures: the unemployed father-of-four is selling his own flat and throwing in another, free.
The three-bedroom apartment in Tarazona, near Zaragoza in eastern Spain, is on the market for only €57,000. The former construction project manager is including a one-bedroom flat that he had been letting in an attempt to entice a buyer.
“I need to find the cash by May 15 or I may be declared bankrupt. I must provide for my children,” Mr Martínez said. He is one of hundreds of thousands of Spaniards facing ruin as Spain's economy heads for meltdown.
The number of Spaniards unable to pay their debts has risen by 26 per cent to 2.7million in 2009, compared with the first four months of last year. During the same period 232,000 companies joined the list of bad debtors, a 67 per cent rise, according to AsNef-Equifax, a Spanish credit agency.
Related Links
* Economic clouds gather as Spain faces recession
* Travel crisis: Britons abandon Spanish costas
Bankruptcies are up 44 per cent in the first quarter this year against the final quarter of 2008, with the worst-hit sectors being services and construction.
Unemployment is running at 17.4 per cent, the highest in Europe, with more than four million on the dole. The European Union predicts that this figure will rise to 20 per cent by next year. Some Spaniards have to accept soup-kitchen meals to feed their families.
Spain, after a decade of continuous growth, is now the sick man of Europe - and discontent is growing.
As 40,000 people took to the streets across the country for May Day demonstrations, Ignacio Fernández Toxo, leader of the CCOO union, threatened a general strike if the Government accepted demands from business to make it cheaper for companies to hire and fire workers.
Last week, unemployed protesters tried to storm the Madrid regional assembly, while jobless pickets closed a shipyard in the Basque Country in a protest at “cheap” Romanian and Portuguese workers - an echo of similar demonstrations in Britain against foreign workers in February.
Spain's Socialist Government, aware that its popularity is falling before European parliamentary elections next month, argues that unemployment is reaching a plateau, pointing out that the number out of work in April rose by 39,478, the smallest increase in nine months.
José Luis Rodríguez Zapatero, the Spanish Prime Minister, has attempted to blunt the impact of the recession with a €33 billion stimulus. It is being spent partly on public works projects, to give temporary work to cut dole queues - but some dismiss these as “sticking plaster” jobs that do not address the problems at the heart of the Spanish economy.
Others defend them, saying that they keep many homeowners from defaulting on mortgages.
Graham Keeley in Madrid
Faced with losing his home if he cannot find €6,000 (£5,350) by the end of this week, Javier Martínez has resorted to desperate measures: the unemployed father-of-four is selling his own flat and throwing in another, free.
The three-bedroom apartment in Tarazona, near Zaragoza in eastern Spain, is on the market for only €57,000. The former construction project manager is including a one-bedroom flat that he had been letting in an attempt to entice a buyer.
“I need to find the cash by May 15 or I may be declared bankrupt. I must provide for my children,” Mr Martínez said. He is one of hundreds of thousands of Spaniards facing ruin as Spain's economy heads for meltdown.
The number of Spaniards unable to pay their debts has risen by 26 per cent to 2.7million in 2009, compared with the first four months of last year. During the same period 232,000 companies joined the list of bad debtors, a 67 per cent rise, according to AsNef-Equifax, a Spanish credit agency.
Related Links
* Economic clouds gather as Spain faces recession
* Travel crisis: Britons abandon Spanish costas
Bankruptcies are up 44 per cent in the first quarter this year against the final quarter of 2008, with the worst-hit sectors being services and construction.
Unemployment is running at 17.4 per cent, the highest in Europe, with more than four million on the dole. The European Union predicts that this figure will rise to 20 per cent by next year. Some Spaniards have to accept soup-kitchen meals to feed their families.
Spain, after a decade of continuous growth, is now the sick man of Europe - and discontent is growing.
As 40,000 people took to the streets across the country for May Day demonstrations, Ignacio Fernández Toxo, leader of the CCOO union, threatened a general strike if the Government accepted demands from business to make it cheaper for companies to hire and fire workers.
Last week, unemployed protesters tried to storm the Madrid regional assembly, while jobless pickets closed a shipyard in the Basque Country in a protest at “cheap” Romanian and Portuguese workers - an echo of similar demonstrations in Britain against foreign workers in February.
Spain's Socialist Government, aware that its popularity is falling before European parliamentary elections next month, argues that unemployment is reaching a plateau, pointing out that the number out of work in April rose by 39,478, the smallest increase in nine months.
José Luis Rodríguez Zapatero, the Spanish Prime Minister, has attempted to blunt the impact of the recession with a €33 billion stimulus. It is being spent partly on public works projects, to give temporary work to cut dole queues - but some dismiss these as “sticking plaster” jobs that do not address the problems at the heart of the Spanish economy.
Others defend them, saying that they keep many homeowners from defaulting on mortgages.
The Freighter Graveyards of South Asia
When times were good, shipping companies ordered huge numbers of new steel behemoths to ply the oceans. Now though, many of those same container lines are eager to get rid of their ships. The scrapping business in South Asia is booming.
The sandy beaches north of Chittagong in Bangladesh look like giant steel graveyards. Ships line the banks ready for dismantling. Others are so far disassembled that their hulls are all that is left protuding morosely from the water, according to shipping industry journal Lloyd's List. All kinds of vessels get broken down here: bulk carriers, container ships, vehicle transporters and oil tankers.)
The wrecks are remnants of a disappearing world. Once they sailed the oceans as flagships of globalization. Now they're symbols of an order that threatens to sink with them.
The global economic and trade crisis is so severe that a growing number of ships, some larger than the Titanic, are being pulled from their routes and sent to scrap yards to be sold for parts. Freight and charter rates have fallen and regularly scheduled passenger lines are being cancelled. Those container ships that are still sailing can barely cover their costs. Over-capacity created in recent boom times has accelerated the trend toward scrapping ships.
Yet one boom replaces another. With shipping down, shipbreaking is the business of the hour. The shift began late last year and initially targeted ships with a combined load-carrying capacity of 10 million tons. Now the heavy rigs are being lined up too as they sit idly anchored in harbors around the world. Much of the scrapping happens in South Asia and with little regulation in place.
As the economy worsens the shipbreaking business improves. The best place to beach large ships is near Alang, in the southern part of the Indian state of Gujarat. Tides are high here, allowing the ships to run ashore under their own power. Once the tide is low and the hulls are out of the water, work begins of gutting and cutting up the ships.
It's a "non-stop boom," the Hindustan Times writes. Blowtorches hiss, steel windlasses screech, and sledgehammers pound along the 11 kilometer beach. Cranes remove the superstructures from the deck. A bulk freighter that until recently might have carried bauxite or grain disappears within 40 days.
A few years ago, when globalization was in full swing, few ships came near Alang. Many of the slots -- as the dismantling sites are now known -- were closed due to a lack of demand. Now millions of dollars are being earned from the scrap metal.
Nobody knows this better than Indian-born Anil Sharma, a cash-buyer who promotes the bizarre boom all the way from Maryland in the US. In the jargon of the industry, a cash-buyer acquires ships from the shipping companies who want to get rid of their burdensome vessels. He then sells them to the scrappers. The scrap metal lands in small mills in places such as Chittagong or Karatchi to be turned into steel for the construction industry. Some parts may reemerge as hinges for shipping containers whose own demand is falling in the global downturn.
More than 1,000 Ships Face Scrapping
Anil Sharma's company, Global Marketing Systems, has grown into the world's largest buyer of scrap ships. He manages about a third of all ships doomed for scrapping. And new candidates show up almost daily. "I believe there will be more than 1,000 additional ships that will be scrapped," Sharma predicted at a convention in London last February. "The next two years will bring the liveliest business there's been so far," the Onassis of scrap told Lloyd's List.
Sharma's travels of the world's scrapping centers have taken him to the coast west of Karachi in Pakistan, where ships loiter in gigantic, watery parking lots. In some places the ships are stacked three vessels high on top of one another, he says. It sounds improbable but it fits the image of Alang, where more than 125 ships have landed between last December and March -- almost as many as in 2007 and 2008 combined.
The shipping companies must dump their old freighters to tackle a dilemma. During the global economic boom they ordered new vessels non-stop, creating over capacity in much the same way as that troubling the car sector. In cases where orders can't be cancelled, new ships are coming off the conveyer belts just as demand declines. It makes the need for selling old ships as scrap all the more pressing.
Nearly 90 percent of the world's shipbreaking happens in India, Pakistan and Bangladesh. Workers drag at steel plates on long ropes; electric cables, pipes, boilers, hatchways, and generators litter the coast. As does asbestos and poisonous sealing compounds.
Those parts that can't be smelted into steel get hawked along the road to Alang on a new kind of bazaar, Reuters reports. On sale here are doors, tables and sofas, carpeting, dishes, refrigerators, air conditioners and even a captain's bathtub.
Ships have been landing at the Bay of Bengal and in the Arabian Sea for cheap recycling for the past three decades. Shipyards in Korea, Taiwan, Japan and Europe prefer to build or repair ships in their dry docks, leaving the un-glamorous scrapping to others.
"I Live in Fear of Accidents"
A worker at Pakistan's Gadani beach earns 280 rupees -- less than three euros -- a day. Still, the scrapping regions do benefit from the industry. A country with few natural resources such as Bangladesh can make good use of scrap metal, particularly since producing its own steel from iron ore would be costly and time-consuming.
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And ship scrapping in South Asia is about to become more strictly regulated thanks to new guidelines penned by the UN's International Maritime Organization in London. The deal foresees a register of dangerous substances contained in ships and demands that scrappers lay out a recycling plan. It also stipulates that ships be inspected by experts before their final voyage to scrapyards.
The new rules are expected to be approved during a meeting next Monday in Hong Kong. But even if approved, it will take years for the nations involved to ratify and implement the rules, experts warn. One exception could be Bangladesh, where a court recently ruled that shipbreaking must become more environmentally friendly.
Until such changes arrive, Chittagong scrap yard worker Omar Faruq will likely continue cutting up steel plates from the ships as he does every day. He ripped open his shin on a sharp edge of scrap last August and the wound required stitches, he told a reporter from the AFP. Others have been much more seriously injured at the shipbreaking yards -- or even killed. "I live in fear of accidents like that," Faruq said at the time. "But I'm even more afraid of not having any money if I can't get to work."
The sandy beaches north of Chittagong in Bangladesh look like giant steel graveyards. Ships line the banks ready for dismantling. Others are so far disassembled that their hulls are all that is left protuding morosely from the water, according to shipping industry journal Lloyd's List. All kinds of vessels get broken down here: bulk carriers, container ships, vehicle transporters and oil tankers.)
The wrecks are remnants of a disappearing world. Once they sailed the oceans as flagships of globalization. Now they're symbols of an order that threatens to sink with them.
The global economic and trade crisis is so severe that a growing number of ships, some larger than the Titanic, are being pulled from their routes and sent to scrap yards to be sold for parts. Freight and charter rates have fallen and regularly scheduled passenger lines are being cancelled. Those container ships that are still sailing can barely cover their costs. Over-capacity created in recent boom times has accelerated the trend toward scrapping ships.
Yet one boom replaces another. With shipping down, shipbreaking is the business of the hour. The shift began late last year and initially targeted ships with a combined load-carrying capacity of 10 million tons. Now the heavy rigs are being lined up too as they sit idly anchored in harbors around the world. Much of the scrapping happens in South Asia and with little regulation in place.
As the economy worsens the shipbreaking business improves. The best place to beach large ships is near Alang, in the southern part of the Indian state of Gujarat. Tides are high here, allowing the ships to run ashore under their own power. Once the tide is low and the hulls are out of the water, work begins of gutting and cutting up the ships.
It's a "non-stop boom," the Hindustan Times writes. Blowtorches hiss, steel windlasses screech, and sledgehammers pound along the 11 kilometer beach. Cranes remove the superstructures from the deck. A bulk freighter that until recently might have carried bauxite or grain disappears within 40 days.
A few years ago, when globalization was in full swing, few ships came near Alang. Many of the slots -- as the dismantling sites are now known -- were closed due to a lack of demand. Now millions of dollars are being earned from the scrap metal.
Nobody knows this better than Indian-born Anil Sharma, a cash-buyer who promotes the bizarre boom all the way from Maryland in the US. In the jargon of the industry, a cash-buyer acquires ships from the shipping companies who want to get rid of their burdensome vessels. He then sells them to the scrappers. The scrap metal lands in small mills in places such as Chittagong or Karatchi to be turned into steel for the construction industry. Some parts may reemerge as hinges for shipping containers whose own demand is falling in the global downturn.
More than 1,000 Ships Face Scrapping
Anil Sharma's company, Global Marketing Systems, has grown into the world's largest buyer of scrap ships. He manages about a third of all ships doomed for scrapping. And new candidates show up almost daily. "I believe there will be more than 1,000 additional ships that will be scrapped," Sharma predicted at a convention in London last February. "The next two years will bring the liveliest business there's been so far," the Onassis of scrap told Lloyd's List.
Sharma's travels of the world's scrapping centers have taken him to the coast west of Karachi in Pakistan, where ships loiter in gigantic, watery parking lots. In some places the ships are stacked three vessels high on top of one another, he says. It sounds improbable but it fits the image of Alang, where more than 125 ships have landed between last December and March -- almost as many as in 2007 and 2008 combined.
The shipping companies must dump their old freighters to tackle a dilemma. During the global economic boom they ordered new vessels non-stop, creating over capacity in much the same way as that troubling the car sector. In cases where orders can't be cancelled, new ships are coming off the conveyer belts just as demand declines. It makes the need for selling old ships as scrap all the more pressing.
Nearly 90 percent of the world's shipbreaking happens in India, Pakistan and Bangladesh. Workers drag at steel plates on long ropes; electric cables, pipes, boilers, hatchways, and generators litter the coast. As does asbestos and poisonous sealing compounds.
Those parts that can't be smelted into steel get hawked along the road to Alang on a new kind of bazaar, Reuters reports. On sale here are doors, tables and sofas, carpeting, dishes, refrigerators, air conditioners and even a captain's bathtub.
Ships have been landing at the Bay of Bengal and in the Arabian Sea for cheap recycling for the past three decades. Shipyards in Korea, Taiwan, Japan and Europe prefer to build or repair ships in their dry docks, leaving the un-glamorous scrapping to others.
"I Live in Fear of Accidents"
A worker at Pakistan's Gadani beach earns 280 rupees -- less than three euros -- a day. Still, the scrapping regions do benefit from the industry. A country with few natural resources such as Bangladesh can make good use of scrap metal, particularly since producing its own steel from iron ore would be costly and time-consuming.
NEWSLETTER
Sign up for Spiegel Online's daily newsletter and get the best of Der Spiegel's and Spiegel Online's international coverage in your In- Box everyday.
And ship scrapping in South Asia is about to become more strictly regulated thanks to new guidelines penned by the UN's International Maritime Organization in London. The deal foresees a register of dangerous substances contained in ships and demands that scrappers lay out a recycling plan. It also stipulates that ships be inspected by experts before their final voyage to scrapyards.
The new rules are expected to be approved during a meeting next Monday in Hong Kong. But even if approved, it will take years for the nations involved to ratify and implement the rules, experts warn. One exception could be Bangladesh, where a court recently ruled that shipbreaking must become more environmentally friendly.
Until such changes arrive, Chittagong scrap yard worker Omar Faruq will likely continue cutting up steel plates from the ships as he does every day. He ripped open his shin on a sharp edge of scrap last August and the wound required stitches, he told a reporter from the AFP. Others have been much more seriously injured at the shipbreaking yards -- or even killed. "I live in fear of accidents like that," Faruq said at the time. "But I'm even more afraid of not having any money if I can't get to work."
Snipping Credit Lines for Small Businesses
JPMorgan Chase and others are shoring up balance sheets by reducing or eliminating these financial lifelines to entrepreneurs
For small business owners, a line of credit can be a lifesaver, giving them a buffer against cash-flow problems and enabling them to handle regular expenses such as payroll. But beginning in March, according to documents obtained by BusinessWeek, JPMorgan Chase (JPM) suspended credit lines for a large number of business owners. According to someone familiar with the matter, the move affected thousands of businesses. They had been clients of Washington Mutual before Chase bought the ailing bank in September 2008. The documents show that Chase tasked a special group inside the bank with responding to inquiries from borrowers.
The bank can expect plenty of those, at least partly because in many cases the businesses whose lines were cut had not missed loan payments. Instead, their credit score or their financials had deteriorated, and credit-line agreements typically give banks the right to change the terms of the line if there is a change in the borrower's financial situation. In this case, the changes in the terms are dramatic. If business owners can't convince Chase of their creditworthiness, they have three options: 1) pay off the balance in full; 2) agree to a conversion of the line of credit into a term loan; or 3) go into default.
Business owners who accept the conversion to a term loan will likely see dramatically higher monthly payments. A business owner may be able to keep a line of credit open with interest-only payments, but term loans typically have to be paid off—interest and principal—within three to five years. Plus, they may carry higher interest rates.
Aggressive Review
Thomas Kelly, a spokesman for Chase, says the bank continually reviews the lines of credit in its portfolio. "We contact customers if we determine there has been an adverse change in their financial condition or credit history. We may eliminate the unused portion of their credit line and set up a standard repayment plan." Kelly says the bank encourages customers to contact Chase if they want the decision reevaluated or if they want to provide information such as their federal tax return. And he says the bank has assigned staff to work with customers who want such decisions reexamined.
Donald Raftery, managing director at Greenwich Associates, a Stamford (Conn.)-based financial-services consulting firm, says the banks, overwhelmed with problem loans, are "trying to take a very active approach on a broad segment of companies. There's no individual type of approach. [Small companies] feel like they're being treated like a number."
Mark Fitchett, the owner of $300,000 music school operator L&M Music in Long Beach, Calif., would certainly agree. He had been a Washington Mutual customer before the bank was acquired by Chase. He had four overdraft lines of credit of $10,000 each, one for each of his schools and one for the parent company, and has been drawing on them at the beginning of each month to help pay the music instructors that contract with his company. In late April, Fitchett was checking his account online and noticed that two of the lines were not showing up. That day a letter arrived saying that, due to an adverse change in his "financial condition and/or credit history," Chase was blocking him from drawing on those two lines. Fitchett said he called Chase, but still doesn't understand what change prompted the move. He's trying to get the lines reinstated, but he's also shopping around for a new line. "I'm thinking now about how I'm going to cover the first week [of paychecks] next month," Fitchett says.
Broader Phenomenon
The phenomenon may extend well beyond Chase and its borrowers. "I'm hearing it more and more," says Stacey Sanchez, senior community loan officer with San Diego-based CDC Small Business Finance, a community development corporation, who says entrepreneurs often turn to her institution when their credit lines are pulled. Sanchez says the increased aggressiveness on the part of lenders may be due in part to banks now being in possession of 2008 tax returns for most of their clients, which show the full ugliness of the last quarter of 2008.
And suspending lines of credit is certainly an efficient way to reduce the risk on a bank's balance sheet. According to officials at the Office of the Comptroller of the Currency, bank reserves for bad loans are based on the total exposure to a customer. So if a bank has a $100,000 line of credit with a small firm and only $20,000 is drawn down, the total exposure is still $100,000, and the bank usually will reserve for loan losses based on that amount. But if they convert the $20,000 outstanding to a term loan and cancel the line of credit, or if they simply cut the line to $20,000, the reserves would be based on that $20,000 figure.
Regulatory pressure likely plays a part as well. Bert Ely, an Alexandria (Va.)-based financial-services consultant, says he hears repeatedly from banks around the country that while the White House and Treasury talk about the need for lending to small business, local bank examiners continue to pressure them to upgrade the quality of their loan portfolios. "You have a disconnect between what policymakers are saying and what the rank-and-file bank examiners and supervisors are saying," Ely says. That has painful repercussions for business owners around the country.
For small business owners, a line of credit can be a lifesaver, giving them a buffer against cash-flow problems and enabling them to handle regular expenses such as payroll. But beginning in March, according to documents obtained by BusinessWeek, JPMorgan Chase (JPM) suspended credit lines for a large number of business owners. According to someone familiar with the matter, the move affected thousands of businesses. They had been clients of Washington Mutual before Chase bought the ailing bank in September 2008. The documents show that Chase tasked a special group inside the bank with responding to inquiries from borrowers.
The bank can expect plenty of those, at least partly because in many cases the businesses whose lines were cut had not missed loan payments. Instead, their credit score or their financials had deteriorated, and credit-line agreements typically give banks the right to change the terms of the line if there is a change in the borrower's financial situation. In this case, the changes in the terms are dramatic. If business owners can't convince Chase of their creditworthiness, they have three options: 1) pay off the balance in full; 2) agree to a conversion of the line of credit into a term loan; or 3) go into default.
Business owners who accept the conversion to a term loan will likely see dramatically higher monthly payments. A business owner may be able to keep a line of credit open with interest-only payments, but term loans typically have to be paid off—interest and principal—within three to five years. Plus, they may carry higher interest rates.
Aggressive Review
Thomas Kelly, a spokesman for Chase, says the bank continually reviews the lines of credit in its portfolio. "We contact customers if we determine there has been an adverse change in their financial condition or credit history. We may eliminate the unused portion of their credit line and set up a standard repayment plan." Kelly says the bank encourages customers to contact Chase if they want the decision reevaluated or if they want to provide information such as their federal tax return. And he says the bank has assigned staff to work with customers who want such decisions reexamined.
Donald Raftery, managing director at Greenwich Associates, a Stamford (Conn.)-based financial-services consulting firm, says the banks, overwhelmed with problem loans, are "trying to take a very active approach on a broad segment of companies. There's no individual type of approach. [Small companies] feel like they're being treated like a number."
Mark Fitchett, the owner of $300,000 music school operator L&M Music in Long Beach, Calif., would certainly agree. He had been a Washington Mutual customer before the bank was acquired by Chase. He had four overdraft lines of credit of $10,000 each, one for each of his schools and one for the parent company, and has been drawing on them at the beginning of each month to help pay the music instructors that contract with his company. In late April, Fitchett was checking his account online and noticed that two of the lines were not showing up. That day a letter arrived saying that, due to an adverse change in his "financial condition and/or credit history," Chase was blocking him from drawing on those two lines. Fitchett said he called Chase, but still doesn't understand what change prompted the move. He's trying to get the lines reinstated, but he's also shopping around for a new line. "I'm thinking now about how I'm going to cover the first week [of paychecks] next month," Fitchett says.
Broader Phenomenon
The phenomenon may extend well beyond Chase and its borrowers. "I'm hearing it more and more," says Stacey Sanchez, senior community loan officer with San Diego-based CDC Small Business Finance, a community development corporation, who says entrepreneurs often turn to her institution when their credit lines are pulled. Sanchez says the increased aggressiveness on the part of lenders may be due in part to banks now being in possession of 2008 tax returns for most of their clients, which show the full ugliness of the last quarter of 2008.
And suspending lines of credit is certainly an efficient way to reduce the risk on a bank's balance sheet. According to officials at the Office of the Comptroller of the Currency, bank reserves for bad loans are based on the total exposure to a customer. So if a bank has a $100,000 line of credit with a small firm and only $20,000 is drawn down, the total exposure is still $100,000, and the bank usually will reserve for loan losses based on that amount. But if they convert the $20,000 outstanding to a term loan and cancel the line of credit, or if they simply cut the line to $20,000, the reserves would be based on that $20,000 figure.
Regulatory pressure likely plays a part as well. Bert Ely, an Alexandria (Va.)-based financial-services consultant, says he hears repeatedly from banks around the country that while the White House and Treasury talk about the need for lending to small business, local bank examiners continue to pressure them to upgrade the quality of their loan portfolios. "You have a disconnect between what policymakers are saying and what the rank-and-file bank examiners and supervisors are saying," Ely says. That has painful repercussions for business owners around the country.
Despite Signs to the Contrary, Real Estate Will Get Worse
Warren Buffett said that the real estate business his company Berkshire Hathaway owns is seeing a small improvement in housing demand. The National Association of Realtors seemed to confirm his observations when it announced that the index for pending home sales went up in March. This data helped send the stock market higher as it stays true to form by rising on the most modest news.
* Housing Takes Center Stage as Economy Looks for Signs
* When To Sell The Empty Nest
* China’s Own Version of the Real Estate Bust
Except for low home prices and very low mortgage rates, all of the elements for a recover in housing are missing. Those two things should be enough, but balanced against them are shrinking access to credit, an inability of Americans to get higher wages, and crippling unemployment. (See pictures of Cleveland struggling with unemployment.)
The April unemployment figures will be out later this week. Six hundred thousand people lost jobs last month, according to most estimates. Two and a half million people have lost work since the beginning of the year. A housing recovery cannot occur in the presence of the massive collapse in unemployment. The devastation of the potential home buying base is too great. Many of the people who lose jobs will also lose their houses and that increases the inventory of unsold homes.
Consumers have lost access to credit. The fact that mortgage rates have dropped does not even begin to offset that. Qualifying for a mortgage is harder than ever. Banks have reason to be cautious. One of the large credit bureaus just released a report that says 4.7% of payments for bank-issued credit cards were late sixty days or more in March, an increase of 38% over the same month last year. According to Reuters, "In March, lenders closed 20 million card accounts, sending the total down by 58 million since the peak in July 2008 to 380 million." Banks will not be lending to consumers as long as there are no solid and sustained signs of an economic recovery. They cannot afford the risk after all of the write-offs they have already taken. (See pictures of TIME's Wall Street covers.)
The single biggest enemy to a housing recovery may be the fact that there is no increase in real wages. The failing economy has ruined any chance that the average worker will make more this year than he did last. Many people will probably make less this year than they did in 2008, although the government figures are not precise enough to show that. Anecdotally it is almost certainly true. Earning a higher wage with unemployment more than 10% has to be nearly impossible in some of the largest states including Florida, Michigan, and California.
The recession has gone on so long and has been so crippling that the eyes of the wishful begin to play tricks. A small piece of economic information, like one month of very modestly improved housing numbers or one week of a slight decrease in jobless claims, sets off a chain reaction. If one set of numbers is OK, the next set will be better. Real estate prices will stop falling everywhere, if they stop falling in hard hit Nevada. (See pictures of Las Vegas.)
Home prices will not get better until the elements that made housing prices perform so well for almost ten years return. Those elements may not come back with the force that they had in 2003, 2004, and 2005, but they must make a modest recovery for housing to recover. People have to be able to believe that they have some meager job security. A bank has to tell them that it wants their business. And, they have to feel that they can, if only rarely, get a raise.
* Housing Takes Center Stage as Economy Looks for Signs
* When To Sell The Empty Nest
* China’s Own Version of the Real Estate Bust
Except for low home prices and very low mortgage rates, all of the elements for a recover in housing are missing. Those two things should be enough, but balanced against them are shrinking access to credit, an inability of Americans to get higher wages, and crippling unemployment. (See pictures of Cleveland struggling with unemployment.)
The April unemployment figures will be out later this week. Six hundred thousand people lost jobs last month, according to most estimates. Two and a half million people have lost work since the beginning of the year. A housing recovery cannot occur in the presence of the massive collapse in unemployment. The devastation of the potential home buying base is too great. Many of the people who lose jobs will also lose their houses and that increases the inventory of unsold homes.
Consumers have lost access to credit. The fact that mortgage rates have dropped does not even begin to offset that. Qualifying for a mortgage is harder than ever. Banks have reason to be cautious. One of the large credit bureaus just released a report that says 4.7% of payments for bank-issued credit cards were late sixty days or more in March, an increase of 38% over the same month last year. According to Reuters, "In March, lenders closed 20 million card accounts, sending the total down by 58 million since the peak in July 2008 to 380 million." Banks will not be lending to consumers as long as there are no solid and sustained signs of an economic recovery. They cannot afford the risk after all of the write-offs they have already taken. (See pictures of TIME's Wall Street covers.)
The single biggest enemy to a housing recovery may be the fact that there is no increase in real wages. The failing economy has ruined any chance that the average worker will make more this year than he did last. Many people will probably make less this year than they did in 2008, although the government figures are not precise enough to show that. Anecdotally it is almost certainly true. Earning a higher wage with unemployment more than 10% has to be nearly impossible in some of the largest states including Florida, Michigan, and California.
The recession has gone on so long and has been so crippling that the eyes of the wishful begin to play tricks. A small piece of economic information, like one month of very modestly improved housing numbers or one week of a slight decrease in jobless claims, sets off a chain reaction. If one set of numbers is OK, the next set will be better. Real estate prices will stop falling everywhere, if they stop falling in hard hit Nevada. (See pictures of Las Vegas.)
Home prices will not get better until the elements that made housing prices perform so well for almost ten years return. Those elements may not come back with the force that they had in 2003, 2004, and 2005, but they must make a modest recovery for housing to recover. People have to be able to believe that they have some meager job security. A bank has to tell them that it wants their business. And, they have to feel that they can, if only rarely, get a raise.
Recession Upends Seasonal Job Market in Beach Towns
REHOBOTH BEACH, Del. -- The approach of warmer weather is brightening the jobs picture for people struggling in Delaware's coastal tourist towns, though seasonal European workers could find themselves frozen out this summer.
Dewey and Rehoboth Beaches, known as affordable vacation hotspots, hope to benefit from a nation in the midst of trading down this year. "It looks like it's going to be a good season," said Sharon Palmer, vice president and manager of rental operations at Coldwell Banker Resort Realty in Rehoboth.
Already, a number of businesses said their season indicators -- President's Day, St. Patrick's Day and even Valentine's Day -- were more successful than they were last year. Meanwhile, rental properties at Coldwell are about on par with last year, the best in recent memory, Ms. Palmer said.
Nationwide, after a steep drop in tourism last fall, the U.S. Travel Association's Traveler Sentiment Index rose to 90.2 in February, up 12 points since the survey was last taken in October.
More than seven million people visit Rehoboth and Dewey each year. Dewey's usual 300-person population balloons to more than 200,000 on a weekend in July or August, many of them lured by its younger, party-hopping crowd. Rehoboth is more family-oriented, touting activities like outlet shopping and miniature golf.
This year, employers are finding that locals -- college and high-school students, teachers with the summer off and retirees -- are quickly flocking to fill summer positions. Sussex County, where both beaches are located, had an 8.9% unemployment rate in February, up from 5% a year ago.
In Rehoboth, Dogfish Head Brewery and Eats held two job fairs earlier this month to give locals a chance to fill about two dozen positions as cooks, hosts and servers. Between both, about 30 candidates showed up.
Margie Booth, 23 years old, one of the applicants, will likely be offered a job as a server. The Wilmington University senior already works at nearby Nicola Pizza, but wanted a second job to take advantage of the season.
"Waiting around here is definitely one of the top jobs," Ms. Booth said. "Having tourists come in, it's a jackpot." She'll use the money to pay for school and rent.
For Kizzie Lisenby, 28, it was an opportunity to ditch her $10.50-an-hour motel job and trade up for something more lucrative, hopefully, to support herself and her two daughters. Although the motel was year-round, her hours and income suffered in the winter.
Dogfish Head will likely offer her a job starting between $8 and $9 an hour, which is less money than she earns now but makes strategic sense, because assistant manager John Ludwig said he is likely to keep Ms. Lisenby year-round. Eventually, she will qualify for full health benefits and life insurance.
While this all augurs for good news for locals, it also means that by the time job applications from foreigners and out-of-towners start rolling in -- often 50 at a time in the weeks before Memorial Day -- the restaurant may be fully staffed.
Nicola Pizza in Rehoboth frequently hires foreign students for the summer. In fact, two Russians were lined up this year -- until existing workers asked for their hours to be increased.
"There's a very good chance that the two guys I promised a job, that...I won't be hiring them," said Nick Caggiano Jr., the vice president of the pizzeria.
The foreign workers in beach towns primarily use seasonal J-1 visas, intended for college students and trainees who are sponsored by companies or organizations in the U.S. This year, the State Department asked large sponsor organizations to voluntarily reduce their numbers.
Seasonal Staffing Solutions, a New Jersey-based company that sponsors such workers, is expecting a 20% to 40% drop in the number of workers to be placed in the U.S. this year. The company placed about 1,000 foreigners last summer, mainly along the East Coast.
"I don't think we'll be able to get close to that number this year," said Vadim Misnik, a partner there.
More than 2,000 foreign workers flood the area in an average summer, said Carol Everhart, the chief executive and president of the Rehoboth Beach-Dewey Beach Chamber of Commerce. This year, fewer than 1,500 are expected. In the past, their presence was as ubiqitous as umbrellas on the beach. Churches organize meals for the foreigners, drawing 150 to 200 workers four days a week, and coordinate trips to New York City and Washington, D.C.
Despite the anticipation of a strong season, the recession still stings here. The Dewey Beach Patrol's ranks will be 12 thinner this year as it reconciles summer hiring with the city's budget cuts, said Capt. Todd Fritchman. Dewey, which has no property tax, is operating with about a $600,000 deficit after its sources of income -- transfer taxes on property titles and building permits -- were hit hard by the downturn.
Thirty-five applicants tried out for five lifeguard spots. The tryouts for new guards -- consisting of sprinting, swimming and rescue technique -- came to a close last weekend. All five spots went to applicants from the Mid-Atlantic region.
Locals such as J.T. Diguglielmo, a 16-year-old high-school student, will take up the summer gigs. In addition to working as a lifeguard, Mr. Diguglielmo plans to keep the busboy position he already has. He hopes to use his summer earnings to fulfill a teenage dream that hasn't yet succumbed to the recession: buying his first car.
Dewey and Rehoboth Beaches, known as affordable vacation hotspots, hope to benefit from a nation in the midst of trading down this year. "It looks like it's going to be a good season," said Sharon Palmer, vice president and manager of rental operations at Coldwell Banker Resort Realty in Rehoboth.
Already, a number of businesses said their season indicators -- President's Day, St. Patrick's Day and even Valentine's Day -- were more successful than they were last year. Meanwhile, rental properties at Coldwell are about on par with last year, the best in recent memory, Ms. Palmer said.
Nationwide, after a steep drop in tourism last fall, the U.S. Travel Association's Traveler Sentiment Index rose to 90.2 in February, up 12 points since the survey was last taken in October.
More than seven million people visit Rehoboth and Dewey each year. Dewey's usual 300-person population balloons to more than 200,000 on a weekend in July or August, many of them lured by its younger, party-hopping crowd. Rehoboth is more family-oriented, touting activities like outlet shopping and miniature golf.
This year, employers are finding that locals -- college and high-school students, teachers with the summer off and retirees -- are quickly flocking to fill summer positions. Sussex County, where both beaches are located, had an 8.9% unemployment rate in February, up from 5% a year ago.
In Rehoboth, Dogfish Head Brewery and Eats held two job fairs earlier this month to give locals a chance to fill about two dozen positions as cooks, hosts and servers. Between both, about 30 candidates showed up.
Margie Booth, 23 years old, one of the applicants, will likely be offered a job as a server. The Wilmington University senior already works at nearby Nicola Pizza, but wanted a second job to take advantage of the season.
"Waiting around here is definitely one of the top jobs," Ms. Booth said. "Having tourists come in, it's a jackpot." She'll use the money to pay for school and rent.
For Kizzie Lisenby, 28, it was an opportunity to ditch her $10.50-an-hour motel job and trade up for something more lucrative, hopefully, to support herself and her two daughters. Although the motel was year-round, her hours and income suffered in the winter.
Dogfish Head will likely offer her a job starting between $8 and $9 an hour, which is less money than she earns now but makes strategic sense, because assistant manager John Ludwig said he is likely to keep Ms. Lisenby year-round. Eventually, she will qualify for full health benefits and life insurance.
While this all augurs for good news for locals, it also means that by the time job applications from foreigners and out-of-towners start rolling in -- often 50 at a time in the weeks before Memorial Day -- the restaurant may be fully staffed.
Nicola Pizza in Rehoboth frequently hires foreign students for the summer. In fact, two Russians were lined up this year -- until existing workers asked for their hours to be increased.
"There's a very good chance that the two guys I promised a job, that...I won't be hiring them," said Nick Caggiano Jr., the vice president of the pizzeria.
The foreign workers in beach towns primarily use seasonal J-1 visas, intended for college students and trainees who are sponsored by companies or organizations in the U.S. This year, the State Department asked large sponsor organizations to voluntarily reduce their numbers.
Seasonal Staffing Solutions, a New Jersey-based company that sponsors such workers, is expecting a 20% to 40% drop in the number of workers to be placed in the U.S. this year. The company placed about 1,000 foreigners last summer, mainly along the East Coast.
"I don't think we'll be able to get close to that number this year," said Vadim Misnik, a partner there.
More than 2,000 foreign workers flood the area in an average summer, said Carol Everhart, the chief executive and president of the Rehoboth Beach-Dewey Beach Chamber of Commerce. This year, fewer than 1,500 are expected. In the past, their presence was as ubiqitous as umbrellas on the beach. Churches organize meals for the foreigners, drawing 150 to 200 workers four days a week, and coordinate trips to New York City and Washington, D.C.
Despite the anticipation of a strong season, the recession still stings here. The Dewey Beach Patrol's ranks will be 12 thinner this year as it reconciles summer hiring with the city's budget cuts, said Capt. Todd Fritchman. Dewey, which has no property tax, is operating with about a $600,000 deficit after its sources of income -- transfer taxes on property titles and building permits -- were hit hard by the downturn.
Thirty-five applicants tried out for five lifeguard spots. The tryouts for new guards -- consisting of sprinting, swimming and rescue technique -- came to a close last weekend. All five spots went to applicants from the Mid-Atlantic region.
Locals such as J.T. Diguglielmo, a 16-year-old high-school student, will take up the summer gigs. In addition to working as a lifeguard, Mr. Diguglielmo plans to keep the busboy position he already has. He hopes to use his summer earnings to fulfill a teenage dream that hasn't yet succumbed to the recession: buying his first car.
Brokers Abandon Wall Street
The number of brokers bolting from Wall Street is on the rise amid slumping markets and diminishing fees -- a trend that could augur lasting changes in the way individuals invest.
In April, more than 2,800 people registered as brokers in the U.S. left the industry, according to the Financial Industry Regulatory Authority. The total number of departures so far this year stands at 11,600. In 2002, the previous high-water mark for industry exits in the 15 years of data available from Finra, a total of 11,500 brokers left Wall Street.
At the current pace, nearly 35,000 brokers would exit by year end, which would leave about 630,000 registered brokers. The final tally will partly depend on whether the stock market builds on its recent rally, which likely would persuade some brokers to stick around. Part of this group, meanwhile, is simply being shown the door.
[calling it quits]
Despite the struggles of some less established brokers, experienced advisers who generate millions of dollars in client fees annually are still in hot demand and are being wooed with hiring bonuses by large banks.
In the week ended April 24, for example, Merrill Lynch, now owned by Bank of America Corp., hired 29 brokers. Cumulatively, the group had generated $42 million in production at their previous gigs, according to people familiar with the situation. The firm is offering one of the highest-paying recruiting deals in the industry for top-producing advisers who join.
Last month, UBS announced plans to let go about 600 lower-producing brokers, generally people who brought in annual fees of less than $260,000. The move will bring UBS's brokerage head count in the U.S. to about 7,900. But the firm also is hiring from the more elite ranks. Last month, it took on about 20 brokers who each brought in more than $1 million in fees.
Morgan Stanley, which plans to acquire control of Citigroup's Smith Barney in the next few months, has watched about 1,200 of Smith Barney's 12,000 brokers leave since the deal was announced. While some have gone to competitors, others have simply exited the business.
Officials at several brokerage firms said a spike in defections is to be expected during a recession and that they are generally holding onto brokers who bring in the most commissions.
"We're making excellent progress on the joint venture and are pleased that a very high percentage of retention-eligible financial advisers on both sides have signed on," a Morgan Stanley spokesman said Tuesday. "The attrition we've seen is typical of down markets and no particular concern."
After massive trading activity propped up brokerage-firm results in 2007 and 2008, many brokers now face a phase of lower volatility and volume that stands to sap their income.
Brokers collect either a piece of the commission revenues they generate or a percentage of their clients' assets under management. That second form of compensation ebbs and flows with the market, and has been curtailed sharply since 2008.
T.C. Nelson, a former financial adviser and client-relations specialist at Bank of America, left the bank last May when new business started drying up. "It was tough to make money," says Mr. Nelson, 38 years old. "As soon as real estate started to pull back, you were kind of spinning your wheels."
In July, he also became an independent trader. More recently, he started looking for a second job that could give him better health-care benefits.
The recent exodus of brokers reflects lasting changes in the way investors save and their expectations for the market during the toughest conditions in decades. Despite the stock market's recent rebound, assets have moved out of stocks as well as many bonds that generally produce high commissions for brokers. Those funds have shifted to safer areas like money-market funds and insured deposit accounts that don't pay much, if anything, in commissions.
As a result, brokers, who generally pocket 30% or 40% of the fees they generate, are facing paychecks that are far below their best years. Independent financial advisers, many of whom aren't counted as brokers, appear to be leaving the industry at a slower pace, in part because many investors favor those who collect fees rather than commissions.
Banks helped spark the global economic decline, but until recently, the business of advising individual investors has held up well compared with more volatile trading and banking businesses. Attracted to the business's long-term stability, Bank of America, Wells Fargo & Co. and Morgan Stanley all announced or completed major deals to expand their brokerage forces in the past six months.
Even so, many brokers are hitting their breaking points.
"It's really hard to make it if you're in your first couple of years" in the business, says Darin Manis, chief executive of recruiting firm RJ & Makay. "Nobody wants to be invested" in stocks. And when brokers leave, he adds, clients are more likely to pull out their remaining balances.
Mr. Manis notes that brokers in recent months have had to hone their counseling skills as investors struggle with retirement goals and college payments. Many have taken their own financial licks from exposure to their parent firms' stocks. "It's a very stressful job during down periods," he says.
John Canale, a former Morgan Stanley broker, has been trying to give brokers an alternative. In recent months, he has brought several former brokers over to his proprietary trading business.
At his small Boston office, the recruits become traders who bet on stocks with their own money or capital from a trading firm. Mr. Canale tells his new colleagues that trading for their own accounts is easier than managing clients' money in a stock market that lost an estimated $7 trillion of its value last year.
"This is a recession-proof job compared to being a broker," says Mr. Canale, whose firm, called Blue Hill Capital, executes its trades through Bright Trading LLC. "When you're a retail broker, you just have to sit and wait for a bull market." Becoming a trader has allowed him to be more "nimble," he says.
In April, more than 2,800 people registered as brokers in the U.S. left the industry, according to the Financial Industry Regulatory Authority. The total number of departures so far this year stands at 11,600. In 2002, the previous high-water mark for industry exits in the 15 years of data available from Finra, a total of 11,500 brokers left Wall Street.
At the current pace, nearly 35,000 brokers would exit by year end, which would leave about 630,000 registered brokers. The final tally will partly depend on whether the stock market builds on its recent rally, which likely would persuade some brokers to stick around. Part of this group, meanwhile, is simply being shown the door.
[calling it quits]
Despite the struggles of some less established brokers, experienced advisers who generate millions of dollars in client fees annually are still in hot demand and are being wooed with hiring bonuses by large banks.
In the week ended April 24, for example, Merrill Lynch, now owned by Bank of America Corp., hired 29 brokers. Cumulatively, the group had generated $42 million in production at their previous gigs, according to people familiar with the situation. The firm is offering one of the highest-paying recruiting deals in the industry for top-producing advisers who join.
Last month, UBS announced plans to let go about 600 lower-producing brokers, generally people who brought in annual fees of less than $260,000. The move will bring UBS's brokerage head count in the U.S. to about 7,900. But the firm also is hiring from the more elite ranks. Last month, it took on about 20 brokers who each brought in more than $1 million in fees.
Morgan Stanley, which plans to acquire control of Citigroup's Smith Barney in the next few months, has watched about 1,200 of Smith Barney's 12,000 brokers leave since the deal was announced. While some have gone to competitors, others have simply exited the business.
Officials at several brokerage firms said a spike in defections is to be expected during a recession and that they are generally holding onto brokers who bring in the most commissions.
"We're making excellent progress on the joint venture and are pleased that a very high percentage of retention-eligible financial advisers on both sides have signed on," a Morgan Stanley spokesman said Tuesday. "The attrition we've seen is typical of down markets and no particular concern."
After massive trading activity propped up brokerage-firm results in 2007 and 2008, many brokers now face a phase of lower volatility and volume that stands to sap their income.
Brokers collect either a piece of the commission revenues they generate or a percentage of their clients' assets under management. That second form of compensation ebbs and flows with the market, and has been curtailed sharply since 2008.
T.C. Nelson, a former financial adviser and client-relations specialist at Bank of America, left the bank last May when new business started drying up. "It was tough to make money," says Mr. Nelson, 38 years old. "As soon as real estate started to pull back, you were kind of spinning your wheels."
In July, he also became an independent trader. More recently, he started looking for a second job that could give him better health-care benefits.
The recent exodus of brokers reflects lasting changes in the way investors save and their expectations for the market during the toughest conditions in decades. Despite the stock market's recent rebound, assets have moved out of stocks as well as many bonds that generally produce high commissions for brokers. Those funds have shifted to safer areas like money-market funds and insured deposit accounts that don't pay much, if anything, in commissions.
As a result, brokers, who generally pocket 30% or 40% of the fees they generate, are facing paychecks that are far below their best years. Independent financial advisers, many of whom aren't counted as brokers, appear to be leaving the industry at a slower pace, in part because many investors favor those who collect fees rather than commissions.
Banks helped spark the global economic decline, but until recently, the business of advising individual investors has held up well compared with more volatile trading and banking businesses. Attracted to the business's long-term stability, Bank of America, Wells Fargo & Co. and Morgan Stanley all announced or completed major deals to expand their brokerage forces in the past six months.
Even so, many brokers are hitting their breaking points.
"It's really hard to make it if you're in your first couple of years" in the business, says Darin Manis, chief executive of recruiting firm RJ & Makay. "Nobody wants to be invested" in stocks. And when brokers leave, he adds, clients are more likely to pull out their remaining balances.
Mr. Manis notes that brokers in recent months have had to hone their counseling skills as investors struggle with retirement goals and college payments. Many have taken their own financial licks from exposure to their parent firms' stocks. "It's a very stressful job during down periods," he says.
John Canale, a former Morgan Stanley broker, has been trying to give brokers an alternative. In recent months, he has brought several former brokers over to his proprietary trading business.
At his small Boston office, the recruits become traders who bet on stocks with their own money or capital from a trading firm. Mr. Canale tells his new colleagues that trading for their own accounts is easier than managing clients' money in a stock market that lost an estimated $7 trillion of its value last year.
"This is a recession-proof job compared to being a broker," says Mr. Canale, whose firm, called Blue Hill Capital, executes its trades through Bright Trading LLC. "When you're a retail broker, you just have to sit and wait for a bull market." Becoming a trader has allowed him to be more "nimble," he says.
The Curse of the Class of 2009
The bad news for this spring's college graduates is that they're entering the toughest labor market in at least 25 years.
The worse news: Even those who land jobs will likely suffer lower wages for a decade or more compared to those lucky enough to graduate in better times, studies show.
Andrew Friedson graduated last year from the University of Maryland with a degree in government and politics and a stint as student-body president on his résumé. After working on Barack Obama's presidential campaign for a few months, Mr. Friedson hoped to get a position in the new administration. When that didn't pan out he looked for jobs on Capitol Hill. No luck there, either.
So now, instead of learning about policymaking and legislation, he's earning about $1,250 a month as a high-school tutor and a part-time fundraiser for Hillel, a Jewish campus organization. To save money, he's living with his parents.
Low Wages Linger
For those who graduate during a recession, the effects on their earnings last years.
If asked a year ago whether he'd be tutoring now, Mr. Friedson says, "I would have laughed in your face."
Trading down to a lower-skilled job isn't just a hit to Mr. Friedson's ego. It could also hurt his bank account for years to come. Economic research shows that the consequences of graduating in a downturn are long-lasting. They include lower earnings, a slower climb up the occupational ladder and a widening gap between the least- and most-successful grads.
In short, luck matters. The damage can linger up to 15 years, says Lisa Kahn, a Yale School of Management economist. She used the National Longitudinal Survey of Youth, a government data base, to track wages of white men who graduated before, during and after the deep 1980s recession.
Ms. Kahn found that for each percentage-point increase in the unemployment rate, those with the misfortune to graduate during the recession earned 7% to 8% less in their first year out than comparable workers who graduated in better times. The effect persisted over many years, with recession-era grads earning 4% to 5% less by their 12th year out of college, and 2% less by their 18th year out.
For example, a man who graduated in December 1982 when unemployment was at 10.8% made, on average, 23% less his first year out of college and 6.6% less 18 years out than one who graduated in May 1981 when the unemployment rate was 7.5%. For a typical worker, that would mean earning $100,000 less over the 18-year period.
The impact on wages could be just as severe this time around, says Ms. Kahn. That's because of the depth of this recession and the possibility that the unemployment rate may approach the 10.8% level not seen since the early 1980s. The rate hit 8.9% in April, the Labor Department reported Friday.
One reason behind declining wage potential, economists say: The caliber of jobs available in a recession, and their accompanying wages, tend to suffer. High-end firms hire fewer people and drive down salaries because jobs are in such demand.
That means many graduates end up with lower-wage, lower-skill jobs at less-prestigious firms or in firms outside their field of interest. Once the economy picks up and they try for better jobs, these workers have to learn skills they should have been developing immediately out of college. In the meantime, colleagues who graduated in a better economy have already developed these skills and progressed much further.
For Brad Dechter, a 24-year-old who majored in graphic design, this could mean starting at the bottom when and if he gets a job at an advertising agency. He studied at the Art Institute of Colorado partly because the Denver school advertises that 86% of alumni get a job within six months of graduation. So far, no dice.
Two recent college graduates are scraping by in the toughest job market in years. They're stuck between trying to find jobs that advance their careers and landing jobs that pay the bills. WSJ's Matt Rivera reports.
Eight months after graduation, Mr. Dechter is making just $500 a month freelancing for bands, designing flyers and album covers. When he runs short of cash, he borrows from his friends. He spends his days on Craigslist searching for job openings instead of learning the marketing and design skills he would have picked up in his first year at an agency.
"I've pretty much given up on trying to find my dream job," says Mr. Dechter.
Christine Pacheco, director of career services at the Art Institute, acknowledges that graduates face a struggle now. "They may need to take two part-time jobs and do some freelance rather than get a full-time job," she says.
College graduates remain better off than those with only high-school diplomas, in good times and bad. The unemployment rate in April among four-year college graduates between 20 and 24 years old was 6.1%; among those the same age with only high-school diplomas, it was 19.6%.
But a college degree isn't an automatic ticket to upward mobility, either. Even before the recession began, graduates were seeing their wages shrink. Between 2002 and 2007, according to government data, the inflation-adjusted hourly wage for men ages 25 to 35 with bachelor's degrees (and no graduate degrees) fell 4.5%. For the typical woman, inflation-adjusted wages fell 4.8%.
This year, employers say they'll hire 22% fewer college graduates than last year, according to the National Association of Colleges and Employers, an organization of career counselors. At the same time, colleges are expected to see the highest number of graduates in a decade. The average starting salary for graduates who do get jobs, meanwhile, dropped to $48,515 this spring, down 2.2% from the same time last year, according to NACE.
Plenty of recent graduates are making far less than the average. Between her business marketing degree and numerous New York City contacts, Nicole Buckley, 21, figured she would find a marketing job after graduating in December from Siena College, a small Catholic liberal arts college near Albany, N.Y. She didn't expect to be working the jobs she has now, five months after graduation: As a full-time receptionist with a part-time gig as a model, promoting Bacardi rum and Grey Goose vodka to patrons at bars. But after doing two interviews a day and applying to more than 50 jobs, she had to do something to pay the bills.
"I don't think anyone went to college and said, 'I want to graduate and make $25,000 a year,' " says Ms. Buckley. She estimates her earnings at a little less than $30,000 between the two jobs.
Sarah Veilleux, 22, one of Ms. Buckley's two roommates in a $1,125-a-month Brooklyn apartment, graduated in May 2008 from the University of New Hampshire with a communications degree. For a few months, she worked selling band merchandise at a music venue. Then she found her ideal job: doing promotions for Sirius Satellite Radio. But they need her only 20 hours a week.
"As soon as I saw the offer for Sirius," she says, "it didn't matter how many hours a week." She spends the other half of her week doing administrative tasks for a staffing company, earning $1,500 a month -- $18,000 a year -- between the two jobs.
Still, Ms. Veilleux probably will be better off than those who take low-wage jobs outside their fields, says Till Marco von Wachter, a Columbia University economist. Mr. von Wachter, with a couple of colleagues, has looked at wage data covering 70% of all Canadians who graduated from college between 1976 and 1995, a span encompassing two recessions. His work indicates that graduates who get jobs in their fields -- even low-paying jobs -- are able to learn the right skills, and thus have an edge when the economy rebounds.
Mr. von Wachter also found that what recession-era graduates studied, and where they went to school, made a big difference in how quickly they caught up to workers who graduated in boom times. People who majored in fields that lead to high-paying jobs, such as chemistry, biology, physics and engineering, tended to catch up to other graduates more quickly, primarily by switching jobs during the economic recovery and landing at better firms. In contrast, says Mr. von Wachter, the wages of humanities majors at less prestigious schools were less likely to catch up to the wages of their peers who graduated in healthier times.
For some graduates, the recession has had an unintended upside: a career path they never thought they wanted.
Diane Hempe, 24, planned to be a teacher. But after graduating from the University of Maryland last year with an elementary education degree, she failed to find a job at a school. So she settled for working at a day-care center, where the $12 an hour she brought in felt like an affront.
In December, Ms. Hempe went in an entirely new direction. She took a job in the customer-service department at a Wells Fargo call center in Frederick, Md. "I definitely know I can move up," she says. "I can be in customer service; I can be in collections; I can be in so many different departments."
And in the meantime she's shifting her long-term goals. Instead of getting a master's degree in education like she once thought she would, Ms. Hempe says eventually she plans to get her master's in business.
Other are opting to ride out the slump doing public service. At AmeriCorps, a nationwide community-service network, applications more than tripled to about 48,500 between November 2008 and March compared to the same time period a year earlier. Teach for America received 35,000 applications this year -- 42% more than last year. About 70% of those were recent college graduates. Among the most common reasons people cited for applying, according to Teach for America, were poor job conditions and President Barack Obama's call to public service.
Another alternative to unemployment or a low-paying job: Stay in school.
Graduate applications for 2007-2008 were up 8% nationwide compared to the year before, according to the most recent numbers from the Council of Graduate Schools. Schools such as Northwestern University and Harvard are already tracking double-digit increases this year.
College grads who went to graduate school instead of the job market during the early '80s recession didn't suffer the same wage losses, says Ms. Kahn, the Yale economist.
That's the approach John Bence is taking. A 2008 graduate of Kenyon College in Ohio, the history major worked with a temp agency and did a six-month stint at an international consulting company. After repeatedly losing out on jobs -- at museums, universities, consulting firms -- to more-qualified candidates with master's degrees, he'll head to New York University to get a master's degree in history, specializing in archival management.
"I wasn't surprised I didn't get those jobs in, like, museums," Mr. Bence says. "But I was surprised that no one was willing to hire me to do anything."
The worse news: Even those who land jobs will likely suffer lower wages for a decade or more compared to those lucky enough to graduate in better times, studies show.
Andrew Friedson graduated last year from the University of Maryland with a degree in government and politics and a stint as student-body president on his résumé. After working on Barack Obama's presidential campaign for a few months, Mr. Friedson hoped to get a position in the new administration. When that didn't pan out he looked for jobs on Capitol Hill. No luck there, either.
So now, instead of learning about policymaking and legislation, he's earning about $1,250 a month as a high-school tutor and a part-time fundraiser for Hillel, a Jewish campus organization. To save money, he's living with his parents.
Low Wages Linger
For those who graduate during a recession, the effects on their earnings last years.
If asked a year ago whether he'd be tutoring now, Mr. Friedson says, "I would have laughed in your face."
Trading down to a lower-skilled job isn't just a hit to Mr. Friedson's ego. It could also hurt his bank account for years to come. Economic research shows that the consequences of graduating in a downturn are long-lasting. They include lower earnings, a slower climb up the occupational ladder and a widening gap between the least- and most-successful grads.
In short, luck matters. The damage can linger up to 15 years, says Lisa Kahn, a Yale School of Management economist. She used the National Longitudinal Survey of Youth, a government data base, to track wages of white men who graduated before, during and after the deep 1980s recession.
Ms. Kahn found that for each percentage-point increase in the unemployment rate, those with the misfortune to graduate during the recession earned 7% to 8% less in their first year out than comparable workers who graduated in better times. The effect persisted over many years, with recession-era grads earning 4% to 5% less by their 12th year out of college, and 2% less by their 18th year out.
For example, a man who graduated in December 1982 when unemployment was at 10.8% made, on average, 23% less his first year out of college and 6.6% less 18 years out than one who graduated in May 1981 when the unemployment rate was 7.5%. For a typical worker, that would mean earning $100,000 less over the 18-year period.
The impact on wages could be just as severe this time around, says Ms. Kahn. That's because of the depth of this recession and the possibility that the unemployment rate may approach the 10.8% level not seen since the early 1980s. The rate hit 8.9% in April, the Labor Department reported Friday.
One reason behind declining wage potential, economists say: The caliber of jobs available in a recession, and their accompanying wages, tend to suffer. High-end firms hire fewer people and drive down salaries because jobs are in such demand.
That means many graduates end up with lower-wage, lower-skill jobs at less-prestigious firms or in firms outside their field of interest. Once the economy picks up and they try for better jobs, these workers have to learn skills they should have been developing immediately out of college. In the meantime, colleagues who graduated in a better economy have already developed these skills and progressed much further.
For Brad Dechter, a 24-year-old who majored in graphic design, this could mean starting at the bottom when and if he gets a job at an advertising agency. He studied at the Art Institute of Colorado partly because the Denver school advertises that 86% of alumni get a job within six months of graduation. So far, no dice.
Two recent college graduates are scraping by in the toughest job market in years. They're stuck between trying to find jobs that advance their careers and landing jobs that pay the bills. WSJ's Matt Rivera reports.
Eight months after graduation, Mr. Dechter is making just $500 a month freelancing for bands, designing flyers and album covers. When he runs short of cash, he borrows from his friends. He spends his days on Craigslist searching for job openings instead of learning the marketing and design skills he would have picked up in his first year at an agency.
"I've pretty much given up on trying to find my dream job," says Mr. Dechter.
Christine Pacheco, director of career services at the Art Institute, acknowledges that graduates face a struggle now. "They may need to take two part-time jobs and do some freelance rather than get a full-time job," she says.
College graduates remain better off than those with only high-school diplomas, in good times and bad. The unemployment rate in April among four-year college graduates between 20 and 24 years old was 6.1%; among those the same age with only high-school diplomas, it was 19.6%.
But a college degree isn't an automatic ticket to upward mobility, either. Even before the recession began, graduates were seeing their wages shrink. Between 2002 and 2007, according to government data, the inflation-adjusted hourly wage for men ages 25 to 35 with bachelor's degrees (and no graduate degrees) fell 4.5%. For the typical woman, inflation-adjusted wages fell 4.8%.
This year, employers say they'll hire 22% fewer college graduates than last year, according to the National Association of Colleges and Employers, an organization of career counselors. At the same time, colleges are expected to see the highest number of graduates in a decade. The average starting salary for graduates who do get jobs, meanwhile, dropped to $48,515 this spring, down 2.2% from the same time last year, according to NACE.
Plenty of recent graduates are making far less than the average. Between her business marketing degree and numerous New York City contacts, Nicole Buckley, 21, figured she would find a marketing job after graduating in December from Siena College, a small Catholic liberal arts college near Albany, N.Y. She didn't expect to be working the jobs she has now, five months after graduation: As a full-time receptionist with a part-time gig as a model, promoting Bacardi rum and Grey Goose vodka to patrons at bars. But after doing two interviews a day and applying to more than 50 jobs, she had to do something to pay the bills.
"I don't think anyone went to college and said, 'I want to graduate and make $25,000 a year,' " says Ms. Buckley. She estimates her earnings at a little less than $30,000 between the two jobs.
Sarah Veilleux, 22, one of Ms. Buckley's two roommates in a $1,125-a-month Brooklyn apartment, graduated in May 2008 from the University of New Hampshire with a communications degree. For a few months, she worked selling band merchandise at a music venue. Then she found her ideal job: doing promotions for Sirius Satellite Radio. But they need her only 20 hours a week.
"As soon as I saw the offer for Sirius," she says, "it didn't matter how many hours a week." She spends the other half of her week doing administrative tasks for a staffing company, earning $1,500 a month -- $18,000 a year -- between the two jobs.
Still, Ms. Veilleux probably will be better off than those who take low-wage jobs outside their fields, says Till Marco von Wachter, a Columbia University economist. Mr. von Wachter, with a couple of colleagues, has looked at wage data covering 70% of all Canadians who graduated from college between 1976 and 1995, a span encompassing two recessions. His work indicates that graduates who get jobs in their fields -- even low-paying jobs -- are able to learn the right skills, and thus have an edge when the economy rebounds.
Mr. von Wachter also found that what recession-era graduates studied, and where they went to school, made a big difference in how quickly they caught up to workers who graduated in boom times. People who majored in fields that lead to high-paying jobs, such as chemistry, biology, physics and engineering, tended to catch up to other graduates more quickly, primarily by switching jobs during the economic recovery and landing at better firms. In contrast, says Mr. von Wachter, the wages of humanities majors at less prestigious schools were less likely to catch up to the wages of their peers who graduated in healthier times.
For some graduates, the recession has had an unintended upside: a career path they never thought they wanted.
Diane Hempe, 24, planned to be a teacher. But after graduating from the University of Maryland last year with an elementary education degree, she failed to find a job at a school. So she settled for working at a day-care center, where the $12 an hour she brought in felt like an affront.
In December, Ms. Hempe went in an entirely new direction. She took a job in the customer-service department at a Wells Fargo call center in Frederick, Md. "I definitely know I can move up," she says. "I can be in customer service; I can be in collections; I can be in so many different departments."
And in the meantime she's shifting her long-term goals. Instead of getting a master's degree in education like she once thought she would, Ms. Hempe says eventually she plans to get her master's in business.
Other are opting to ride out the slump doing public service. At AmeriCorps, a nationwide community-service network, applications more than tripled to about 48,500 between November 2008 and March compared to the same time period a year earlier. Teach for America received 35,000 applications this year -- 42% more than last year. About 70% of those were recent college graduates. Among the most common reasons people cited for applying, according to Teach for America, were poor job conditions and President Barack Obama's call to public service.
Another alternative to unemployment or a low-paying job: Stay in school.
Graduate applications for 2007-2008 were up 8% nationwide compared to the year before, according to the most recent numbers from the Council of Graduate Schools. Schools such as Northwestern University and Harvard are already tracking double-digit increases this year.
College grads who went to graduate school instead of the job market during the early '80s recession didn't suffer the same wage losses, says Ms. Kahn, the Yale economist.
That's the approach John Bence is taking. A 2008 graduate of Kenyon College in Ohio, the history major worked with a temp agency and did a six-month stint at an international consulting company. After repeatedly losing out on jobs -- at museums, universities, consulting firms -- to more-qualified candidates with master's degrees, he'll head to New York University to get a master's degree in history, specializing in archival management.
"I wasn't surprised I didn't get those jobs in, like, museums," Mr. Bence says. "But I was surprised that no one was willing to hire me to do anything."
Men Hit Hardest by Job Losses
The economic crisis is leading to huge job losses but not everyone is equally at risk. The worst affected areas, such as the automobile and construction sectors, are largely male domains. Women, it seems, have simply adapted better to the changing world of work.
The images are repeating themselves these days: Continental workers are demonstrating in France, autoworkers are demanding a rescue plan for Opel in the German city of Rüsselheim, while in New York and London bankers are clearing out their desks. They are the images of a crisis and the faces have one thing in common: They are almost all men.
Shipyard workers demonstrating in Bremerhaven: Men have been especially hard hit by the recession.
DDP
Shipyard workers demonstrating in Bremerhaven: Men have been especially hard hit by the recession.
As the crisis continues unabated and the collapse of the global economy pushes up unemployment figures, one thing is becoming clear: The crisis is disproportionately affecting men. Almost 80 percent of the 5.1 million Americans who have lost their jobs in recent months have been men. The US male unemployment figure is now 8.8 percent, while it is still only 7 percent for women.
The same is now happening in Germany where 55 percent of those registered as unemployed are men, and that is only going to increase. Male workers are more adversely affected by the current economic crisis, explained Heinrich Alt of Germany's Federal Employment Agency (BA) on Thursday as he presented the latest unemployment figures. The numbers speak volumes: While the unemployment rate for men in April increased by 12.4 percent compared to the same month last year, it actually decreased by 2.8 percent for women. More concretely: While almost 218,000 men lost their jobs, 46,939 women actually found one.
Industrial Sector Remains 'Male Domain'
"That is not really all that surprising, because this economic crisis has been concentrated in the classic industrial sectors," says Christian Dreger, head of Macro Analysis and Forecasting at the Berlin-based German Institute for Economic Research (DIW). The automobile industry in particular, including the businesses that supply the main carmakers, is shedding jobs. "And those are sectors that still employ more men," Dreger says. Women tend to work more in the service sector. "And the crisis has had little or no impact there."
Germany's DGB trade union federation agrees with this assessment. "Job losses at the moment are affecting men in particular because the industrial sectors such as auto making and mechanical engineering have remained male domains," DGB spokeswoman Claudia Falk says. Up to now the introduction of shorter working hours, under a scheme where the government makes up part of the shortfall in pay, has been able to cushion the impact in many big companies. "However, workers at small firms are already losing their jobs," Falk says.
RELATED SPIEGEL ONLINE LINKS
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Is 2009 the New 1929?: Current Crisis Shows Uncanny Parallels to Great Depression (04/29/2009)
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Taking the Downturn on the Chin: Why Is Germany So Calm? (04/28/2009)
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Germany's Recession Blues: Berlin Predicts Sharp GDP Contraction for 2009 (04/29/2009)
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SPIEGEL 360: Our Full Coverage of the Global Economic Downturn
Another factor is that a significantly higher number of men work than women. According to the Federal Employment Agency, male employment is currently 81.6 percent while female employment is only 69.2 percent. Those who work more are more likely, therefore, to lose their job.
In addition it is mostly full-time positions that are being cut -- and many women do not work a full 40-hour week. Around a third of employed women work part-time, while only 5.5 percent of working men are employed on a part-time basis.
That means that women are more likely to work in low-paid jobs. The Federal Employment Agency says that 67.4 percent of those in low-paid jobs are women, who often work as carers in retirement homes, supermarket cashiers, childminders or cleaners. These jobs may not be well paid but they are still required even in times of economic crisis.
'Women Are More Flexible'
However, better-paid women are also doing well, such as those working in traditionally more female spheres like education or health. The major industries like construction, manufacturing or even the financial services industry have always been more vulnerable to economic cycles and therefore suffer when the economy dips.
"Women are also more flexible when it comes to location or type of job and they adapt more quickly," says Falk of the DGB. "If a woman realizes that she hasn't got any more prospects somewhere then she tries to go somewhere else. It's something we have experienced in eastern Germany in the past." Many women from eastern Germany have in recent years left to go to western states, or even emigrated, in pursuit of job opportunities.
"In a society where services are becoming increasingly important, women quite simply have the better jobs," says Hans Bertram, a sociologist at the Humboldt University in Berlin.
Bertram is not at all surprised by the fact that it is men who are worst affected by the crisis. "That was historically always the case, for example when you look at the collapse of the steel and coal industries in the Ruhr industrial region," he says. Unemployment has always been a part of life in an industrialized country, and belongs to the rhythm of industrial society. "As long as someone is young and strong, he can make good money as a construction worker. But once you are 35 and your body won't cooperate any more, there are fewer prospects," Bertram explains.
He thinks it unlikely that, for example, former Opel workers will simply retrain to work in the service sector. "You can't turn a steel worker into a call center agent," he says. The service industry usually requires higher qualifications and these are not easily acquired later on in life, he explains.
"The change will only come with the generations," Bertram says. "Perhaps young men will now more often decide against becoming a mechanic or a construction worker and instead opt to train as a nurse."
The images are repeating themselves these days: Continental workers are demonstrating in France, autoworkers are demanding a rescue plan for Opel in the German city of Rüsselheim, while in New York and London bankers are clearing out their desks. They are the images of a crisis and the faces have one thing in common: They are almost all men.
Shipyard workers demonstrating in Bremerhaven: Men have been especially hard hit by the recession.
DDP
Shipyard workers demonstrating in Bremerhaven: Men have been especially hard hit by the recession.
As the crisis continues unabated and the collapse of the global economy pushes up unemployment figures, one thing is becoming clear: The crisis is disproportionately affecting men. Almost 80 percent of the 5.1 million Americans who have lost their jobs in recent months have been men. The US male unemployment figure is now 8.8 percent, while it is still only 7 percent for women.
The same is now happening in Germany where 55 percent of those registered as unemployed are men, and that is only going to increase. Male workers are more adversely affected by the current economic crisis, explained Heinrich Alt of Germany's Federal Employment Agency (BA) on Thursday as he presented the latest unemployment figures. The numbers speak volumes: While the unemployment rate for men in April increased by 12.4 percent compared to the same month last year, it actually decreased by 2.8 percent for women. More concretely: While almost 218,000 men lost their jobs, 46,939 women actually found one.
Industrial Sector Remains 'Male Domain'
"That is not really all that surprising, because this economic crisis has been concentrated in the classic industrial sectors," says Christian Dreger, head of Macro Analysis and Forecasting at the Berlin-based German Institute for Economic Research (DIW). The automobile industry in particular, including the businesses that supply the main carmakers, is shedding jobs. "And those are sectors that still employ more men," Dreger says. Women tend to work more in the service sector. "And the crisis has had little or no impact there."
Germany's DGB trade union federation agrees with this assessment. "Job losses at the moment are affecting men in particular because the industrial sectors such as auto making and mechanical engineering have remained male domains," DGB spokeswoman Claudia Falk says. Up to now the introduction of shorter working hours, under a scheme where the government makes up part of the shortfall in pay, has been able to cushion the impact in many big companies. "However, workers at small firms are already losing their jobs," Falk says.
RELATED SPIEGEL ONLINE LINKS
*
Is 2009 the New 1929?: Current Crisis Shows Uncanny Parallels to Great Depression (04/29/2009)
*
Taking the Downturn on the Chin: Why Is Germany So Calm? (04/28/2009)
*
Germany's Recession Blues: Berlin Predicts Sharp GDP Contraction for 2009 (04/29/2009)
*
SPIEGEL 360: Our Full Coverage of the Global Economic Downturn
Another factor is that a significantly higher number of men work than women. According to the Federal Employment Agency, male employment is currently 81.6 percent while female employment is only 69.2 percent. Those who work more are more likely, therefore, to lose their job.
In addition it is mostly full-time positions that are being cut -- and many women do not work a full 40-hour week. Around a third of employed women work part-time, while only 5.5 percent of working men are employed on a part-time basis.
That means that women are more likely to work in low-paid jobs. The Federal Employment Agency says that 67.4 percent of those in low-paid jobs are women, who often work as carers in retirement homes, supermarket cashiers, childminders or cleaners. These jobs may not be well paid but they are still required even in times of economic crisis.
'Women Are More Flexible'
However, better-paid women are also doing well, such as those working in traditionally more female spheres like education or health. The major industries like construction, manufacturing or even the financial services industry have always been more vulnerable to economic cycles and therefore suffer when the economy dips.
"Women are also more flexible when it comes to location or type of job and they adapt more quickly," says Falk of the DGB. "If a woman realizes that she hasn't got any more prospects somewhere then she tries to go somewhere else. It's something we have experienced in eastern Germany in the past." Many women from eastern Germany have in recent years left to go to western states, or even emigrated, in pursuit of job opportunities.
"In a society where services are becoming increasingly important, women quite simply have the better jobs," says Hans Bertram, a sociologist at the Humboldt University in Berlin.
Bertram is not at all surprised by the fact that it is men who are worst affected by the crisis. "That was historically always the case, for example when you look at the collapse of the steel and coal industries in the Ruhr industrial region," he says. Unemployment has always been a part of life in an industrialized country, and belongs to the rhythm of industrial society. "As long as someone is young and strong, he can make good money as a construction worker. But once you are 35 and your body won't cooperate any more, there are fewer prospects," Bertram explains.
He thinks it unlikely that, for example, former Opel workers will simply retrain to work in the service sector. "You can't turn a steel worker into a call center agent," he says. The service industry usually requires higher qualifications and these are not easily acquired later on in life, he explains.
"The change will only come with the generations," Bertram says. "Perhaps young men will now more often decide against becoming a mechanic or a construction worker and instead opt to train as a nurse."
Budget Gap Is Revised to Surpass $1.8 Trillion
WASHINGTON — President Obama has lately begun pointing to optimistic signs for the economy, but the continuing crisis still bedevils his budget projections and his domestic agenda.
Peter Orszag, the budget director, who appeared with President Obama last week, disclosed the latest revisions in his blog.
The administration, in final budget and tax details released Monday, disclosed a double wallop of bad news from government number-crunchers. First, its Office of Management and Budget reported that the economy had added — both for this year and next — $90 billion to the historically high deficit estimates the administration issued just two months ago.
And the Treasury released revised figures showing that Mr. Obama’s proposal for financing fully half of his health care initiative over the next decade — a 28 percent limit on deductions for Americans in the top two income tax brackets — would raise $267 billion, or roughly $50 billion less than he initially projected. That further complicates the president’s struggles, together with Democrats in Congress, to pay for overhauling health care.
To fill the revenue gap, the Treasury outlined several new ideas for raising nearly $60 billion over 10 years, mainly from tightening rules for inheritance taxes but also from changes in taxing some types of life insurance and other products.
Separately, the chairwoman of the Council of Economic Advisers, Christina Romer, released a preliminary report standing by the administration’s claim that the $787 billion, two-year economic stimulus package that became law in February will save or create 3.5 million jobs by the fourth quarter of 2010, compared with what would have happened without the spending and tax cuts.
The budget office’s revised deficit projections bring the expected shortfall this fiscal year, which ends Sept. 30, to $1.84 trillion, from a February projection of $1.75 trillion. For the 2010 fiscal year, the new estimate is $1.26 trillion, up from $1.17 trillion.
Measured against the economy, this year’s shortfall would be 12.9 percent of the gross domestic product. Next year’s deficit would be 8.5 percent of G.D.P. Even before the revisions, the deficit projections were the highest in more than 60 years, since the end of World War II.
Economists generally agree a country’s annual deficits should not exceed 3 percent of economic output. Mr. Obama, in his 10-year budget outline in February, projected the United States would fall just below that level in the last months of his term, in the 2013 fiscal year. Many analysts consider his economic assumptions too rosy, however, which casts doubt on his deficit forecast.
The president’s budget director, Peter R. Orszag, disclosed the deficit revisions Monday in his blog on the budget office’s Web site. He said they were “driven in large part by the economic crisis inherited by this administration.” He cited Treasury estimates that revenue collections would be $30 billion to $50 billion less this year and next compared with February calculations, and higher-than-expected costs for bank bailouts.
Congressional Democrats echoed the reference to the inheritance from President George W. Bush. “It took eight years for the previous administration to dig this hole. It is going to take time to climb our way out,” Senator Kent Conrad of North Dakota, chairman of the Senate Budget Committee, said in a statement.
Congressional Republicans seized on the new deficit projection to tweak the Democratic administration for its boast last week that its “line-by-line scrub” of the federal budget had produced proposals to save $17 billion in the 2010 fiscal year.
The Senate Republican leader, Senator Mitch McConnell of Kentucky, said in a statement that “the administration acknowledged today that since the president took office, their projections for the deficit grew five times faster than the proposed cuts would save, and that’s assuming all the cuts are enacted” — which they will not be, members of both parties in Congress say.
Mr. Obama’s proposal to limit high-income Americans’ deductions had already hit a wall of opposition in Congress, with the Democratic chairmen of the House and Senate tax-writing committees, among others, objecting that it could depress tax-deductible contributions for charities, colleges and other recipients. The proposal was intended to raise $318 billion of a proposed $635 billion, 10-year reserve fund to introduce cost-saving changes into health care and to expand coverage to the uninsured; the other half was to come from Medicare savings.
Of the new Treasury proposals to raise $60 billion through 2019, more than $24 billion would come from estate and gift taxes that would affect less than three-tenths of 1 percent of estates in any year, according to a senior Treasury official, who spoke to reporters on condition of anonymity. The main change would affect how a taxpayer values property transferred to a family member either at death or during the taxpayer’s life.
Peter Orszag, the budget director, who appeared with President Obama last week, disclosed the latest revisions in his blog.
The administration, in final budget and tax details released Monday, disclosed a double wallop of bad news from government number-crunchers. First, its Office of Management and Budget reported that the economy had added — both for this year and next — $90 billion to the historically high deficit estimates the administration issued just two months ago.
And the Treasury released revised figures showing that Mr. Obama’s proposal for financing fully half of his health care initiative over the next decade — a 28 percent limit on deductions for Americans in the top two income tax brackets — would raise $267 billion, or roughly $50 billion less than he initially projected. That further complicates the president’s struggles, together with Democrats in Congress, to pay for overhauling health care.
To fill the revenue gap, the Treasury outlined several new ideas for raising nearly $60 billion over 10 years, mainly from tightening rules for inheritance taxes but also from changes in taxing some types of life insurance and other products.
Separately, the chairwoman of the Council of Economic Advisers, Christina Romer, released a preliminary report standing by the administration’s claim that the $787 billion, two-year economic stimulus package that became law in February will save or create 3.5 million jobs by the fourth quarter of 2010, compared with what would have happened without the spending and tax cuts.
The budget office’s revised deficit projections bring the expected shortfall this fiscal year, which ends Sept. 30, to $1.84 trillion, from a February projection of $1.75 trillion. For the 2010 fiscal year, the new estimate is $1.26 trillion, up from $1.17 trillion.
Measured against the economy, this year’s shortfall would be 12.9 percent of the gross domestic product. Next year’s deficit would be 8.5 percent of G.D.P. Even before the revisions, the deficit projections were the highest in more than 60 years, since the end of World War II.
Economists generally agree a country’s annual deficits should not exceed 3 percent of economic output. Mr. Obama, in his 10-year budget outline in February, projected the United States would fall just below that level in the last months of his term, in the 2013 fiscal year. Many analysts consider his economic assumptions too rosy, however, which casts doubt on his deficit forecast.
The president’s budget director, Peter R. Orszag, disclosed the deficit revisions Monday in his blog on the budget office’s Web site. He said they were “driven in large part by the economic crisis inherited by this administration.” He cited Treasury estimates that revenue collections would be $30 billion to $50 billion less this year and next compared with February calculations, and higher-than-expected costs for bank bailouts.
Congressional Democrats echoed the reference to the inheritance from President George W. Bush. “It took eight years for the previous administration to dig this hole. It is going to take time to climb our way out,” Senator Kent Conrad of North Dakota, chairman of the Senate Budget Committee, said in a statement.
Congressional Republicans seized on the new deficit projection to tweak the Democratic administration for its boast last week that its “line-by-line scrub” of the federal budget had produced proposals to save $17 billion in the 2010 fiscal year.
The Senate Republican leader, Senator Mitch McConnell of Kentucky, said in a statement that “the administration acknowledged today that since the president took office, their projections for the deficit grew five times faster than the proposed cuts would save, and that’s assuming all the cuts are enacted” — which they will not be, members of both parties in Congress say.
Mr. Obama’s proposal to limit high-income Americans’ deductions had already hit a wall of opposition in Congress, with the Democratic chairmen of the House and Senate tax-writing committees, among others, objecting that it could depress tax-deductible contributions for charities, colleges and other recipients. The proposal was intended to raise $318 billion of a proposed $635 billion, 10-year reserve fund to introduce cost-saving changes into health care and to expand coverage to the uninsured; the other half was to come from Medicare savings.
Of the new Treasury proposals to raise $60 billion through 2019, more than $24 billion would come from estate and gift taxes that would affect less than three-tenths of 1 percent of estates in any year, according to a senior Treasury official, who spoke to reporters on condition of anonymity. The main change would affect how a taxpayer values property transferred to a family member either at death or during the taxpayer’s life.
Adding Up the Auto Bailout: $80 Billion and Growing
Now that you've finished filing your taxes, here's another task sure to clog your calculator—tallying the cost of the auto bailout. With General Motors Corp. running through $10 billion in cash from the federal treasury during the first three months of 2009 and Congress poised to offer consumers substantial tax credits for new, more fuel efficient vehicles, the costs of helping the struggling automobile industry are mounting fast. Throw in special financing for auto loans supported by the Federal Reserve Board, and the aid for automakers now totals $83 billion—and it keeps growing.
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Last week the Treasury Department provided Chrysler $4.1 billion in debtor-in-possession financing to help it get through bankruptcy, bringing the total amount of federal 'loans' to Chrysler to more than $8.2 billion. GM, meanwhile, has received $15.4 billion from the Troubled Asset Relief Program and its total loan request could top $27 billion before the company completes its restructuring, a GM spokesman says. Even that figure assumes that GM's cash burn, which was running more than $3 billion per month in the first quarter, begins to slow later in the year. If the recession deepens, GM could be back at the bar for more. (Read about the success of GM's Chinese division.)
The U.S. Treasury has also loaned $5 billion to GMAC, GM's auto financing partner, and another $1.5 billion to Chrysler Financial, which once financed Chrysler vehicles. Chrysler Financial is now being de-commissioned since GMAC will take over the financing of Chrysler vehicles under President Obama's plan to reorganize the automaker into a joint venture with Fiat. (Read "Porsche and VW Agree to a Merger".)
In a less celebrated aid package, the U.S. Treasury has advanced $5 billion to automotive suppliers in an effort to keep them out of bankruptcy.
Next up: Congress is moving ahead with a special 'cash for clunkers' program that is supported by a broad coalition of auto dealers, trade unions, finance companies and auto manufacturers. The nearly completed bill, which President Obama has indicated he will sign, offers consumers credits of $3,500 to $4,500 to trade in old vehicles for new, more fuel-efficient cars. The incentive is expected to cost the government $4 billion and to boost sales of new vehicles by one million units. "We believe this will play an important role in driving demand and stimulating sales," says Ray Young, GM's chief financial officer. (Read "My $4,500 Lemon: Taking the Feds Up on Cash For Clunkers".)
In addition, several automakers, among them Ford Motor Co., Volkswagen, Nissan, Honda and Mitsubishi, have applied for assistance under the Federal Reserve Board's Term Asset-Backed Securities Loan Facility or TALF. The TALF, which was set up last fall, was designed to subsidize the sale of asset-backed securities, a critical source of funding for car loans, student loans and credit card receivables.
Don't put down your pencil yet. The Obama Administration also has agreed to support GM and Chrysler's warranties as part of its bailout plans. The two companies have trimmed warranty expenses in recent years, but based on financial information from both automakers the potential federal liability required to back up Obama's pledge could ultimately run into the billions of dollars.
Almost lost amidst all the headlines about crisis aid to the automakers, the U.S. Department of Energy is now preparing to release $25 billion in loans appropriated last autumn to speed up the transition to more fuel efficient vehicles. The cash is supposed to be used for specific projects that increase fuel economy. Ford, for example, has applied to use some of the federal cash to convert an assembly plant in suburban Detroit from building trucks to building small cars and electric vehicles. The project costs $550 million and Ford hopes to use some of the DOE cash. GM, Chrysler, Nissan and Tesla, the California manufacturer of an exotic electric sports car, are also applying for some of the funds.
Meanwhile, automotive suppliers have petitioned the Treasury Department for an additional $8 billion and GMAC, which is now a bank, will need $11.5 billion in new capital according to the U.S. Treasury Department's stress tests.
As if all that weren't enough, GM predicted in February that bankruptcy, which now looks inevitable after the company's disastrous first quarter, could cost as much as $100 billion.
Related
Audio
Host Katherine Lanpher talks with the TIME's Barbara Kiviat about easy steps anyone can take to start saving now
Download | Subscribe
Stories
* China: Where GM Is Going Gangbusters
More Related
* Automakers Win Hearts in D.C., But No Cash (Yet)
* The Auto Bailout Keeps Growing, and Growing
* Bush’s Rescue Plan for Detroit: Passing The Buck
Last week the Treasury Department provided Chrysler $4.1 billion in debtor-in-possession financing to help it get through bankruptcy, bringing the total amount of federal 'loans' to Chrysler to more than $8.2 billion. GM, meanwhile, has received $15.4 billion from the Troubled Asset Relief Program and its total loan request could top $27 billion before the company completes its restructuring, a GM spokesman says. Even that figure assumes that GM's cash burn, which was running more than $3 billion per month in the first quarter, begins to slow later in the year. If the recession deepens, GM could be back at the bar for more. (Read about the success of GM's Chinese division.)
The U.S. Treasury has also loaned $5 billion to GMAC, GM's auto financing partner, and another $1.5 billion to Chrysler Financial, which once financed Chrysler vehicles. Chrysler Financial is now being de-commissioned since GMAC will take over the financing of Chrysler vehicles under President Obama's plan to reorganize the automaker into a joint venture with Fiat. (Read "Porsche and VW Agree to a Merger".)
In a less celebrated aid package, the U.S. Treasury has advanced $5 billion to automotive suppliers in an effort to keep them out of bankruptcy.
Next up: Congress is moving ahead with a special 'cash for clunkers' program that is supported by a broad coalition of auto dealers, trade unions, finance companies and auto manufacturers. The nearly completed bill, which President Obama has indicated he will sign, offers consumers credits of $3,500 to $4,500 to trade in old vehicles for new, more fuel-efficient cars. The incentive is expected to cost the government $4 billion and to boost sales of new vehicles by one million units. "We believe this will play an important role in driving demand and stimulating sales," says Ray Young, GM's chief financial officer. (Read "My $4,500 Lemon: Taking the Feds Up on Cash For Clunkers".)
In addition, several automakers, among them Ford Motor Co., Volkswagen, Nissan, Honda and Mitsubishi, have applied for assistance under the Federal Reserve Board's Term Asset-Backed Securities Loan Facility or TALF. The TALF, which was set up last fall, was designed to subsidize the sale of asset-backed securities, a critical source of funding for car loans, student loans and credit card receivables.
Don't put down your pencil yet. The Obama Administration also has agreed to support GM and Chrysler's warranties as part of its bailout plans. The two companies have trimmed warranty expenses in recent years, but based on financial information from both automakers the potential federal liability required to back up Obama's pledge could ultimately run into the billions of dollars.
Almost lost amidst all the headlines about crisis aid to the automakers, the U.S. Department of Energy is now preparing to release $25 billion in loans appropriated last autumn to speed up the transition to more fuel efficient vehicles. The cash is supposed to be used for specific projects that increase fuel economy. Ford, for example, has applied to use some of the federal cash to convert an assembly plant in suburban Detroit from building trucks to building small cars and electric vehicles. The project costs $550 million and Ford hopes to use some of the DOE cash. GM, Chrysler, Nissan and Tesla, the California manufacturer of an exotic electric sports car, are also applying for some of the funds.
Meanwhile, automotive suppliers have petitioned the Treasury Department for an additional $8 billion and GMAC, which is now a bank, will need $11.5 billion in new capital according to the U.S. Treasury Department's stress tests.
As if all that weren't enough, GM predicted in February that bankruptcy, which now looks inevitable after the company's disastrous first quarter, could cost as much as $100 billion.
Are Taxpayers Bailing Out Troubled Banks Twice?
The federal government is taking up the fight against credit card companies accused of taking advantage of consumers.
In taking aim at what he called "abuse that goes unpunished," President Obama has asked Congress to send him a bill by Memorial Day that prevents credit card companies from suddenly raising rates on everyday customers.
"Americans know they have a responsibility to live within their means and pay what they owe," Obama said. "But they also have a right to not get ripped off by sudden rate hikes, unfair penalties and hidden fees."
Congress is moving swiftly to comply with the president's request. A credit card holder's Bill of Rights has already passed the House. The bill would prohibit retroactive rate increases, prevent companies from issuing cards to anyone under 18 and eliminate what's called "double-cycle billing."
Double-cycle billing is a little known calculation used by many companies. The company looks at your current monthly balance, as well as your previous months' spending, and averages them both, charging you a higher interest rate.
Although the practice is considered deceptive, credit card holders often consent to it when they sign a contract.
"Most of these credit card companies have a little clause left somewhere in the back on page 28 in language that says, 'we can charge you any amount we want, at any time we want, for no reason at all,'" said Elizabeth Warren, a law professor at Harvard.
Warren chairs the Congressional Oversight Panel, an independent agency that tracks the hundreds of billions in taxpayer dollars already being used to help the banks survive.
On the heels of this week's stress tests, which showed 10 of the nation's 19 largest banks will need a further injection of cash to survive, she said it's no secret where the banks will get the money.
"We've seen a sharp rise in interest rates in the last few months on good customers who are paying. It's coming from banks taking taxpayer dollars." Warren said.
In essence, that means the banks will raise rates on taxpayers who helped them out in the first place.
One of those taxpayers, Mindy Busch, graduated from college today. She and her husband, Michael, are now expecting a baby. What they were not expecting were the rate hikes on the credit cards they pay faithfully. Bank of America raised their interest rate from 20 percent to 32 percent.
"It's just not fair," Busch said. "We pay every month, and this is a bank that is benefitting already from our taxpayer dollars."
Bank of America told ABC News they could not comment on an individual's account. As far as rates go, the bank said, "Any hikes reflect the current economic conditions. Our costs of providing credit have significantly increased."
In taking aim at what he called "abuse that goes unpunished," President Obama has asked Congress to send him a bill by Memorial Day that prevents credit card companies from suddenly raising rates on everyday customers.
"Americans know they have a responsibility to live within their means and pay what they owe," Obama said. "But they also have a right to not get ripped off by sudden rate hikes, unfair penalties and hidden fees."
Congress is moving swiftly to comply with the president's request. A credit card holder's Bill of Rights has already passed the House. The bill would prohibit retroactive rate increases, prevent companies from issuing cards to anyone under 18 and eliminate what's called "double-cycle billing."
Double-cycle billing is a little known calculation used by many companies. The company looks at your current monthly balance, as well as your previous months' spending, and averages them both, charging you a higher interest rate.
Although the practice is considered deceptive, credit card holders often consent to it when they sign a contract.
"Most of these credit card companies have a little clause left somewhere in the back on page 28 in language that says, 'we can charge you any amount we want, at any time we want, for no reason at all,'" said Elizabeth Warren, a law professor at Harvard.
Warren chairs the Congressional Oversight Panel, an independent agency that tracks the hundreds of billions in taxpayer dollars already being used to help the banks survive.
On the heels of this week's stress tests, which showed 10 of the nation's 19 largest banks will need a further injection of cash to survive, she said it's no secret where the banks will get the money.
"We've seen a sharp rise in interest rates in the last few months on good customers who are paying. It's coming from banks taking taxpayer dollars." Warren said.
In essence, that means the banks will raise rates on taxpayers who helped them out in the first place.
One of those taxpayers, Mindy Busch, graduated from college today. She and her husband, Michael, are now expecting a baby. What they were not expecting were the rate hikes on the credit cards they pay faithfully. Bank of America raised their interest rate from 20 percent to 32 percent.
"It's just not fair," Busch said. "We pay every month, and this is a bank that is benefitting already from our taxpayer dollars."
Bank of America told ABC News they could not comment on an individual's account. As far as rates go, the bank said, "Any hikes reflect the current economic conditions. Our costs of providing credit have significantly increased."
The “Stress Test” Scam
The “Stress Test” Scam
By Mr. Walker
The results are in and, completely and utterly to no surprise at all, the US banking system is in decent fundamental shape. Yup, Dr. Geithner and Nurse Bernanke had the 19 largest banks in the US drop trow, grabbed their balls, told them to turn their heads and cough, and pronounced them in more or less good health. $74 billion short of rude, independent vigor perhaps, but short nothing more than a run of penicillin here and a couple of aspirin there. As needed. Of course it was only last September, when Lehman was allowed to fail for the unforgivable sin of not being Goldman Sachs, that US banking was well and truly on the brink of collapse, with the electronic/institutional equivalent of a run on the system. Since then we have heard nothing but a relentless stream of bad news about the US and world economy. But, carry on folks, nothing to see here. All is well.
The news was not all good, of course. Bank of America needs to raise something like $35 billion in capital to weather a “bad” recession (more on what makes a recession “bad” anon). Citi, the biggest basket case of them all, needs a third injection of capital from somewhere, to the tune of at least $10 billion, and Citi is looking to sell pretty much anything down to the Sharpies, toner cartridges, and paper clips. Other smaller banks need smaller injections of money and after that we’re told should be all set to ride out the storm.
What all this tells us is not anything terrifically important or insightful about the banks. They’re fucked, for years at least, but the fix was pretty much in. Treasury has about $110 billion in TARP money left in the kitty, and Congress has made it crystal clear that having voted for every law that got us in this mess, and having taken money from any WaMU lobbyist who happened to turn up, they are now shocked, SHOCKED that all of this happened. For the foreseeable future Congress is going to stand on the sideline with arms frumpily crossed and do the only thing they do well–hold vacuous hearings and try to make someone else take the blame. So Treasury isn’t getting any more money once that $110 billion runs out. Thus the stress tests would show a result that can be plugged by the available funds and nothing more. After that money is depleted, Colonel Ben and Sergeant Tim will have no arrows left in the quiver save repaid TARP money, the fed balance sheet, and the printing press. Tim and Ben knew that going into the stress tests, so it’s not surprising that the results show a $74 billion hole that can be filled comfortably with a combination of private and public investment.
What is a stress test? When one hears the word “stress test” it conjures notions of something quite kinetic and active. When a design for an airplane wing is stress tested a prototype is built and then put into a wind tunnel where it is subjected to amounts of force it will likely never see in practice. No such rigor or violence was visited upon the 19 banks in question here. The “stress test” was fundamentally an exercise in accounting, and generous accounting at that. Fire up the copy of Microsoft Excel, run a bunch of numbers assuming a pair of economic scenarios as inputs, then try to guess what reserves a bank will need to weather each scenario. As an accounting exercise there is something crushingly boring about most of this, certainly it’s nowhere near as fun as blowing up an airplane in a wind tunnel.
For the stress tests the degree of “stress” applied to the banks was calibrated by two possible economic scenarios for 2009 and 2010. The “baseline” scenario estimates US GDP contracting -2% in 2009 and rebounding to 2.1% growth in 2010. This scenario has unemployment at 8.4% in ‘09, and 8.8% in ‘10, with housing prices down -14% and -4% in those two years. The “adverse” scenario assumes -3.3% and +0.5% GDP, 8.9% and 10.3% unemployment, and -22% and -7% in hosing prices in 2009 and 2010.
Keeping in mind that the data out of a model is only as good as the assumptions the model takes as inputs, the parameters for “baseline” sound rather a lot more like “extremely optimistic” than anything else. For example, GDP contracted at a -6.2% annualized rate in the last quarter of 2008, while preliminary estimates for the first quarter of 2009 suggest an annualized contraction of -6.1%. That’s a scant .1% improvement. Still, the ‘baseline’ scenario in the stress tests assumes we can get back to -2% for the year. With the economy currently contracting at a rate of -6% and change over two quarters, returning to -2% will take some real doing.
On the housing front, according to the Case-Schiller Index (the best we have), housing prices dropped 18.2% during calendar 2008, and that data can be paired with the fact that roughly 19 million homes were empty at the end of 2008, easily a record number. Additionally, people who want to get mortgages today, as opposed to in 2006, have to have exotic things called ‘jobs’ and the US has been shaving half a million of those off the economy every month for some time now.
All of this makes the assumptions of the stress tests look questionable, at least. But let’s look beyond the GDP and housing numbers a bit.
A far more interesting measure of where we are in the business cycle comes from one of the Fed’s own economic measurements. This Fed statistic measures industrial capacity and industrial utilization for the US. Not all statistics are created equal, many can be cooked and spun with surprising ease. However, a few measures cut to the chase like industrial output and capacity.
Total industrial production is everything the home of the brave is making. Consumer goods, business goods, raw materials like oil and natural gas, and power created by utilities. Take a look at this chart:
On the top chart industrial capacity appears to have flattened, meaning very few new factories are being built, wells are being drilled, or power plants fired. On that same chart production itself, as opposed to capacity, is declining instead of flatlining. That is, what we COULD be making has been flat since mid-2007, but what we ARE making is declining rapidly, taking a nose dive since late 2007. Even scarier is the lower chart, which instead of showing absolute numbers shows relative ones. Of our total industrial capacity, what percentage of it is in use and what percentage of it is idle? How many of our factories, coal mines, and power plants are in use, and how many are sitting still? As you can see, that relative number is the worst it has been since data collection started in 1967, and it’s trending rather brutally down. Kind of like a missile in descent. Also, those little gray vertical bars on the charts are previous recessions, and you can decide for yourself how closely recessions track this data for industrial production and capacity. Looks pretty close to me.
Keep in mind, these numbers have absolutely zero to do with banking and Wall Street, save the extent to which credit conditions are impacting purchases by both businesses and individuals. These numbers are about the “real economy.” This is not a robber baron index, it’s a working class index. How much stuff are we making, how much could we make, and what amount of our industrial capacity is sitting idle and what amount is being used. The numbers are uniformly, and somewhat shockingly grim. Which makes me wonder why we don’t hear much about them on CNBC.
Now then, I’m not a merchant of doom, but I try to be a dispenser of realism. Looking at those charts, and recent GDP numbers, it’s hard to call the “baseline” scenario of the stress tests “baseline.” They look more like “highly optimistic” or if you want to get all intellectual and shit, “Panglossian.” The “adverse” scenario then, -3.3% in 2009 and then close to flat in 2010, would move to the “hopeful but not trying to kid ourselves” category. From the very start, it would seem the “stress tests” are using exceedingly gentle amounts of stress. And there are far more stressful situations that are not difficult to imagine.
What is scary is that even using the “adverse scenario” which, upon further review, looks not all that adverse, Bank of America needs another $35 billion to stay afloat. Not to prosper, just to stay in business. If that’s the case, then why would $74 billion of private capital arrive to plug this hole? I don’t know about you, but if I had $74 billion burning a hole in my pocket the first place I would invest it would NOT be the least solvent banks in the home of the brave. Not by a long shot.
But they will be cobbled together, these banks, no matter what the cost to the taxpayer. They are “too big to fail,” so they will not fail, no matter the cost.
There are a few interesting things to watch as we handicap the next few moves. How much private capital can be conjured to help the banks? Again, if it’s my private capital that would be not one solitary nickel, but will others fill the breach? Assuming private capital can’t or won’t make things right, how much taxpayer money will have to substitute for private investment? And, worst of all, what happens if the “adverse” scenario winds up being something rather more optimistic than adverse?
Anybody who says they know the answers to these questions is full of shit. Nobody knows. Personally I hope for the best, but try to confront reality.
By Mr. Walker
The results are in and, completely and utterly to no surprise at all, the US banking system is in decent fundamental shape. Yup, Dr. Geithner and Nurse Bernanke had the 19 largest banks in the US drop trow, grabbed their balls, told them to turn their heads and cough, and pronounced them in more or less good health. $74 billion short of rude, independent vigor perhaps, but short nothing more than a run of penicillin here and a couple of aspirin there. As needed. Of course it was only last September, when Lehman was allowed to fail for the unforgivable sin of not being Goldman Sachs, that US banking was well and truly on the brink of collapse, with the electronic/institutional equivalent of a run on the system. Since then we have heard nothing but a relentless stream of bad news about the US and world economy. But, carry on folks, nothing to see here. All is well.
The news was not all good, of course. Bank of America needs to raise something like $35 billion in capital to weather a “bad” recession (more on what makes a recession “bad” anon). Citi, the biggest basket case of them all, needs a third injection of capital from somewhere, to the tune of at least $10 billion, and Citi is looking to sell pretty much anything down to the Sharpies, toner cartridges, and paper clips. Other smaller banks need smaller injections of money and after that we’re told should be all set to ride out the storm.
What all this tells us is not anything terrifically important or insightful about the banks. They’re fucked, for years at least, but the fix was pretty much in. Treasury has about $110 billion in TARP money left in the kitty, and Congress has made it crystal clear that having voted for every law that got us in this mess, and having taken money from any WaMU lobbyist who happened to turn up, they are now shocked, SHOCKED that all of this happened. For the foreseeable future Congress is going to stand on the sideline with arms frumpily crossed and do the only thing they do well–hold vacuous hearings and try to make someone else take the blame. So Treasury isn’t getting any more money once that $110 billion runs out. Thus the stress tests would show a result that can be plugged by the available funds and nothing more. After that money is depleted, Colonel Ben and Sergeant Tim will have no arrows left in the quiver save repaid TARP money, the fed balance sheet, and the printing press. Tim and Ben knew that going into the stress tests, so it’s not surprising that the results show a $74 billion hole that can be filled comfortably with a combination of private and public investment.
What is a stress test? When one hears the word “stress test” it conjures notions of something quite kinetic and active. When a design for an airplane wing is stress tested a prototype is built and then put into a wind tunnel where it is subjected to amounts of force it will likely never see in practice. No such rigor or violence was visited upon the 19 banks in question here. The “stress test” was fundamentally an exercise in accounting, and generous accounting at that. Fire up the copy of Microsoft Excel, run a bunch of numbers assuming a pair of economic scenarios as inputs, then try to guess what reserves a bank will need to weather each scenario. As an accounting exercise there is something crushingly boring about most of this, certainly it’s nowhere near as fun as blowing up an airplane in a wind tunnel.
For the stress tests the degree of “stress” applied to the banks was calibrated by two possible economic scenarios for 2009 and 2010. The “baseline” scenario estimates US GDP contracting -2% in 2009 and rebounding to 2.1% growth in 2010. This scenario has unemployment at 8.4% in ‘09, and 8.8% in ‘10, with housing prices down -14% and -4% in those two years. The “adverse” scenario assumes -3.3% and +0.5% GDP, 8.9% and 10.3% unemployment, and -22% and -7% in hosing prices in 2009 and 2010.
Keeping in mind that the data out of a model is only as good as the assumptions the model takes as inputs, the parameters for “baseline” sound rather a lot more like “extremely optimistic” than anything else. For example, GDP contracted at a -6.2% annualized rate in the last quarter of 2008, while preliminary estimates for the first quarter of 2009 suggest an annualized contraction of -6.1%. That’s a scant .1% improvement. Still, the ‘baseline’ scenario in the stress tests assumes we can get back to -2% for the year. With the economy currently contracting at a rate of -6% and change over two quarters, returning to -2% will take some real doing.
On the housing front, according to the Case-Schiller Index (the best we have), housing prices dropped 18.2% during calendar 2008, and that data can be paired with the fact that roughly 19 million homes were empty at the end of 2008, easily a record number. Additionally, people who want to get mortgages today, as opposed to in 2006, have to have exotic things called ‘jobs’ and the US has been shaving half a million of those off the economy every month for some time now.
All of this makes the assumptions of the stress tests look questionable, at least. But let’s look beyond the GDP and housing numbers a bit.
A far more interesting measure of where we are in the business cycle comes from one of the Fed’s own economic measurements. This Fed statistic measures industrial capacity and industrial utilization for the US. Not all statistics are created equal, many can be cooked and spun with surprising ease. However, a few measures cut to the chase like industrial output and capacity.
Total industrial production is everything the home of the brave is making. Consumer goods, business goods, raw materials like oil and natural gas, and power created by utilities. Take a look at this chart:
On the top chart industrial capacity appears to have flattened, meaning very few new factories are being built, wells are being drilled, or power plants fired. On that same chart production itself, as opposed to capacity, is declining instead of flatlining. That is, what we COULD be making has been flat since mid-2007, but what we ARE making is declining rapidly, taking a nose dive since late 2007. Even scarier is the lower chart, which instead of showing absolute numbers shows relative ones. Of our total industrial capacity, what percentage of it is in use and what percentage of it is idle? How many of our factories, coal mines, and power plants are in use, and how many are sitting still? As you can see, that relative number is the worst it has been since data collection started in 1967, and it’s trending rather brutally down. Kind of like a missile in descent. Also, those little gray vertical bars on the charts are previous recessions, and you can decide for yourself how closely recessions track this data for industrial production and capacity. Looks pretty close to me.
Keep in mind, these numbers have absolutely zero to do with banking and Wall Street, save the extent to which credit conditions are impacting purchases by both businesses and individuals. These numbers are about the “real economy.” This is not a robber baron index, it’s a working class index. How much stuff are we making, how much could we make, and what amount of our industrial capacity is sitting idle and what amount is being used. The numbers are uniformly, and somewhat shockingly grim. Which makes me wonder why we don’t hear much about them on CNBC.
Now then, I’m not a merchant of doom, but I try to be a dispenser of realism. Looking at those charts, and recent GDP numbers, it’s hard to call the “baseline” scenario of the stress tests “baseline.” They look more like “highly optimistic” or if you want to get all intellectual and shit, “Panglossian.” The “adverse” scenario then, -3.3% in 2009 and then close to flat in 2010, would move to the “hopeful but not trying to kid ourselves” category. From the very start, it would seem the “stress tests” are using exceedingly gentle amounts of stress. And there are far more stressful situations that are not difficult to imagine.
What is scary is that even using the “adverse scenario” which, upon further review, looks not all that adverse, Bank of America needs another $35 billion to stay afloat. Not to prosper, just to stay in business. If that’s the case, then why would $74 billion of private capital arrive to plug this hole? I don’t know about you, but if I had $74 billion burning a hole in my pocket the first place I would invest it would NOT be the least solvent banks in the home of the brave. Not by a long shot.
But they will be cobbled together, these banks, no matter what the cost to the taxpayer. They are “too big to fail,” so they will not fail, no matter the cost.
There are a few interesting things to watch as we handicap the next few moves. How much private capital can be conjured to help the banks? Again, if it’s my private capital that would be not one solitary nickel, but will others fill the breach? Assuming private capital can’t or won’t make things right, how much taxpayer money will have to substitute for private investment? And, worst of all, what happens if the “adverse” scenario winds up being something rather more optimistic than adverse?
Anybody who says they know the answers to these questions is full of shit. Nobody knows. Personally I hope for the best, but try to confront reality.
Banks Brace for Credit Card Write-Offs
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
Skip to next paragraph
Multimedia
Unemployment and Bank Card LossesGraphic
Unemployment and Bank Card Losses
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called an adverse economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
Skip to next paragraph
Multimedia
Unemployment and Bank Card LossesGraphic
Unemployment and Bank Card Losses
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called an adverse economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
The New York Fed is the most powerful financial institution you've never heard of. Look who's running it.
The kerfuffle about current New York Federal Reserve Bank Chairman Stephen Friedman's purchase of some Goldman stock while the Fed was involved in reviewing major decisions about Goldman's future—well-covered by the Wall Street Journal here and here—raises a fundamental question about Wall Street's corruption. Just as the millions in AIG bonuses obscured the much more significant issue of the $70 billion-plus in conduit payments authorized by the N.Y. Fed to AIG's counterparties, the small issue of Friedman's stock purchase raises very serious issues about the competence and composition of the Federal Reserve of New York, which is the most powerful financial institution most Americans know nothing about.
A quasi-independent, public-private body, the New York Fed is the first among equals of the 12 regional Fed branches. Unlike the Washington Federal Reserve Board of Governors, or the other regional fed branches, the N.Y. Fed is active in the markets virtually every day, changing the critical interest rates that determine the liquidity of the markets and the profitability of banks. And, like the other regional branches, it has boundless power to examine, at will, the books of virtually any banking institution and require that wide-ranging actions be taken—from raising capital to stopping lending—to ensure the stability and soundness of the bank. Over the past year, the New York Fed has been responsible for committing trillions of dollars of taxpayer money to resuscitate the coffers of the banks it oversees.
Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.
So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed.
The composition of the New York Fed's board, which supervises the organization and current Chairman Friedman, is equally troubling. The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are "public" representatives.
So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!
Of course, there have been the occasional nonfinance representatives from academia and labor. But they have been so outnumbered that their presence has done little to alter the direction of the board.
So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?
I do not mean to suggest that any of these board members intentionally discharged their duties with the specific goal of benefitting themselves. Rather, what we have seen is disastrous groupthink, a way of looking at the world from the perspective of Wall Street and Wall Street alone. That failure has brought the world economy to the edge of unraveling. And some of Geithner's early missteps betrayed an inability to get beyond this tunnel vision, such as the idea that the banks need to be first in line to be paid and to be paid in full. We can only hope that Geithner, who, to his credit, did try to raise some of the regulatory issues that mattered while he was at the Fed, is no longer in the mental prison of Lower Manhattan and will have more success now that he has a board of one—President Obama.
Perhaps it is time to calculate what these board members have been paid by their banks in salary and bonuses over the years and seek to have them return it to the public as small compensation for their failed oversight of the N.Y. Fed. And more fundamentally, perhaps it is time to take a hard look at the governing structure and supposed independence of this institution that actually controls the use of our tax dollars and, heaven help us, the fate of our economy.
A quasi-independent, public-private body, the New York Fed is the first among equals of the 12 regional Fed branches. Unlike the Washington Federal Reserve Board of Governors, or the other regional fed branches, the N.Y. Fed is active in the markets virtually every day, changing the critical interest rates that determine the liquidity of the markets and the profitability of banks. And, like the other regional branches, it has boundless power to examine, at will, the books of virtually any banking institution and require that wide-ranging actions be taken—from raising capital to stopping lending—to ensure the stability and soundness of the bank. Over the past year, the New York Fed has been responsible for committing trillions of dollars of taxpayer money to resuscitate the coffers of the banks it oversees.
Given the power of the N.Y. Fed, it is time to ask some very hard questions about its recent performance. The first question to ask is: Who is the New York Fed? Who exactly has been running the show? Yes, we all know that Tim Geithner was the president and CEO of the N.Y. Fed from 2003 until his ascension as treasury secretary. But who chose him for that position, and to whom did he report? The N.Y. Fed president reports to, and is chosen by, the Fed board of directors.
So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros. It was not a group of typical depositors worried about the security of their savings accounts but rather one whose interest was in preserving a capital structure and way of doing business that cried out for—but did not receive—harsh examination from the N.Y. Fed.
The composition of the New York Fed's board, which supervises the organization and current Chairman Friedman, is equally troubling. The board consists of nine individuals, three chosen by the N.Y. Fed member banks as their own representatives, three chosen by the member banks to represent the public, and three chosen by the national Fed Board of Governors to represent the public. In theory this sounds great: Six board members are "public" representatives.
So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!
Of course, there have been the occasional nonfinance representatives from academia and labor. But they have been so outnumbered that their presence has done little to alter the direction of the board.
So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?
I do not mean to suggest that any of these board members intentionally discharged their duties with the specific goal of benefitting themselves. Rather, what we have seen is disastrous groupthink, a way of looking at the world from the perspective of Wall Street and Wall Street alone. That failure has brought the world economy to the edge of unraveling. And some of Geithner's early missteps betrayed an inability to get beyond this tunnel vision, such as the idea that the banks need to be first in line to be paid and to be paid in full. We can only hope that Geithner, who, to his credit, did try to raise some of the regulatory issues that mattered while he was at the Fed, is no longer in the mental prison of Lower Manhattan and will have more success now that he has a board of one—President Obama.
Perhaps it is time to calculate what these board members have been paid by their banks in salary and bonuses over the years and seek to have them return it to the public as small compensation for their failed oversight of the N.Y. Fed. And more fundamentally, perhaps it is time to take a hard look at the governing structure and supposed independence of this institution that actually controls the use of our tax dollars and, heaven help us, the fate of our economy.
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