A long, winding road to great depression
Bankruptcy sale: A woman walks past a store advertising a sale, on 'Black Friday' in Fairfax, Virginia on Friday. Shoppers turned up early for holiday sales at US stores on Friday, but the annual pilgrimage appeared thinner this year and many consumers vowed to keep spending down due to a shrinking economy.Picture: Reuters
J BRADFORD DELONG
BERKELEY
Sunday, November 30, 2008
FOR 15 months, the United States Federal Reserve, assisted by the financial regulators of the US Treasury, have been trying to make the macroeconomic consequences of the American mortgage-backed securities financial crisis as small as possible trying, above all, to avoid a deep depression.
They have also had three subsidiary objectives:
Keep as much economic activity as possible under private-sector control, in order to ensure that what is produced is what consumers really want.
Prevent the princes of Wall Street who led us into the crisis from profiting from the systemic risk that they created.
Ensure that homeowners and small investors do not absorb too much loss, for their only crime was to accept bad risks, which they would not have done in a world of properly diversified portfolios.
Now it is clear that the Fed and the Treasury have lost the game.
If a depression is to be avoided, it will have to be the work of other arms of the government, with other tools and powers.
The failure to contain the crisis will ultimately be traced, I think, to excessive concern with the first two subsidiary objectives: reining in Wall Street princes and keeping economic decision-making private.
Had the Fed and the Treasury given those two objectives their proper subsidiary weight, I suspect that we would not now be in this mess, and that the danger of a global depression would still be very far away. The desire to prevent the princes of Wall Street from profiting from the crisis was reflected in the Fed-Treasury decision to let Lehman Brothers collapse in an uncontrolled bankruptcy without oversight, supervision, or guarantees.
The logic behind that decision was that, previously in the crisis, equity shareholders had been severely punished when their firms were judged too big to fail.
The shareholders of Bear Stearns, AIG, Fannie Mae, and Freddie Mac essentially had ownership positions and all their wealth confiscated for pennies.
But this was not true of bondholders and counterparties, who were paid in full.
The Fed and Treasury feared that the lesson being taught in the last half of 2007 and the first half of 2008 was that the US government guaranteed all the debt and transactions of every bank and bank-like entity that was regarded as too big to fail.
That, the Fed and the Treasury believed, could not be healthy.
Lenders to very large overleveraged institutions had to have some incentive to calculate the risks.
But that required, at some point, allowing some bank to fail, and persuading some debt holders and counterparties that the government guarantee of support to institutions that were too big to fail was not certain.
In retrospect, this was a major mistake.
The extended web of finance as it existed in the summer of 2008 was the result of millions of calculations that the US government did, in fact, guarantee the unsecured debt of every very large bank and bank-like entity in America.
With that guarantee broken by Lehman Brothers collapse, every financial institution immediately sought to acquire a much greater capital cushion in order to avoid the need to draw on government support, but found it impossible to do so.
The Lehman Brothers bankruptcy created an extraordinary and immediate demand for additional bank capital, which the private sector could not supply.
It was at this point that the Treasury made the second mistake. Because it tried to keep the private sector private, it sought to avoid partial or full nationalisation of the components of the banking system deemed too big to fail.
In retrospect, the Treasury should have identified all such entities and started buying common stock in them whether they liked it or not until the crisis passed.
Yes, this is what might be called lemon socialism, creating grave dangers for corporate control, posing a threat of large-scale corruption, and establishing a precedent for intervention that could be very dangerous down the road.
But would that have been worse than what we face now?
The failure to sacrifice the subsidiary objective of keeping the private sector private meant that the Fed and the Treasury lost their opportunity to attain the principal objective of avoiding depression.
Of course, hindsight is always easy.
But if depression is to be avoided, it will be through old-fashioned Keynesian fiscal policy: the government must take a direct hand in boosting spending and deciding what goods and services will be in demand.
J Bradford DeLong is Professor of Economics at the University of California at Berkeley and a former Assistant US Treasury Secretary.
Project Syndicate
Sunday, November 30, 2008
Friday, November 28, 2008
China economic downturn deepens
China economic downturn deepens
For long life: A group of Chinese chefs show off the art of noodle making in Xian, northern China's Shaanxi province on Wednesday. The Chinese have been feasting on noodles for approximately 2,000 years, dating back to the Han dynasty (206 BC-220 AD). Picture: AFP
SINGAPORE
Friday, November 28, 2008
CHINA yesterday warned its economic downturn was deepening with the spread of the global financial crisis, while a senior European policymaker said woes could extend beyond 2009.
In India, emerging Asia's other economic titan, financial markets were closed after Islamist militants killed more than 100 people in the commercial capital Mumbai.
The violence in Mumbai and the political unrest in Thailand showed that political risk is an extra potential threat to emerging markets reeling from the global crisis.
"These awful events are reinforcing the nervousness about emerging markets, which have been weak any way for some time after the U.S. slowdown and the domino effect," said Justin Urquhart Stewart, investment director at Seven Investment Management in London.
The economic warnings from China's top planner came a day after its central bank cut interest rates by the biggest margin in 11 years in response to the worst global downturn in decades.
China's State Information Centre, a government think-tank, forecast annual growth would slow to eight per cent this quarter from nine per cent in the third quarter, a rapid cooling from double-digit rates recorded in the past five years.
"The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November," Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.
With factories closing by the thousands, Chinese officials have grown increasingly concerned in recent weeks that slowing growth may threaten the stability that the ruling Communist party craves for its 1.3 billion people.
Slowing demand for Chinese exports in the West is curbing growth and there is no relief in sight.
The eurozone is likely to be in recession next year, European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said, reversing a forecast of slight growth made earlier this month.
Almunia would not give a specific forecast for 2009, but said next year may not mark the end of the eurozone's troubles. "The crisis may not end in 2009," he said.
Emphasising the bleak outlook, the eurozone's business climate indicator fell to its lowest in more than 15 years in November, European Commission data showed.
Reuters
For long life: A group of Chinese chefs show off the art of noodle making in Xian, northern China's Shaanxi province on Wednesday. The Chinese have been feasting on noodles for approximately 2,000 years, dating back to the Han dynasty (206 BC-220 AD). Picture: AFP
SINGAPORE
Friday, November 28, 2008
CHINA yesterday warned its economic downturn was deepening with the spread of the global financial crisis, while a senior European policymaker said woes could extend beyond 2009.
In India, emerging Asia's other economic titan, financial markets were closed after Islamist militants killed more than 100 people in the commercial capital Mumbai.
The violence in Mumbai and the political unrest in Thailand showed that political risk is an extra potential threat to emerging markets reeling from the global crisis.
"These awful events are reinforcing the nervousness about emerging markets, which have been weak any way for some time after the U.S. slowdown and the domino effect," said Justin Urquhart Stewart, investment director at Seven Investment Management in London.
The economic warnings from China's top planner came a day after its central bank cut interest rates by the biggest margin in 11 years in response to the worst global downturn in decades.
China's State Information Centre, a government think-tank, forecast annual growth would slow to eight per cent this quarter from nine per cent in the third quarter, a rapid cooling from double-digit rates recorded in the past five years.
"The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November," Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.
With factories closing by the thousands, Chinese officials have grown increasingly concerned in recent weeks that slowing growth may threaten the stability that the ruling Communist party craves for its 1.3 billion people.
Slowing demand for Chinese exports in the West is curbing growth and there is no relief in sight.
The eurozone is likely to be in recession next year, European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said, reversing a forecast of slight growth made earlier this month.
Almunia would not give a specific forecast for 2009, but said next year may not mark the end of the eurozone's troubles. "The crisis may not end in 2009," he said.
Emphasising the bleak outlook, the eurozone's business climate indicator fell to its lowest in more than 15 years in November, European Commission data showed.
Reuters
US$5 trillion lost in global financial crisis
US$5 trillion lost in global financial crisis
PARIS
Friday, November 28, 2008
A TOTAL of US$5 trillion has been lost in the global financial crisis, the head of the Davos economic forum said yesterday as he announced a record presence of world leaders at the conference in January.
Russian Prime Minister Vladimir Putin will give the opening speech at the World Economic Forum in the Swiss resort on January 28 where the theme will be "Shaping The Post Crisis World", said its founder Klaus Schwab.
The Swiss economist, on a visit to Paris, said: "As it stands now, about US$5 trillion has been lost in the financial crisis and now has to be reconstituted" by governments. The forum had forecast the crisis in the financial system in its annual risk report at the start of the year.
"I am not dramatically pessimistic about the future, just realistically pessimistic and I think there are also enormous opportunities in terms of using technology and changing the environment," Schwab said.
He said the turmoil, the worst financial crisis since the Great Depression, meant that the 39th annual Davos meeting would be the most important ever and it will have the biggest participation.
Schwab said there would be more than 160 leaders of head of state or government or ministerial rank among the 1,200 business, social and trade union leaders at the five-day forum.
Putin was the only world leader whose presence was confirmed, but forum officials said many leaders from the Group of Eight industrial powers and emerging economic powers were expected to attend. The full list will only be released in January.
The violence in India and political unrest in Thailand highlighted political risk as an extra potential threat to emerging markets battered by the global crisis.
A crisis that began last year with the collapse of the US housing market has spread around the world, bringing several financial institutions to their knees and pushing the US, Japan and Europe into recession or to the brink of it.
Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies.
Economic sentiment in Europe's single currency zone slumped to 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut by the European Central Bank (ECB) next week.
"The eurozone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 per cent."
Benchmark rates stand at 3.25 per cent in the eurozone, compared with one per cent in the US.
Amid the crisis, job cuts are also increasing across the globe. Steelmaker ArcelorMittal said it would slash up to 9,000 positions. AFP, Reuters
PARIS
Friday, November 28, 2008
A TOTAL of US$5 trillion has been lost in the global financial crisis, the head of the Davos economic forum said yesterday as he announced a record presence of world leaders at the conference in January.
Russian Prime Minister Vladimir Putin will give the opening speech at the World Economic Forum in the Swiss resort on January 28 where the theme will be "Shaping The Post Crisis World", said its founder Klaus Schwab.
The Swiss economist, on a visit to Paris, said: "As it stands now, about US$5 trillion has been lost in the financial crisis and now has to be reconstituted" by governments. The forum had forecast the crisis in the financial system in its annual risk report at the start of the year.
"I am not dramatically pessimistic about the future, just realistically pessimistic and I think there are also enormous opportunities in terms of using technology and changing the environment," Schwab said.
He said the turmoil, the worst financial crisis since the Great Depression, meant that the 39th annual Davos meeting would be the most important ever and it will have the biggest participation.
Schwab said there would be more than 160 leaders of head of state or government or ministerial rank among the 1,200 business, social and trade union leaders at the five-day forum.
Putin was the only world leader whose presence was confirmed, but forum officials said many leaders from the Group of Eight industrial powers and emerging economic powers were expected to attend. The full list will only be released in January.
The violence in India and political unrest in Thailand highlighted political risk as an extra potential threat to emerging markets battered by the global crisis.
A crisis that began last year with the collapse of the US housing market has spread around the world, bringing several financial institutions to their knees and pushing the US, Japan and Europe into recession or to the brink of it.
Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies.
Economic sentiment in Europe's single currency zone slumped to 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut by the European Central Bank (ECB) next week.
"The eurozone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 per cent."
Benchmark rates stand at 3.25 per cent in the eurozone, compared with one per cent in the US.
Amid the crisis, job cuts are also increasing across the globe. Steelmaker ArcelorMittal said it would slash up to 9,000 positions. AFP, Reuters
Banking Crises: Plus Ça Change
Banking Crises: Plus Ça Change …
By Steve Hanke
Banking crises are all too common. They are also costly. The potential cost of the most recent bail-out package in the United States is a staggering $2.25 trillion. That’s 16% of GDP. Compared to the actual bail-out costs following Indonesia’s banking crisis of 1997-98, for example, the US figure is small change. Indeed, Indonesia’s bail out costs amounted to 40% of GDP.
Today, facing the threat of a new banking crisis, many governments in this region have increased state guarantee on bank deposits (see table below) using taxpayers’ money. Malaysia too has guaranteed all ringgit and foreign currency deposits through the Malaysia Deposit Insurance Corporation (Perbadanan Insurans Deposit Malaysia).
New Zealand Guarantee retail deposits in New Zealand-registered banks, building societies, credit unions and deposit-taking finance companies (Oct 12)
Indonesia Raised bank deposit guarantees to 2 billion rupiah from 100 million rupiah per account (Oct 13)
Hong Kong Guaranteed all customer bank deposits until end of 2010 (Oct 14)
Malaysia Guaranteed all ringgit and foreign currency deposits with commercial, Islamic and investment banks, and deposit-taking development financial institutions regulated by the central bank until December, 2010 (Oct 16)
Singapore Guaranteed all Singapore dollar and foreign currency deposits of individual and non-bank customers in banks, finance companies and merchant banks licensed by the Monetary Authority of Singapore (Oct 16)
South Korea May expand deposit guarantee (Oct 17) Asia-Pacific governments most recent deposit guarantee policy changes
Australia Guarantee all deposits with financial institutions for the next three years (Oct 12)
Source: Bloomberg News
But the reality is, a potential crisis still lurks.
Is there a better way to organize banking, so that it would be safer, sounder and more stable? That is, so that it wouldn’t require backbreaking taxpayer bail outs?
Today, banks that accept deposits are not required to hold 100% liquid reserves against those deposits. Accordingly, banks operate under a fractional-reserve system that allows them to create liabilities: bank money.
To eliminate this element of discretion in the money circuit, fractional-reserve banking could be replaced by 100%-reserve banking. In short, banks would be required to cover all deposits they accept with 100% liquid reserves, which would restrict investments of depositors’ money into “safe” and liquid securities such as government bonds or bonds guaranteed by the government.
Under 100%-reserve banking, banks that accepted deposits would essentially be transformed into money-market mutual funds – “narrow banks” – which could not create credit.
Accordingly, depositors would no longer have to live in fear of being unable to withdraw their deposits because banks would have the liquid reserves to cover any withdrawals.
Banking panics, system-wide banking crises, and taxpayer bail outs would all be relegated to history.
Another important advantage of 100%-reserve banking is that banks would need very little equity capital to cover the small risks associated with the matching of their assets and deposit liabilities. This makes the 100%-reserve system particularly well-suited for emerging economies, where banks are usually notoriously undercapitalized.
How would credit be supplied in such a money and banking system? Merchant (or investment) banks that do not accept deposits would assume that function. They would intermediate savings and generate credit (not money) by issuing shares and subordinated debt instruments (unsecured bonds that have low-ranking claims on a company’s earnings and assets).
Safety, soundness, stability
This approach facilitates credit flows while separating money from credit. By doing so, it injects safety, soundness and stability into the credit circuit.
Indeed, shareholders would provide an important source of market discipline to the merchant banks because the banks’ owners would risk losing their investments in case of merchant bank failures.
The other element in the merchant banks’ capital structure would be provided by subordinated debt. This debt also provides an attractive source of market discipline because, as distinct from depositors, the holders of subordinated debt cannot withdraw their funds on demand when bad news surfaces.
The holders of subordinated debt would, therefore, have an incentive to monitor the merchant bankers carefully.
Would speculative entrepreneurial ventures never get loans because merchant banks would be too conservative? Not at all. Banks that specialized in riskier loans would simply issue subordinated debt at significantly higher interest rates. Investors would purchase these instruments, just as they purchase high yield junk bonds.
If banks that accept deposits were prohibited from creating bank money and were transformed into money-market mutual funds, bank runs would come to a halt. And more importantly, taxpayers would be off the hook, too.
----
Steve H. Hanke, contributing author to www.WauBebas.org, is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the CatoInstitute in Washington, D.C.
This article was published in Malaysiakini (28 Nov 08)
By Steve Hanke
Banking crises are all too common. They are also costly. The potential cost of the most recent bail-out package in the United States is a staggering $2.25 trillion. That’s 16% of GDP. Compared to the actual bail-out costs following Indonesia’s banking crisis of 1997-98, for example, the US figure is small change. Indeed, Indonesia’s bail out costs amounted to 40% of GDP.
Today, facing the threat of a new banking crisis, many governments in this region have increased state guarantee on bank deposits (see table below) using taxpayers’ money. Malaysia too has guaranteed all ringgit and foreign currency deposits through the Malaysia Deposit Insurance Corporation (Perbadanan Insurans Deposit Malaysia).
New Zealand Guarantee retail deposits in New Zealand-registered banks, building societies, credit unions and deposit-taking finance companies (Oct 12)
Indonesia Raised bank deposit guarantees to 2 billion rupiah from 100 million rupiah per account (Oct 13)
Hong Kong Guaranteed all customer bank deposits until end of 2010 (Oct 14)
Malaysia Guaranteed all ringgit and foreign currency deposits with commercial, Islamic and investment banks, and deposit-taking development financial institutions regulated by the central bank until December, 2010 (Oct 16)
Singapore Guaranteed all Singapore dollar and foreign currency deposits of individual and non-bank customers in banks, finance companies and merchant banks licensed by the Monetary Authority of Singapore (Oct 16)
South Korea May expand deposit guarantee (Oct 17) Asia-Pacific governments most recent deposit guarantee policy changes
Australia Guarantee all deposits with financial institutions for the next three years (Oct 12)
Source: Bloomberg News
But the reality is, a potential crisis still lurks.
Is there a better way to organize banking, so that it would be safer, sounder and more stable? That is, so that it wouldn’t require backbreaking taxpayer bail outs?
Today, banks that accept deposits are not required to hold 100% liquid reserves against those deposits. Accordingly, banks operate under a fractional-reserve system that allows them to create liabilities: bank money.
To eliminate this element of discretion in the money circuit, fractional-reserve banking could be replaced by 100%-reserve banking. In short, banks would be required to cover all deposits they accept with 100% liquid reserves, which would restrict investments of depositors’ money into “safe” and liquid securities such as government bonds or bonds guaranteed by the government.
Under 100%-reserve banking, banks that accepted deposits would essentially be transformed into money-market mutual funds – “narrow banks” – which could not create credit.
Accordingly, depositors would no longer have to live in fear of being unable to withdraw their deposits because banks would have the liquid reserves to cover any withdrawals.
Banking panics, system-wide banking crises, and taxpayer bail outs would all be relegated to history.
Another important advantage of 100%-reserve banking is that banks would need very little equity capital to cover the small risks associated with the matching of their assets and deposit liabilities. This makes the 100%-reserve system particularly well-suited for emerging economies, where banks are usually notoriously undercapitalized.
How would credit be supplied in such a money and banking system? Merchant (or investment) banks that do not accept deposits would assume that function. They would intermediate savings and generate credit (not money) by issuing shares and subordinated debt instruments (unsecured bonds that have low-ranking claims on a company’s earnings and assets).
Safety, soundness, stability
This approach facilitates credit flows while separating money from credit. By doing so, it injects safety, soundness and stability into the credit circuit.
Indeed, shareholders would provide an important source of market discipline to the merchant banks because the banks’ owners would risk losing their investments in case of merchant bank failures.
The other element in the merchant banks’ capital structure would be provided by subordinated debt. This debt also provides an attractive source of market discipline because, as distinct from depositors, the holders of subordinated debt cannot withdraw their funds on demand when bad news surfaces.
The holders of subordinated debt would, therefore, have an incentive to monitor the merchant bankers carefully.
Would speculative entrepreneurial ventures never get loans because merchant banks would be too conservative? Not at all. Banks that specialized in riskier loans would simply issue subordinated debt at significantly higher interest rates. Investors would purchase these instruments, just as they purchase high yield junk bonds.
If banks that accept deposits were prohibited from creating bank money and were transformed into money-market mutual funds, bank runs would come to a halt. And more importantly, taxpayers would be off the hook, too.
----
Steve H. Hanke, contributing author to www.WauBebas.org, is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the CatoInstitute in Washington, D.C.
This article was published in Malaysiakini (28 Nov 08)
US$5 trillion lost in global financial crisis
US$5 trillion lost in global financial crisis
PARIS
Friday, November 28, 2008
A TOTAL of US$5 trillion has been lost in the global financial crisis, the head of the Davos economic forum said yesterday as he announced a record presence of world leaders at the conference in January.
Russian Prime Minister Vladimir Putin will give the opening speech at the World Economic Forum in the Swiss resort on January 28 where the theme will be "Shaping The Post Crisis World", said its founder Klaus Schwab.
The Swiss economist, on a visit to Paris, said: "As it stands now, about US$5 trillion has been lost in the financial crisis and now has to be reconstituted" by governments. The forum had forecast the crisis in the financial system in its annual risk report at the start of the year.
"I am not dramatically pessimistic about the future, just realistically pessimistic and I think there are also enormous opportunities in terms of using technology and changing the environment," Schwab said.
He said the turmoil, the worst financial crisis since the Great Depression, meant that the 39th annual Davos meeting would be the most important ever and it will have the biggest participation.
Schwab said there would be more than 160 leaders of head of state or government or ministerial rank among the 1,200 business, social and trade union leaders at the five-day forum.
Putin was the only world leader whose presence was confirmed, but forum officials said many leaders from the Group of Eight industrial powers and emerging economic powers were expected to attend. The full list will only be released in January.
The violence in India and political unrest in Thailand highlighted political risk as an extra potential threat to emerging markets battered by the global crisis.
A crisis that began last year with the collapse of the US housing market has spread around the world, bringing several financial institutions to their knees and pushing the US, Japan and Europe into recession or to the brink of it.
Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies.
Economic sentiment in Europe's single currency zone slumped to 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut by the European Central Bank (ECB) next week.
"The eurozone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 per cent."
Benchmark rates stand at 3.25 per cent in the eurozone, compared with one per cent in the US.
Amid the crisis, job cuts are also increasing across the globe. Steelmaker ArcelorMittal said it would slash up to 9,000 positions. AFP, Reuters
PARIS
Friday, November 28, 2008
A TOTAL of US$5 trillion has been lost in the global financial crisis, the head of the Davos economic forum said yesterday as he announced a record presence of world leaders at the conference in January.
Russian Prime Minister Vladimir Putin will give the opening speech at the World Economic Forum in the Swiss resort on January 28 where the theme will be "Shaping The Post Crisis World", said its founder Klaus Schwab.
The Swiss economist, on a visit to Paris, said: "As it stands now, about US$5 trillion has been lost in the financial crisis and now has to be reconstituted" by governments. The forum had forecast the crisis in the financial system in its annual risk report at the start of the year.
"I am not dramatically pessimistic about the future, just realistically pessimistic and I think there are also enormous opportunities in terms of using technology and changing the environment," Schwab said.
He said the turmoil, the worst financial crisis since the Great Depression, meant that the 39th annual Davos meeting would be the most important ever and it will have the biggest participation.
Schwab said there would be more than 160 leaders of head of state or government or ministerial rank among the 1,200 business, social and trade union leaders at the five-day forum.
Putin was the only world leader whose presence was confirmed, but forum officials said many leaders from the Group of Eight industrial powers and emerging economic powers were expected to attend. The full list will only be released in January.
The violence in India and political unrest in Thailand highlighted political risk as an extra potential threat to emerging markets battered by the global crisis.
A crisis that began last year with the collapse of the US housing market has spread around the world, bringing several financial institutions to their knees and pushing the US, Japan and Europe into recession or to the brink of it.
Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies.
Economic sentiment in Europe's single currency zone slumped to 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut by the European Central Bank (ECB) next week.
"The eurozone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 per cent."
Benchmark rates stand at 3.25 per cent in the eurozone, compared with one per cent in the US.
Amid the crisis, job cuts are also increasing across the globe. Steelmaker ArcelorMittal said it would slash up to 9,000 positions. AFP, Reuters
Thursday, November 27, 2008
Crisis to take toll on pay: ILO
Crisis to take toll on pay: ILO
Stop the pain!: A worker, holds a cardboard of a screaming mouth, during the weekly demonstration over the global financial crisis in central Reykjavik on November 22. The ILO said the economic downturn will erode the wages of millions of workers. Picture: AFP
GENEVA
Thursday, November 27, 2008
ECONOMIC turmoil will erode the wages of millions of workers in 2009, fanning the flames of global recession, the International Labour Organisation (ILO) yesterday said.
Inflation-adjusted pay in rich nations will fall 0.5 per cent in the coming year the first wage decrease since before 2001 after having increased 0.8 per cent this year, according to new estimates from the United Nations agency.
Developing country wages should prove more resilient, led by continued gains in China and India, the ILO said.
On a global basis, it estimated real wages will rise 1.1 per cent in 2009, compared with 1.7 per cent in 2008.
"For the world's 1.5 billion wage earners, difficult times lie ahead," ILO Director-General Juan Somavia said in the Global Wage Report, whose comparable data only stretches back to 2001.
Somavia, a Chilean, called for strong collective bargaining to counter any decrease in wages linked to the world's financial and economic crises that the ILO has previously said will wipe out 20 million jobs by the end of 2009.
In previous periods of contraction, every one percentage point drop in gross domestic product (GDP) per capita brought about a 1.55 percentage point decline in average wages, making it even harder for people to spend and invest, according to ILO data.
"If this pattern were to be followed in the rapidly spreading global downturn, it would deepen the recession and delay the recovery," Somavia said.
But even when economic growth rates were buoyant, the ILO report said wages have failed to keep pace.
For each one percentage point of GDP growth from 1995 to 2007, average wages only increased 0.75 percentage points, with pay rates largely failing to increase in line with productivity growth levels, it found.
Inequalities between top and bottom wages have also risen, most notably in the US, Germany, Poland, Argentina, China and Thailand, the ILO said.
France, Spain, Brazil and Indonesia were found to have reduced those gaps somewhat in recent years.
Women's wages represent an average of 70 to 90 per cent of men's wages in most major economies, though some Asian nations have larger disparities, the report said.
People at the bottom of the wage ladder will be squeezed hardest by decreasing rates of pay in the coming period of economic contraction, according to ILO expert Manuela Tomei.
"If they fall too much, this will make the crisis even worse," she told a news briefing in Geneva.
Greater efforts to empower workers and enact minimum wage laws should help more people weather the coming storm, the ILO concluded.
"We think that it is important to encourage collective bargaining and social dialogue," Tomei said.
There have been a spate of job cuts from companies worldwide who have been hit hard by the financial turmoil.
International recruitment company Manpower had said employee numbers will be cut sharply in many Western nations as companies pare costs to survive the global financial crisis.
Reuters, AFP
Stop the pain!: A worker, holds a cardboard of a screaming mouth, during the weekly demonstration over the global financial crisis in central Reykjavik on November 22. The ILO said the economic downturn will erode the wages of millions of workers. Picture: AFP
GENEVA
Thursday, November 27, 2008
ECONOMIC turmoil will erode the wages of millions of workers in 2009, fanning the flames of global recession, the International Labour Organisation (ILO) yesterday said.
Inflation-adjusted pay in rich nations will fall 0.5 per cent in the coming year the first wage decrease since before 2001 after having increased 0.8 per cent this year, according to new estimates from the United Nations agency.
Developing country wages should prove more resilient, led by continued gains in China and India, the ILO said.
On a global basis, it estimated real wages will rise 1.1 per cent in 2009, compared with 1.7 per cent in 2008.
"For the world's 1.5 billion wage earners, difficult times lie ahead," ILO Director-General Juan Somavia said in the Global Wage Report, whose comparable data only stretches back to 2001.
Somavia, a Chilean, called for strong collective bargaining to counter any decrease in wages linked to the world's financial and economic crises that the ILO has previously said will wipe out 20 million jobs by the end of 2009.
In previous periods of contraction, every one percentage point drop in gross domestic product (GDP) per capita brought about a 1.55 percentage point decline in average wages, making it even harder for people to spend and invest, according to ILO data.
"If this pattern were to be followed in the rapidly spreading global downturn, it would deepen the recession and delay the recovery," Somavia said.
But even when economic growth rates were buoyant, the ILO report said wages have failed to keep pace.
For each one percentage point of GDP growth from 1995 to 2007, average wages only increased 0.75 percentage points, with pay rates largely failing to increase in line with productivity growth levels, it found.
Inequalities between top and bottom wages have also risen, most notably in the US, Germany, Poland, Argentina, China and Thailand, the ILO said.
France, Spain, Brazil and Indonesia were found to have reduced those gaps somewhat in recent years.
Women's wages represent an average of 70 to 90 per cent of men's wages in most major economies, though some Asian nations have larger disparities, the report said.
People at the bottom of the wage ladder will be squeezed hardest by decreasing rates of pay in the coming period of economic contraction, according to ILO expert Manuela Tomei.
"If they fall too much, this will make the crisis even worse," she told a news briefing in Geneva.
Greater efforts to empower workers and enact minimum wage laws should help more people weather the coming storm, the ILO concluded.
"We think that it is important to encourage collective bargaining and social dialogue," Tomei said.
There have been a spate of job cuts from companies worldwide who have been hit hard by the financial turmoil.
International recruitment company Manpower had said employee numbers will be cut sharply in many Western nations as companies pare costs to survive the global financial crisis.
Reuters, AFP
Job losses feared in Malaysia
Job losses feared in Malaysia
Gloomy forecast: Malaysian investor looks at the index board at a viewing gallery in Kuala Lumpur, Malaysia, last month. The recession in Malaysia next year is projected to be worse than the Asian crisis in 1997. It would be more like 1986, when commodity prices slumped and exports weakened, prompting factories to retrench workers.Picture: EPA
ANIL NETTO
PENANG
Thursday, November 27, 2008
THE global economic slowdown is slowly creeping onto Malaysian shores leaving many worried about the impact it will have on workers. Although Malaysia's financial institutions and banks are in better shape than they were during the East Asian financial crisis in 1997, the economy is already feeling the effects of the recession in the West.
Economic growth for the country is projected at 3.5 per cent for next year but even that could be optimistic. Some analysts are not ruling out an economic contraction and there is growing concern that workers, both Malaysian and migrants, could be vulnerable.
"The recession here next year could be worse than the Asian crisis in 1997," warns economist Subramaniam Pillay, an associate professor in international finance at Nottingham University's campus in Malaysia. "It would be more like 1986, when commodity prices slumped and exports weakened, prompting factories to retrench workers."
Now there are similar fears that as consumer demand in the West falters, exports here could slide and factories could once again shed workers before long.
With the experience of the recession of the mid to late 1980s in mind, activists have been calling for a comprehensive social security plan. Increasingly, calls are being heard for a national retrenchment fund to protect workers in anticipation of possible job losses.
The government has said it is considering this "but even if they start it off now, the fund won't be big enough to handle the recession next year," warns opposition parliamentarian Jeyakumar Devaraj.
The Malaysian Trades Union Congress has proposed that employers and employees should each contribute one ringgit per worker to the fund. With around five million salaried workers in the private sector, such a retrenchment fund could collect more than 100 million ringgit ($40 million) in a year.
"But there is no commitment from the government up to now," laments Devaraj. "Instead, we see them injecting 5 billion ringgit from the (state-managed) Employees Provident Fund (a retirement fund for workers) into the stock market."
Some have pointed out Malaysians will be cushioned from job losses by the presence of these migrant workers who could be the first to lose their jobs.
But that may give a false sense of security as thousands of Malaysians are also employed in free trade zones especially as operators in the electronics multinational corporations.
Subramaniam feels that the government should review its low-wage policy in attracting foreign investors. Local wages are suppressed by the presence of some three million low-wage migrant workers, about a third of them undocumented.
"What's the point of being among the world's top trading nations when your workers are being paid peanuts?" he asks.
Meanwhile, economic analysts have noted that a revised budget for next year is necessary as the present one tabled earlier this year was calculated based on an assumption of a global oil prices for next year of US$125 — whereas the price now has plummeted to around 50 dollars now.
About 40 per cent of the national budget is traditionally funded from petroleum revenue — Malaysia is a net exporter of oil — with the remainder coming from taxes, observes Subramaniam.
A sharp drop in the prices of oil and palm oil products will erode Malaysia's earnings and affect the budget - though the country has ample foreign exchange reserves.
Meanwhile, the government has announced a 5 million ringgit allocation to retrain retrenched workers. Human Resources Minister S Subramaniam said the government would top up 1 ringgit for every 1 ringgit spent by employers to retrain workers and upgrade their skills.
From November 1 this year, all skills upgrading retraining programmes would receive full financial aid.
In addition, the government has also announced a 7 billion ringgit economic stimulus package of pre-emptive pump priming.
Devaraj says instead of giving out large infrastructure contracts to private contractors who may hire low-wage foreign workers, the Public Works Department could hire temporary local workers directly as "work brigades", which he says would be a more effective way of creating a multiplier effect for the local economy.
Despite the fall in oil prices, many Malaysians are still finding it hard to cope with the cost of living especially higher food prices, which particularly squeezes the poor.
On November 17, the government slashed the pump price of petrol from 2.15 ringgit per litre to 2 ringgit — the fifth reduction in recent months as global prices sank to US$55 per barrel.
But many noticed that the local pump price is now still higher than it was on January 5 when petrol prices were then raised by 41 per cent to 2.70 ringgit at a time when the global oil price was around US$125.
The effect of the June 5 oil price hike is still being felt. Even as the pump prices locally were reduced, food prices — driven up by commodity speculators and local retailers — have not fallen correspondingly.
"It may be true that the price of oil has gone down but the prices of rice and other basic necessities are still sky high," complained one reader from Sabah in North Borneo of the popular Malaysia Today website. "I was in Kuching (in neighbouring Sarawak state) a month ago and I noted that the price of Beras Malaysia (local rice) was only 15 ringgit (4.1 dollars). Here in Kota Kinabalu (in Sabah) it is sold at 18 ringgit (4.9 dollars). Why is the difference so big?"
Even the poverty line has come under scrutiny. Though the official threshold for monthly household income was raised a couple of years ago from 588 to 691 ringgit, many analysts feel that that benchmark for measuring poverty is grossly understated.
A more realistic poverty line could be double that figure, putting many more Malaysians — up to 30 per cent in the industrialised state of Selangor — in the poverty bracket.
Concerned that workers rights could be affected as the economy slides, a coalition of civil society groups, the Oppressed People's Network (Jerit), is organising a nationwide bicycle campaign to highlight their concern about the more difficult conditions for workers. Scores of cyclists from three main locations in the north, south and east coast of the peninsula will be flagged off simultaneously on December 3 and they will pedal towards the Federal Parliament, converging there on December 18.
There they will be present a memorandum to Prime Minister Abdullah Badawi and opposition leader Anwar Ibrahim, highlighting their demands.
Their main demands include the introduction of a minimum wage, decent housing, price controls for essential goods and an end to the privatisation of essential services.
They are also linking this to broader civil and political rights including the restoration of local government election and the repeal of the draconian Internal Security Act, which allows indefinite detention without trial.
Along the way, they will also distribute leaflets to the public and present similar memorandums to the chief ministers of the various states.
Devaraj notes that recent global events have proven that the neo-liberal model — with its accompanying assumptions of deregulation and the unchecked pursuit of wealth — has had adverse results ranging from climate change to worsening food security to imbalances in the distribution of wealth between and within nations. "So we need to look at new and alternative paradigms of development," he says.
IPS
Gloomy forecast: Malaysian investor looks at the index board at a viewing gallery in Kuala Lumpur, Malaysia, last month. The recession in Malaysia next year is projected to be worse than the Asian crisis in 1997. It would be more like 1986, when commodity prices slumped and exports weakened, prompting factories to retrench workers.Picture: EPA
ANIL NETTO
PENANG
Thursday, November 27, 2008
THE global economic slowdown is slowly creeping onto Malaysian shores leaving many worried about the impact it will have on workers. Although Malaysia's financial institutions and banks are in better shape than they were during the East Asian financial crisis in 1997, the economy is already feeling the effects of the recession in the West.
Economic growth for the country is projected at 3.5 per cent for next year but even that could be optimistic. Some analysts are not ruling out an economic contraction and there is growing concern that workers, both Malaysian and migrants, could be vulnerable.
"The recession here next year could be worse than the Asian crisis in 1997," warns economist Subramaniam Pillay, an associate professor in international finance at Nottingham University's campus in Malaysia. "It would be more like 1986, when commodity prices slumped and exports weakened, prompting factories to retrench workers."
Now there are similar fears that as consumer demand in the West falters, exports here could slide and factories could once again shed workers before long.
With the experience of the recession of the mid to late 1980s in mind, activists have been calling for a comprehensive social security plan. Increasingly, calls are being heard for a national retrenchment fund to protect workers in anticipation of possible job losses.
The government has said it is considering this "but even if they start it off now, the fund won't be big enough to handle the recession next year," warns opposition parliamentarian Jeyakumar Devaraj.
The Malaysian Trades Union Congress has proposed that employers and employees should each contribute one ringgit per worker to the fund. With around five million salaried workers in the private sector, such a retrenchment fund could collect more than 100 million ringgit ($40 million) in a year.
"But there is no commitment from the government up to now," laments Devaraj. "Instead, we see them injecting 5 billion ringgit from the (state-managed) Employees Provident Fund (a retirement fund for workers) into the stock market."
Some have pointed out Malaysians will be cushioned from job losses by the presence of these migrant workers who could be the first to lose their jobs.
But that may give a false sense of security as thousands of Malaysians are also employed in free trade zones especially as operators in the electronics multinational corporations.
Subramaniam feels that the government should review its low-wage policy in attracting foreign investors. Local wages are suppressed by the presence of some three million low-wage migrant workers, about a third of them undocumented.
"What's the point of being among the world's top trading nations when your workers are being paid peanuts?" he asks.
Meanwhile, economic analysts have noted that a revised budget for next year is necessary as the present one tabled earlier this year was calculated based on an assumption of a global oil prices for next year of US$125 — whereas the price now has plummeted to around 50 dollars now.
About 40 per cent of the national budget is traditionally funded from petroleum revenue — Malaysia is a net exporter of oil — with the remainder coming from taxes, observes Subramaniam.
A sharp drop in the prices of oil and palm oil products will erode Malaysia's earnings and affect the budget - though the country has ample foreign exchange reserves.
Meanwhile, the government has announced a 5 million ringgit allocation to retrain retrenched workers. Human Resources Minister S Subramaniam said the government would top up 1 ringgit for every 1 ringgit spent by employers to retrain workers and upgrade their skills.
From November 1 this year, all skills upgrading retraining programmes would receive full financial aid.
In addition, the government has also announced a 7 billion ringgit economic stimulus package of pre-emptive pump priming.
Devaraj says instead of giving out large infrastructure contracts to private contractors who may hire low-wage foreign workers, the Public Works Department could hire temporary local workers directly as "work brigades", which he says would be a more effective way of creating a multiplier effect for the local economy.
Despite the fall in oil prices, many Malaysians are still finding it hard to cope with the cost of living especially higher food prices, which particularly squeezes the poor.
On November 17, the government slashed the pump price of petrol from 2.15 ringgit per litre to 2 ringgit — the fifth reduction in recent months as global prices sank to US$55 per barrel.
But many noticed that the local pump price is now still higher than it was on January 5 when petrol prices were then raised by 41 per cent to 2.70 ringgit at a time when the global oil price was around US$125.
The effect of the June 5 oil price hike is still being felt. Even as the pump prices locally were reduced, food prices — driven up by commodity speculators and local retailers — have not fallen correspondingly.
"It may be true that the price of oil has gone down but the prices of rice and other basic necessities are still sky high," complained one reader from Sabah in North Borneo of the popular Malaysia Today website. "I was in Kuching (in neighbouring Sarawak state) a month ago and I noted that the price of Beras Malaysia (local rice) was only 15 ringgit (4.1 dollars). Here in Kota Kinabalu (in Sabah) it is sold at 18 ringgit (4.9 dollars). Why is the difference so big?"
Even the poverty line has come under scrutiny. Though the official threshold for monthly household income was raised a couple of years ago from 588 to 691 ringgit, many analysts feel that that benchmark for measuring poverty is grossly understated.
A more realistic poverty line could be double that figure, putting many more Malaysians — up to 30 per cent in the industrialised state of Selangor — in the poverty bracket.
Concerned that workers rights could be affected as the economy slides, a coalition of civil society groups, the Oppressed People's Network (Jerit), is organising a nationwide bicycle campaign to highlight their concern about the more difficult conditions for workers. Scores of cyclists from three main locations in the north, south and east coast of the peninsula will be flagged off simultaneously on December 3 and they will pedal towards the Federal Parliament, converging there on December 18.
There they will be present a memorandum to Prime Minister Abdullah Badawi and opposition leader Anwar Ibrahim, highlighting their demands.
Their main demands include the introduction of a minimum wage, decent housing, price controls for essential goods and an end to the privatisation of essential services.
They are also linking this to broader civil and political rights including the restoration of local government election and the repeal of the draconian Internal Security Act, which allows indefinite detention without trial.
Along the way, they will also distribute leaflets to the public and present similar memorandums to the chief ministers of the various states.
Devaraj notes that recent global events have proven that the neo-liberal model — with its accompanying assumptions of deregulation and the unchecked pursuit of wealth — has had adverse results ranging from climate change to worsening food security to imbalances in the distribution of wealth between and within nations. "So we need to look at new and alternative paradigms of development," he says.
IPS
Subscribe to:
Posts (Atom)