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TRUMPET: Six Minutes to Midnight
From the March 2010 Trumpet Print Edition »
The Bulletin of Atomic Scientists says mankind has bought itself some time. By Jeremiah Jacques
The minute hand of the symbolic Doomsday Clock was moved back by one minute on January 14. The Bulletin of Atomic Scientists (bas) cited a “more hopeful state of world affairs” regarding the threat of nuclear war and global climate change. The clock is now set at six minutes to midnight.
The “Doomsday Clock,” created in 1947, is a symbolic measurement of the likelihood that mankind will begin nuclear war, with midnight representing the zero hour—global destruction. The farthest from midnight the clock has ever been was in 1991 when the Cold War era ended, and it was set at 17 minutes to midnight. The nearest to the zero hour it has ever been was in 1953 when it sat at two minutes to midnight following the announcement that the U.S. and the Soviet Union had tested thermonuclear devices within less than a year of each other.
The bas reported that the most recent change represents new optimism on the part of its panel of scientists—including 19 Nobel laureates—about the threat of nuclear war, and global cooperation on climate change.
“The main factor,” bas board member Lawrence Krauss told National Public Radio, “was that there’s been a sense that there’s been a sea change in the possibility for international cooperation regarding both nuclear weapons and climate change” (January 15).
“There are now—largely, one would have to say, as a result of the election of Barack Obama—new international talks and agreements to reduce arms,” he said.
To those keeping close watch on global developments relating to nuclear proliferation, this statement likely comes as a shock. An unbiased evaluation of global trends since the clock was last adjusted in 2007 reveals that the threat of nuclear war has only multiplied in that time.
U.S. Appeasement
A U.S. administration operating on a policy of appeasement and trust of enemies has convinced this panel of scientists that the world is a safer place because of its softening stance, but the opposite is true. The Obama administration last year slashed America’s homeland missile defense budget and abandoned plans for a missile defense system in Eastern Europe that would have served as a major deterrent to a nuclear attack on its allies. Have America’s disarmament policies really lessened the threat of nuclear war? Has its willingness to perpetually suspend judgment on Iranian designs in the name of diplomacy removed the world one inch from the danger of nuclear war? Policies of appeasement have only shown Iran, North Korea and other nations how quickly U.S. will to counter their aggressive actions is evaporating. Those policies have emboldened the rogue nations of the world.
Iran
A litany of headlines shows Iran making great strides toward nuclear armament. In December, the Times of London cited secret Iranian documents revealing that Tehran has been working on a “neutron initiator”—the trigger used to detonate a nuclear bomb. This discovery further exposed the deceit of Iran’s claims that its nuclear program is strictly for peaceful purposes. Compounding the significance of Iran’s nuclear advancements is President Mahmoud Ahmadinejad’s desire to plunge the world into a nuclear abyss for religious reasons.
North Korea
2009 saw a North Korea of unprecedented defiance. Since President Obama took office, Kim Jong Il’s nation has successfully tested a bona fide nuclear weapon and a long-range missile, withdrawn from the 1953 armistice agreement with South Korea, and announced that it will weaponize its plutonium reserves. In response to these belligerent acts, the Obama administration showered Pyongyang with concessions, including caving in to Kim’s demand for bilateral talks.
Russian Arms Reduction
High on the list of 2009’s celebrated international peace talks was July’s discussion between President Obama and Russian President Dmitry Medvedev about cutting the nuclear arsenals of their respective countries. But even a cursory look at the agreement reveals these reduction plans to be ludicrous—at least for America. Washington Post columnist Charles Krauthammer called the agreement “useless at best, detrimental at worst,” because Russia agreed to dismantle a certain quantity of its archaic offensive nuclear warheads in exchange for the U.S.’s elimination of a comparable amount of its state-of-the-art nuclear defense weaponry. In this laughable scenario, Russia loses nothing, and the U.S. loses everything.
Pakistan
Although Pakistan’s nuclear weapons haven’t yet come under direct attack by Islamists, the looming threat is increasing. Never before have Pakistan’s weapons been in so much danger of being stolen by terrorist organizations. In 2007, militants attacked nuclear weapons facilities in Punjab, Sargodha and Kamra. In 2008, they blew up gates to the Wah weapons complex, leaving 63 people dead. The U.S. government is funneling substantial funds into Pakistan’s military because the stakes are so high. So far the terrorists have been kept at bay, but the threat is growing.
Krauss was careful to point out that the January adjustment was the first time in history that the bas has moved the clock’s time by an increment as small as one minute. In explaining that the board’s optimism is reserved, he said, “If we don’t follow up on all the talk that’s been happening with action, it could go much closer to midnight. On the other hand, if all of these things that we hope are going to happen happen, it could move much further away.”
So the move was essentially based on talk—on diplomatic initiatives. But an objective analysis of our diplomatic track record shows that these efforts will prove fruitless in most situations and counterproductive in others.
However slight the adjustment, the bas’s optimism over these talks showcases man’s refusal to admit that the problems threatening us are too big for us to solve. It highlights mankind’s unwarranted confidence in itself. Six thousand years of strife-ridden history have failed to teach our experts that man does not know the way of peace. Man’s inability to effect peace should have become more evident in the last two years. But, as the danger intensifies, man’s delusion that he is able to solve his own problems has only grown stronger.
It will take Christ’s intervention to keep us from annihilating ourselves and usher in true peace (Matthew 24:22). There is no cause for optimism about mankind solving its problems, but there is every cause to be optimistic about God’s solutions to humanity’s troubles!
For more about this hope-filled future—a future in which the concept of a Doomsday Clock will be totally irrelevant—request a free copy of Herbert W. Armstrong’s inspiring booklet The Wonderful World Tomorrow—What It Will Be Like. •
IRAN: "Shock" Announcement Promised Tomorrow
Iranian nukes
Published: Feb. 10, 2010 at 9:27 AM
By United Press International
WASHINGTON, Feb. 10 (UPI) -- U.S. President Barack Obama threatened Tehran with "significant" sanctions regarding Iran's nuclear program.
Obama said Tuesday that Iran is on a course that would lead to the development of nuclear weapons-grade material. Iran has contended its nuclear program is for peaceful purposes; many Western countries fear that true goal is to make Tehran a nuclear weapons power.
Obama said international officials were "developing a significant regime of sanctions" because of Iran's nuclear ambitions.
Tehran has taken its own course on nuclear development, virtually ignoring existing sanctions and allegedly not being completely forthcoming with international bodies such as the International Atomic Energy Agency.
Iran this week said it would build additional nuclear material refining facilities and increase the level of refinement to 20 percent. Currently its program can refine uranium to 3.5 percent, which could be used in nuclear reactors. A nuclear weapon needs materials reined to 90 percent.
Iranian leaders promised that a "shock" announcement regarding its nuclear program would be made during ceremonies marking the Feb. 11 anniversary of the Islamic Revolution. It is unclear if the increase in refinement was that announcement or if Tehran will have additional news Thursday.
http://www.upi.com/Daily-Briefing/2010/02/10/Iranian-nukes/UPI-84691265812022/
IRAN: Fiery rhetoric fuels Mideast war fears
Published: Feb. 10, 2010 at 5:34 PM
TEL AVIV, Israel, Feb. 10 (UPI) -- Tough-talking Foreign Minister Avigdor Lieberman has raised the temperature in the Middle East by warning the Damascus regime it will fall if Syria gets involved in the regional conflict that many fear is now brewing.
As the inflammatory rhetoric on both sides becomes more strident, the Iranian-backed Hezbollah militia in Lebanon has gone on alert.
Israel is positioning its new Iron Dome anti-rocket system along its northern border to counter any Hezbollah broadsides, instead of being deployed in the south to shield against Hamas rockets as planned.
The Israelis are realizing that the next war will expose their civilian population to greater risk than ever before because of the large number of rockets and missiles that will be fired by Iran, Hezbollah, Hamas and probably Syria as well.
Yet the hawkish Lieberman warned Syrian President Bashar Assad on Feb. 4: "In the next war, not only will you lose, but you and your family will lose the regime."
Prime Minister Binyamin Netanyahu's government sought to distance itself from Lieberman's provocative outburst. But to many in the Middle East his comments only emphasized the bellicose statements being voiced by Israeli leaders that war is coming.
This has been simmering since the summer of 2006, when Hezbollah and Israel fought a 34-day war triggered by a Hezbollah attack on the border.
The conflict ended with Israel failing in its avowed aim to destroy Hezbollah. Its guerrilla fighters not only fought the Israelis to a standstill but pummeled northern Israel with 4,000 rockets, eroding Israel's deterrence capability.
The bombardment was the most sustained battering the Jewish state had endured.
Israel maintains that it pulled its punches in 2006 and did not go after the nation as a whole, concentrating on Hezbollah and its infrastructure. But next time, they say, they will show no mercy.
Ever since Hezbollah joined the Beirut government a few months ago, Israel has repeatedly warned the Lebanese that if war erupts again the whole nation will be held accountable.
Tension in the region has been high because of Israeli threats to launch pre-emptive strikes against Iran, Hezbollah's patron, to knock out its nuclear facilities.
The general feeling is that if Israel does attack, despite U.S. efforts to prevent that, Tehran will retaliate by unleashing Hezbollah and Hamas against the Jewish state.
That will undoubtedly entail a more ferocious missile barrage from both groups than anything Israel has had to endure before.
Salvos of ballistic missiles from Iran are likely as well. The Israelis suspect that Syria, Iran's sole Arab ally, will have little option but to join in as well if Tehran orders it to.
The Israelis know they are vulnerable to coordinated attacks by hundreds of missiles from north and south and that their much-vaunted anti-missile shield will be able to knock out only a fraction of the incoming projectiles.
Casualties are expected to be high since the whole country would be exposed, not just the north. One estimate put potential fatalities at 8,000, mostly civilians -- an unprecedented death toll for the Jewish state.
In 2006 Hezbollah had some 12,000 Syrian and Iranian rockets. Now it's believed to have in excess of 42,000, including a large number capable of hitting Tel Aviv, Israel's largest city, and the Dimona nuclear reactor further south.
According to Jane's Defense Weekly, Syria has recently supplied Hezbollah with M-600 missiles, copies of Iran's Fateh-110 system and capable of hitting central Israel.
Even Hamas, less well equipped than Hezbollah, is now reputed to have rockets that can hit Tel Aviv's outskirts from the south.
In the event of a coordinated attack the Israeli air force, the most powerful in the region, would be overwhelmed and unable to knock out every missile launch site.
Israeli commanders have said as much publicly, which indicates that they seek to prepare the civilian population for the worst.
In January Minister without Portfolio Yossi Peled declared that another conflict with Hezbollah was "just a matter of time." He said that if war erupted, Israel would hold Syria and Lebanon alike responsible.
Soon after, Defense Minister Ehud Barak said that if Israel had to fight Syria "we will defeat them."
Syria's "undaunted and increased support for Hezbollah appears to reflect a clear strategic turn taken by Damascus," according to analyst Jonathan Spyer of the Global Research in International Affairs Center outside Tel Aviv.
http://www.upi.com/Top_News/Special/2010/02/10/Fiery-rhetoric-fuels-Mideast-war-fears/UPI-61251265841240/
ZH: Coming To America: The Greek Sovereign Debt Crisis
Submitted by Tyler Durden on 02/10/2010 19:14 -0500
Yesterday we presented our views on why Europe's decision to tip over the first of the bailout dominoes will be inherently a catastrophic one in the long term, and will ultimately transfer the peripheral liquidity risk into funding, and ultimately, solvency (and once again, liquidity) risk to the very core. Today, Niall Ferguson joins in, in this latest Op-Ed in the Financial Times. "It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate." In other words, Marc Faber 1, CNBC talking heads, 0... as usual.
Ferguson lists the current dead ends presented before the EU:
ZH: Surprise! The Dollar Is Rallying... Or Is It?
Submitted by Tyler Durden on 02/10/2010 12:38 -0500
Submitted by Yves Lamoureux of Macquarie Private Wealth
If you have been wondering what is the real reason for the recent upswing in the US dollar, read on. I am very bullish on its future rise. This report follows our early December comments, which were appropriately called “The carry trade now in trouble.” You can review them at http://www.zerohedge.com/article/guest-post-carry-trade-now-trouble.
Very clearly, we stated, “The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends.”
My recent enthusiasm is largely based on evidence gathered since 2007 of the loss of velocity in money aggregates. In other words, the money base is contracting or slowing down its expansion phase.
Like anything that matters in the investing world: rarity defines value. It would then be no surprise that the US dollar will appreciate in the medium term. This is what I call the “now mechanics.” Recent movements are still mostly defined as stocks versus bonds and anything else here has been a sideshow. I am still bullish on a number of things—namely, the hard assets category. I do think that timing is critical to temper this bullishness and money contraction will become the overriding factor.
Even when broad-based equity markets rally, I find astonishing that money is not able to gain traction. The focus on M1 is ultimately wrong, since it is not transmitted to other parts of the economy.
However, it should not be underappreciated that falling stocks will have huge repercussions on the money base and will only exacerbate ongoing volatility. The period 1930 to 1940 was a great example of how the dynamics of money velocity impact stocks and the economy.
We are great students of past eras as they provide guidance and insight into present markets.
People focus too much on the day-to-day news as it reveals very little of the markets’ often superb anticipation skills. Contracting money, to us, is now the prime driver of the greenback’s rise and its ascension could definitely surprise us .
Yves Lamoureux, Investment Advisor, Macquarie Private Wealth Inc.
http://www.zerohedge.com/article/guest-post-surprise-dollar-rallying-or-it
COMMENTS:
by 10044
on Wed, 02/10/2010 - 12:59
#225136
Money base is contracting?? WTF?? Has this guy ever seen the [no longer] published M3?
The dollar is up because the fed is buying , that's it
reply
by Anonymous
on Wed, 02/10/2010 - 13:20
#225182
All the estimates for M3 (Shadow Stats, etc) show that it has also decreased in the past year. The dollar is up on some fear and reverse of the carry trade.
reply
by butchee
on Wed, 02/10/2010 - 13:41
#225227
John Williams at SGS reports the M3 is contracting and accelerating in its contraction to 5.2% in Jan.
reply
by butchee
on Wed, 02/10/2010 - 13:42
#225228
John Williams at SGS reports the M3 is contracting and accelerating in its contraction to 5.2% in Jan.
reply
by Anonymous
on Wed, 02/10/2010 - 13:43
#225232
M3, currently dropping like a stone:
http://www.nowandfutures.com/images/m3b_long_term.png
reply
by CONners
on Wed, 02/10/2010 - 13:03
#225148
The banks are not lending. Velocity goes to zero. The credit crunch continues.
reply
by aswipe
on Wed, 02/10/2010 - 13:04
#225150
+1 10044 We are the lesser of currency evils.
by Anonymous
on Wed, 02/10/2010 - 13:15
#225175
You all don't get it!!!
All currencies are gone and not just the Euro or the Dollar..
One of this days we are going to wape-up with an huge headache and discover that all savings are gone...all pensions benefits are gone etc...
At that time you would have Mr. Volcker coming like a Terminator and saying: Let's default on everyhing as this is unsustainable
Never forget that the end of Bretton Woods was done just to leverage the debt portion of every country but who benefited the most was the US.
Now you have no way out of this as until you have 3B Chinese, Indians and Africans working for $200 per month without any social security, the problems are likely to compound.
My take is that not only currencies are already gone accross the board but that free trade is also gone
by Anonymous
on Wed, 02/10/2010 - 14:33
#225333
I ran this chart and superimposed the dxy, there is no relation here, in fact if anything there is a more positive correlation than negative. Run the facts yourself before listening to anyone.
by Anonymous
on Wed, 02/10/2010 - 14:58
#225374
A stronger USD due to global "margin" calls does not affect any of the US gov accounts/outlays, especially if zirp is maintained.
I too was trained in old style accounting....one must get over it. Flows are the only metric, collateral be damned.
Flows are needed ONLY to extract FEES. Bonus time ensues if one can grab collateral for no cost.
Stop the flows and the fees stop. Simple, really, for those not needing another dime. Trouble is, too much of the investing world needs another dime.
40muleteam borax
by Instant Karma
on Wed, 02/10/2010 - 15:45
#225505
I went long USO for Iran's "stunning" surprise tomorrow. Also balances off my smallish short positions in silver and gold.
by Mr Lennon Hendrix
on Wed, 02/10/2010 - 18:26
#225771
(B)arry (S)anders is running things...juke moves! All this talk, juke moves. Ben is looking over his "What to do once re-elected" checklist....
1) Helicopter. Check.
b) Updated "Turbo Deluxe Printing Press". Check.
4) Big tittied hoes. Check.
g) PPT (He looks over his shoulder. His team gives him a thumbs up). Check.
4) Black cape and wizard's cap. Check.
5) Picture of Sarah Palin in running shorts. Check.
7) Picture of Palin naked (a la Dulles' body scanners). Check.
J) Get out of jail free card, signed "From your bestess buddy, W." Check.
13) 6 big phattie spliffs, and a celebration cigar. Check and check.
by Anonymous
on Wed, 02/10/2010 - 19:08
#225863
Money supply is vaporizing. The past few days have been HUGE for gold in relative terms. Nominal values are deceptive. Pay attention to stocks not flows. Dow 1000? Were headed there until the UST cries uncle and then it's Dow back to 5000 along with gold 5000. If not Dow 10k and gold 10k
TBI: The Dumping Begins: Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested
Zero Hedge | Feb. 9, 2010, 10:00 PM | 2,984 | 28
It appears that this time China's posturing is for real.
Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt.
Continue reading at Zero Hedge »
It appears that this time China's posturing is for real. Following up on our earlier post that Chinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. And from following TIC data we know that China's enthusiasm for MBS/Agencies over the past year has been matched solely by that of one Bill Gross.
From Asia Times:
TBI: Credit Suisse: America Now Has More Sovereign Risk Than Kazakhstan
Vincent Fernando | Feb. 10, 2010, 1:52 PM | 990 |
Below is a Credit Suisse table ranking countries by perceived country risk. Usual suspects Iceland and Greece unsurprisingly make the top of the list. Yet what struck us was how badly the U.S. ranked. According to Credit Suisse, it has more sovereign risk than Kazakhstan even.
It appears that U.S. government debt and private sector credit are what hurtled the U.S. past Kazakhstan. Credit Suisse's table makes it seem as if U.S. credit default swap (CDS) spreads are far too low in relation to other nations. If the ranking is valid, of course:
http://www.businessinsider.com/credit-suisse-usa-now-more-likely-to-default-on-its-debt-than-kazakhstan-2010-2
TBI: The Tightening Cycle Is About To Being Again, And It Will Start In Australia
Joe Weisenthal | Feb. 10, 2010, 3:20 PM
Last week Australia stunned the world when it decided to pause its series of interest rate hikes. With that single move, it seemed, the tightening cycle had come to a premature end.
Or maybe it was just a pause.
That's what analysts at Hong Kong-based Currency Options Hotline argue in a recent note:
------
Last week, the Reserve Bank of
Australia (RBA) confounded economists'
forecasts -- including our own! -- by
holding short-term interest rates steady
at 3.75%.
This broke a run of 3 consecutive
quarter-point hikes going back to
October.
But in retrospect, it's clear that
the currency markets effectively
anticipated this decision. The Aussie
actually peaked in mid-January above
US$0.93, and has since fallen about 6.9%
to US$0.8673.
That said, the same factors that
have thus far led to 3 consecutive
quarter-point interest rate hikes since
October, still exist. For example ...
* The Australian economy is still
growing strongly.
* Consumer spending and employment
are rising sharply.
* Inflationary pressures continue to
intensify.
Because of this, we are pretty sure
RBA's decision represents only a pause
-- not an end -- to the rising interest
rate cycle.
On top of that, the Aussie's retreat
to date has left it sitting just above
major support near US$0.865. To us,
that suggests the A$'s temporary
pullback has probably run its course --
which means the next move is likely to
be back up.
http://www.businessinsider.com/the-tightening-cycle-is-about-to-being-again-and-it-will-start-in-australia-2010-2
TBI: Ten Year Treasuries Nose Dive At Auction
Vincent Fernando | Feb. 10, 2010, 1:18 PM | 2,658 |
Ten Year treasury yields hit 3.692% in today's auction, which was well above where the ten-year treasuries were trading going into the auction.
Zero Hedge: Yields 3.692% vs. Exp. 3.680%... Bid To Cover 2.67 vs. Avg. 2.78 (Prev. 3.00) Indirects 33.2% vs. Avg. 43.27% (Prev. 29.0%) ... Direct Take Down: Massive 13%
Embedded image:
http://www.businessinsider.com/ten-year-treasuries-nose-dive-at-auction-2010-2
CNBC: US, Europe Will All Default On Their Debt: Marc Faber
Published: Wednesday, 10 Feb 2010 | 2:38 PM ET
The governments of every developed economy will eventually default on their sovereign debts, including the US, the UK and Western Europe, Marc Faber, editor of the Gloom, Boom & Doom report, told CNBC.
"In the developed world we have huge debt to GDP, in terms of government debt to GDP and unfunded liabilities that will come due," Faber said in a live interview via telephone. "These unfunded liabilities are so huge that eventually these governments will all have to print money before they default."
Faber said that emerging economies are much more financially sound on this basis than the developed world, with the exception of Singapore, which has a limited amount of debt and huge reserves.
His comments come amid talks of a bailout for struggling Euro zone member Greece, which needs to borrow 53 billion euros, or $73 billion, to cover its deficit and refinance debt that is coming due.
Faber added that the global stock markets — which have mostly fallen about 10 to 20 percent from their peaks — have begun a correction phase that he expects to continue.
He said he thinks the new resistance level for the S&P 500 will be 1,100, though an oversold market could cause a relief rally over the next ten days.
Still, he said he is "relatively optimistic" about stocks going up, referring to them and precious metals as two of the best safe havens.
Slideshow: Government Debt Issuers Most Likely to Default
—Reuters contributed to this report
http://www.cnbc.com/id/35332965
TBI: CNBC Anchors Freak Out After Marc Faber Says US Will Default
Joe Weisenthal |
Feb. 10, 2010, 4:57 PM | 2,777 |
It's hard for Marc Faber to top himself, since he maintains such a cataclysmic outlook.
Still, in today's discussion about Greece and general sovereign risks, we were very entertained by the reaction of the Power Lunch crew when Faber delivered the bad news that the US will one day, just like the others, default on its debt. Listen right at the 2:15 mark.
Watch today's:
http://www.businessinsider.com/cnbc-anchors-freak-out-after-marc-faber-says-us-will-default-2010-2
Link 2: http://www.cnbc.com/id/15840232/?video=1409986641&play=1
Marc Faber, Feb 5th:
TMG: It Sure Sounds Like Goldman Just Rang The Bell At The Top Of The Shanghai Housing Bubble
John Carney | Feb. 10, 2010, 3:47 PM | 541 |
The Money Game
Just a little over two years after Goldman Sachs bought a Shanghai residential project for $190 million, the Wall Street firm is now poised to sell it for $328 million.
A unit of the developer Shanghai Forte will buy Shanghai Garden Plaza for $328 million, Bloomberg reported this morning. The developer confirmed the purchase in a statement to the Hong Kong stock exchange.
Bloomberg's Cathy Chan reports:
TBI: Why Hasn't There Been A Greek Bailout Yet? Because Every Option Is Horrible
Megan McArdle | Feb. 10, 2010, 4:27 PM | 1,064
The Business Insider
As most of you already know, Greece is in big, big trouble. Its deficits are enormous, its debts are larger, and its credit quality is so shaky that it may set a world record on the Richter Scale. For a while now, the consensus has been that larger, more solvent members of the eurozone would bail the country out. Greece's creditors are saying, in effect, "Nice eurozone you've got there . . . shame if anything happened to it."
And it would be. There's no real mechanism for a country to exit the eurozone. That is, from all accounts, deliberate--a currency zone doesn't work if you start with the assumption that countries may exit at any time. The problem is, if a country is forced to exit, the process is . . . well, let's just say it's disorderly. If Greece leaves the currency union, the best case scenario is a local bank run and a sharp jump in interest rates for euro-denominated debt, particularly that issued by weaker members, as lenders start pricing in currency risk. The worst case scenario is that Ireland, Spain, and Portugal also suffer bank runs, forcing them to exit as well, which fatally weakens the whole project.
This is why almost everyone expects the richer members to eventually come through. The problem is, there's also no mechanism for delivering a bailout. Greece can't ask for one, because it thinks this would undermine the credibility of its plan to reduce the deficit. (Note to Greece: this is like Paris Hilton worrying that buying an Amy Tan novel might undermine her reputation for intellectual seriousness). And Germany, the obvious candidate to lead a bailout, is not eager to do so. So while everyone knows this is going to happen, no one is quite ready to say, "Hey, we're going to hand Greece a bunch of money and get little in return except, well, not having our currency zone broken."
No one has the authority to do the obvious: swoop in with a bunch of cash, in return for which the Greek government gets put on a serious diet. I mean, they can tell Greece to get its fiscal house in order, and negotiations over this sort of thing are part of the reason for the delay. But while they can force Greece to agree to austerity measures, they can't actually enforce them, other than with a set of fairly pitiful sanctions. Which is why Greece is running such huge deficits in the first place, even though the rules of the monetary union say that deficits aren't supposed to exceed 3% of GDP. Since it is entirely possible that Greece will find itself in the same pickle ten years hence, no one's exactly enthusiastic about making this sort of commitment. Giving Greece money also gives markets the idea that Greece is Too Big to Fail, which means that if Greece does end up in trouble again, a bailout will be even more necessary.
None of the choices are good. Thus we wait until everyone, including the Germans, reluctantly concedes that there is no other way to get out of this than to funnel money into the eurozone's most profligate government.
From TheAtlantic - shaping the national debate on the most critical issues of our times, from politics, business, and the economy, to technology, arts, and culture
http://www.businessinsider.com/why-hasnt-there-been-a-greek-bailout-yet-because-every-option-is-horrible-2010-2
TBI: GRSSCE CRUMBLES
Joe Weisenthal | Feb. 10, 2010, 5:17 PM | 1,051
The Business Insider
Another day and still no bailout for Greece.
The bottom line is that there are no good options.
Let's review:
-Greece citizens take to the streets in protest.
-Why Greece knows is has the EU over a barrel.
-The nine ways a Greek bailout could work.
-Greece: No good options.
For hot links & stories visit:
http://www.businessinsider.com/grce-crumbles-2010-2
COMMENTS:
Obama World Suckers on Feb 10, 5:43 PM said:
Hey Businessinsider liberal rags: why don't you publish this story??? You follow Zerohedge.com but you're so selective in what you want your readers to know, I wonder why???
http://www.zerohedge.com/article/great-highway-robbery-continues-how-fdic-legally-transferring-billions-taxpayer-money-hedge-
cramerisassmonkey on Feb 10, 5:45 PM said: Offensive
This is a HELLenic contagion with more shoes and dominoes to fall.
Dubai dubacle was the 1st inning in late 2009 and the global markets shrugged off as an exception to greed and excess. Well there are plenty more Dubais on the horizon.
The reason for the rescue led by Germany with France is self-centered. The capital that would flee Greece could affect the entire European economy and the value of the Euro. In other words it can drag the whole EU down with it not to mention the flight to safety as people dump the Euro. A default on the nation’s sovereign paper would also hurt large banks in the region because many hold Greek bonds.
What's worse is that rather reactive precedent will be set with Greece leading to chain reactions as how about the rest of sick STUPID nations like Spain, Turkey, UK, Portugal, Ireland and Dubai?
PS - This can bring the whole global markets down as the leveraged USD carry trades are unwound as USD appreciates. Outcome is multiple LTCM debacle... I fear Great Depression II and even the global turmoil leading to WW III. Far fetched? Perhaps but take a look at the parallels to 1930's and WW II.
cramerisassmonkey on Feb 10, 5:48 PM said:
Expect some ugly trading Thrs and Fri. Call it buy on rumour and sell on news. Devil is in the details and the markets and Greeks may not like the terms and conditions attached to the proposed bail out.
And don't be surprised if the "bad cop" IMF is brought in to rein on the HELLenic tragedy imposing severe austerity measures. BTW - how much can IMF tap into anyway given the sorry state of treasuries of the G20 nations?
IMHO - we might breach the March 2009 low this year if other unforeseen skeletons crawl out like Iranian nuclear weapon testing, Israel pre-emptive strike in Iran, coordinated Al Queda attacks, trade war between US/EU and China, nuclear Pakistan taken over by radicals, etc.
I've been accumulating double short ETFs since Nov 2009 and been buying heavily in last 10 days. Recommend buying with 10% stop loss in case the markets turns up. Good bets are QID (Nas), TWM (Russel 2k) and SDS (S&P).
We are indeed living in the interesting times....
TBI: The Greece Powder Keg Explodes
Gus Lubin | Feb. 10, 2010, 2:48 PM | 9,003 | 22
The Business Insider/Money Game
Don't expect Greeks to swallow their medicine willingly.
Civil servants in the massive default risk country launched a 24-hour strike today to protest government cutbacks. Mob chants included "We won't pay for their crisis!" and "Not one euro to be sacrificed to the bankers!" according to the New York Times.
Strikes are a beloved tradition in many European countries, but they do make financial reform hard. Recently, Iceland refused payment on a financial crisis debt for fear of angering the population.
Air traffic controllers, customs and tax officials, hospital doctors and schoolteachers are involved in Greece's strike. Needless to say, that means basically no economic progress in Greece today
read more:
http://www.businessinsider.com/greeks-take-to-the-streets-to-protest-fiscal-restraint-2010-2
Antal E Fekete: When money refuses to flow uphill
Feb 11, 2010
By Antal E Fekete
ASIA TIMES
For some nine years I have been predicting that the economy is going into a recession morphing into a depression, using a purely theoretical argument.
The essence of my argument is that the open market operations of the US Federal Reserve cause a protracted decline in interest rates, which is responsible for the hard-to-detect capital destruction affecting the financial sector no less than the productive sector. The immediate cause of the depression is the destruction of capital. The ultimate cause is the monetary policy of open market operations. The chain of causation is as follows:
1. Open market operations (in effect, net purchases of Treasury bills) by the Fed are predictable. They invite bond speculators to take risk-free profits offered by this fact of predictability.
2. Bond speculators buy the long-dated Treasuries and sell the short-dated ones, to pocket the difference in yields. These straddles represent borrowing short and lending long. As such, they are inherently risky. However, Quantitative Easing takes the risk out by making the odds, that the normal yield curve will invert, negligible.
3. The bond speculator faces the problem of having to roll forward the fast-expiring short leg of his straddle by selling T-bills. The extraordinary funding and refunding requirements the Treasury is facing, and the extraordinary pressure on the Fed to increase the money supply combine to make it ultra-easy for the bond speculator to move both the short and the long leg of his straddles as he sees fit.
4. The upshot is that interest rates keep falling along the entire yield curve. Regardless how many long-dated issues the Treasury offers, bond speculators snap them up even before the ink is dry on them. Here we have the solution to the Greenspan-conundrum: the sky is the limit to the bond speculators' appetite for Treasury paper. They are all right as long as they can sell T-bills against them. But as the sky is the limit to the Fed's appetite for T-bills, both flanks of the speculators are secure.
In my other writings I have explained how a prolonged fall in interest rates along the yield curve brings about depression through the indiscriminate destruction of capital in the productive as well as financial sector.
There is a vicious spiral: the more currency the Fed creates, the more risk-free profits bond speculators will reap, contributing to a further fall of interest rates.
This outcome is the exact opposite of the one monetarism predicts. The new money created by the Fed will flow to the commodity market bidding up prices there, to nip recession in the bud, monetarism predicts. Bernanke & Co fully expects this to happen. This is not what is happening, however. The new money refuses to flow uphill to the commodity market. It flows downhill to the bond market where the fun is. Why take risks in the commodity market, the speculators ask, when you can gamble risk free in the bond market? So grab the money, buy more bonds and sell an equal amount of bills. As a consequence of bullish bond speculation interest rates fall, prices fall, employment falls, and firms fail. The squeeze is on, bankrupting the entire economy.
Official check-kiting
Some might object that the Fed could short-circuit the process and undercut the bond speculators' lucrative business. All it has to do is to buy the short-dated paper directly from the Treasury. Inverting the yield curve will shake off the parasites.
My answer is that there is no danger of this happening. The Treasury and the Fed know that bond-vigilantes watch what they are doing like hawks. Any hanky-panky of direct sales of T-bills by the Treasury to the Fed would make them cry "foul play!" As indeed it would be: direct sales of Treasury paper to the Fed would degrade the dollar from irredeemable currency to fiat currency. There is a subtle difference, realized only by the few.
Fiat currency is worse. Its arbitrary augmenting is decided behind closed doors. It does not need the endorsement of the open market. Fiat currencies have a short life span as they readily succumb to the sudden-death syndrome. Irredeemable currencies are different from fiat in that they are created openly, using collateral purchased in the open market. They have a more respectable life span. As long as the official check-kiting conspiracy between the Treasury and the Fed remains hidden from the general public, irredeemable currency may even prosper. Direct sale of T-bills by the Treasury to the Fed would tear down the curtain that hides the fact of check-kiting.
The mechanism of check-kiting is as follows. The Treasury issues debt that it has neither the intention nor the means ever to repay. This debt is used as "backing" for Federal Reserve notes and deposits, which the Fed has neither the intention nor the means ever to redeem. When the Treasury debt matures, it is paid in Federal Reserve credit issued on the collateral security of new Treasury debt. When Federal Reserve credit is presented for redemption, the Fed offers interest-bearing Treasury debt in exchange. This is a shell game and it exhausts the definition of check-kiting. Neither the Treasury debt, nor the Federal Reserve credit is issued in good faith. Neither is redeemable any more than Charles Ponzi's tickets were. They are both issued in order to mesmerize a gullible public, much the same way as Ponzi did.
Treasury and Fed officials know their history. They are familiar with the fate of the assignat, the mandat, the Reichsmark, not to mention the Continental. They know that no fiat money ever survived "the slings and arrows of an outrageous fortune". Their only hope is that the fate of the irredeemable dollar, as predicted by Friedman, would be different. They would not embark upon an adventure in monetary policy involving direct sales of T-bills by the Treasury to the Fed. If they did, surely this would be the end of their experiment. Foreigners as well as Americans would dump the dollar unceremoniously, and buy anything they can lay their hands on. This is variously known as flight into real goods, Flucht in die Sachwerte, crack-up boom, Katastrophenhausse. I purposely avoid using the term hyperinflation as it connotes with the Quantity Theory of Money, which is not really a theory. It is a linear model trying to explain non-linear phenomena.
Falsecarding by the Fed
There is also a second method by means of which bond speculators are making risk-free profits. They "front-run" the Fed in the bill market. This means that, through inside information or otherwise, they divine when the Fed has to answer "nature's call" and must make the next trip to the open market in order to buy the collateral without which it cannot issue more money.
Bond speculators forestall the Fed by purchasing the bills beforehand, thus driving up the price. Then they turn around and dump the paper into the lap of the Fed at the enhanced price, making a risk-free profit. This process is called "scalping", after the kindred activities of small-time speculators in tickets for the World Series and other popular sporting events.
The objection that the Fed knows how to throw bond speculators off scent by various stratagems - for example, through falsecarding, say, by selling when speculators would expect it to buy - can be safely dismissed. There is no question that every year the Fed is a big buyer of bills on a net basis. If it sells, it has to buy that much more later on. Fiddling means that the Fed may miss its target. Falsecarding may backfire.
The speculators are a smart lot, thanks to "natural selection'' culling the rank and file. They risk their own capital, which they stand to lose if they place the wrong bet. Once their capital is gone they are out, and smarter guys will take over. Hired hands at the Fed are no match for them as far as brightness and adroitness is concerned. The latter work for salaries. If they make the wrong bet, losses will be replenished by dipping into the public purse.
Think of the losses the Bank of England suffered at the hand of a lonely bond speculator, one George Soros. The British public was forced to swallow the loss, and Soros was allowed to run with the loot and boast in his book that he has busted the Bank of England single-handedly. Recently Soros said in Davos that he is bearish on gold. In his opinion gold is in a bubble. Of course. He knows that he couldn't bust the Bank of England again, once it is back on the gold standard!
Cheating in Las Vegas
My voice has remained a cry in the wilderness. Nobody paid attention to the mumblings of this armchair economist. My idle theorizing got an unexpected boost last month from the website Jesse's Cafe Americain [1] . On January 22, Jesse posted a story with the title "Front-Running the Fed in the Treasury Market'' from which the following quotation is taken.
Atlantic: How a New Jobless Era Will Transform America
The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.
by Don Peck
March 2010 Issue
How should we characterize the economic period we have now entered? After nearly two brutal years, the Great Recession appears to be over, at least technically. Yet a return to normalcy seems far off. By some measures, each recession since the 1980s has retreated more slowly than the one before it. In one sense, we never fully recovered from the last one, in 2001: the share of the civilian population with a job never returned to its previous peak before this downturn began, and incomes were stagnant throughout the decade. Still, the weakness that lingered through much of the 2000s shouldn’t be confused with the trauma of the past two years, a trauma that will remain heavy for quite some time.
The unemployment rate hit 10 percent in October, and there are good reasons to believe that by 2011, 2012, even 2014, it will have declined only a little. Late last year, the average duration of unemployment surpassed six months, the first time that has happened since 1948, when the Bureau of Labor Statistics began tracking that number. As of this writing, for every open job in the U.S., six people are actively looking for work.
All of these figures understate the magnitude of the jobs crisis. The broadest measure of unemployment and underemployment (which includes people who want to work but have stopped actively searching for a job, along with those who want full-time jobs but can find only part-time work) reached 17.4 percent in October, which appears to be the highest figure since the 1930s. And for large swaths of society—young adults, men, minorities—that figure was much higher (among teenagers, for instance, even the narrowest measure of unemployment stood at roughly 27 percent). One recent survey showed that 44 percent of families had experienced a job loss, a reduction in hours, or a pay cut in the past year.
There is unemployment, a brief and relatively routine transitional state that results from the rise and fall of companies in any economy, and there is unemployment—chronic, all-consuming. The former is a necessary lubricant in any engine of economic growth. The latter is a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps society’s most noxious ill.
The worst effects of pervasive joblessness—on family, politics, society—take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.
If it persists much longer, this era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.
The Long Road Ahead
Since last spring, when fears of economic apocalypse began to ebb, we’ve been treated to an alphabet soup of predictions about the recovery. Various economists have suggested that it might look like a V (a strong and rapid rebound), a U (slower), a W (reflecting the possibility of a double-dip recession), or, most alarming, an L (no recovery in demand or jobs for years: a lost decade). This summer, with all the good letters already taken, the former labor secretary Robert Reich wrote on his blog that the recovery might actually be shaped like an X (the imagery is elusive, but Reich’s argument was that there can be no recovery until we find an entirely new model of economic growth).
No one knows what shape the recovery will take. The economy grew at an annual rate of 2.2 percent in the third quarter of last year, the first increase since the second quarter of 2008. If economic growth continues to pick up, substantial job growth will eventually follow. But there are many reasons to doubt the durability of the economic turnaround, and the speed with which jobs will return.
Historically, financial crises have spawned long periods of economic malaise, and this crisis, so far, has been true to form. Despite the bailouts, many banks’ balance sheets remain weak; more than 140 banks failed in 2009. As a result, banks have kept lending standards tight, frustrating the efforts of small businesses—which have accounted for almost half of all job losses—to invest or rehire. Exports seem unlikely to provide much of a boost; although China, India, Brazil, and some other emerging markets are growing quickly again, Europe and Japan—both major markets for U.S. exports—remain weak. And in any case, exports make up only about 13 percent of total U.S. production; even if they were to grow quickly, the impact would be muted.
Most recessions end when people start spending again, but for the foreseeable future, U.S. consumer demand is unlikely to propel strong economic growth. As of November, one in seven mortgages was delinquent, up from one in 10 a year earlier. As many as one in four houses may now be underwater, and the ratio of household debt to GDP, about 65 percent in the mid-1990s, is roughly 100 percent today. It is not merely animal spirits that are keeping people from spending freely (though those spirits are dour). Heavy debt and large losses of wealth have forced spending onto a lower path.
So what is the engine that will pull the U.S. back onto a strong growth path? That turns out to be a hard question. The New York Times columnist Paul Krugman, who fears a lost decade, said in a lecture at the London School of Economics last summer that he has “no idea” how the economy could quickly return to strong, sustainable growth. Mark Zandi, the chief economist at Moody’s Economy.com, told the Associated Press last fall, “I think the unemployment rate will be permanently higher, or at least higher for the foreseeable future. The collective psyche has changed as a result of what we’ve been through. And we’re going to be different as a result.”
One big reason that the economy stabilized last summer and fall is the stimulus; the Congressional Budget Office estimates that without the stimulus, growth would have been anywhere from 1.2 to 3.2 percentage points lower in the third quarter of 2009. The stimulus will continue to trickle into the economy for the next couple of years, but as a concentrated force, it’s largely spent. Christina Romer, the chair of President Obama’s Council of Economic Advisers, said last fall, “By mid-2010, fiscal stimulus will likely be contributing little to further growth,” adding that she didn’t expect unemployment to fall significantly until 2011. That prediction has since been echoed, more or less, by the Federal Reserve and Goldman Sachs.
The economy now sits in a hole more than 10 million jobs deep—that’s the number required to get back to 5 percent unemployment, the rate we had before the recession started, and one that’s been more or less typical for a generation. And because the population is growing and new people are continually coming onto the job market, we need to produce roughly 1.5 million new jobs a year—about 125,000 a month—just to keep from sinking deeper.
Even if the economy were to immediately begin producing 600,000 jobs a month—more than double the pace of the mid-to-late 1990s, when job growth was strong—it would take roughly two years to dig ourselves out of the hole we’re in. The economy could add jobs that fast, or even faster—job growth is theoretically limited only by labor supply, and a lot more labor is sitting idle today than usual. But the U.S. hasn’t seen that pace of sustained employment growth in more than 30 years. And given the particulars of this recession, matching idle workers with new jobs—even once economic growth picks up—seems likely to be a particularly slow and challenging process.
The construction and finance industries, bloated by a decade-long housing bubble, are unlikely to regain their former share of the economy, and as a result many out-of-work finance professionals and construction workers won’t be able to simply pick up where they left off when growth returns—they’ll need to retrain and find new careers. (For different reasons, the same might be said of many media professionals and auto workers.) And even within industries that are likely to bounce back smartly, temporary layoffs have generally given way to the permanent elimination of jobs, the result of workplace restructuring. Manufacturing jobs have of course been moving overseas for decades, and still are; but recently, the outsourcing of much white-collar work has become possible. Companies that have cut domestic payrolls to the bone in this recession may choose to rebuild them in Shanghai, Guangzhou, or Bangalore, accelerating off-shoring decisions that otherwise might have occurred over many years.
New jobs will come open in the U.S. But many will have different skill requirements than the old ones. “In a sense,” says Gary Burtless, a labor economist at the Brookings Institution, “every time someone’s laid off now, they need to start all over. They don’t even know what industry they’ll be in next.” And as a spell of unemployment lengthens, skills erode and behavior tends to change, leaving some people unqualified even for work they once did well.
Ultimately, innovation is what allows an economy to grow quickly and create new jobs as old ones obsolesce and disappear. Typically, one salutary side effect of recessions is that they eventually spur booms in innovation. Some laid-off employees become entrepreneurs, working on ideas that have been ignored by corporate bureaucracies, while sclerotic firms in declining industries fail, making way for nimbler enterprises. But according to the economist Edmund Phelps, the innovative potential of the U.S. economy looks limited today. In a recent Harvard Business Review article, he and his co-author, Leo Tilman, argue that dynamism in the U.S. has actually been in decline for a decade; with the housing bubble fueling easy (but unsustainable) growth for much of that time, we just didn’t notice. Phelps and Tilman finger several culprits: a patent system that’s become stifling; an increasingly myopic focus among public companies on quarterly results, rather than long-term value creation; and, not least, a financial industry that for a generation has focused its talent and resources not on funding business innovation, but on proprietary trading, regulatory arbitrage, and arcane financial engineering. None of these problems is likely to disappear quickly. Phelps, who won a Nobel Prize for his work on the “natural” rate of unemployment, believes that until they do disappear, the new floor for unemployment is likely to be between 6.5 percent and 7.5 percent, even once “recovery” is complete.
It’s likely, then, that for the next several years or more, the jobs environment will more closely resemble today’s environment than that of 2006 or 2007—or for that matter, the environment to which we were accustomed for a generation. Heidi Shierholz, an economist at the Economic Policy Institute, notes that if the recovery follows the same basic path as the last two (in 1991 and 2001), unemployment will stand at roughly 8 percent in 2014.
“We haven’t seen anything like this before: a really deep recession combined with a really extended period, maybe as much as eight years, all told, of highly elevated unemployment,” Shierholz told me. “We’re about to see a big national experiment on stress.”
The Recession and America’s Youth
“I’m definitely seeing a lot of the older generation saying, ‘Oh, this [recession] is so awful,’” Robert Sherman, a 2009 graduate of Syracuse University, told The New York Times in July. “But my generation isn’t getting as depressed and uptight.” Sherman had recently turned down a $50,000-a-year job at a consulting firm, after careful deliberation with his parents, because he hadn’t connected well with his potential bosses. Instead he was doing odd jobs and trying to get a couple of tech companies off the ground. “The economy will rebound,” he said.
Over the past two generations, particularly among many college grads, the 20s have become a sort of netherworld between adolescence and adulthood. Job-switching is common, and with it, periods of voluntary, transitional unemployment. And as marriage and parenthood have receded farther into the future, the first years after college have become, arguably, more carefree. In this recession, the term funemployment has gained some currency among single 20-somethings, prompting a small raft of youth-culture stories in the Los Angeles Times and San Francisco Weekly, on Gawker, and in other venues.
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Video: Experts explain why the current crop of 20-somethings is unequipped to face today’s job market :
http://www.theatlantic.com/doc/201003/jobless-america-future
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Most of the people interviewed in these stories seem merely to be trying to stay positive and make the best of a bad situation. They note that it’s a good time to reevaluate career choices; that since joblessness is now so common among their peers, it has lost much of its stigma; and that since they don’t have mortgages or kids, they have flexibility, and in this respect, they are lucky. All of this sounds sensible enough—it is intuitive to think that youth will be spared the worst of the recession’s scars.
But in fact a whole generation of young adults is likely to see its life chances permanently diminished by this recession. Lisa Kahn, an economist at Yale, has studied the impact of recessions on the lifetime earnings of young workers. In one recent study, she followed the career paths of white men who graduated from college between 1979 and 1989. She found that, all else equal, for every one-percentage-point increase in the national unemployment rate, the starting income of new graduates fell by as much as 7 percent; the unluckiest graduates of the decade, who emerged into the teeth of the 1981–82 recession, made roughly 25 percent less in their first year than graduates who stepped into boom times.
But what’s truly remarkable is the persistence of the earnings gap. Five, 10, 15 years after graduation, after untold promotions and career changes spanning booms and busts, the unlucky graduates never closed the gap. Seventeen years after graduation, those who had entered the workforce during inhospitable times were still earning 10 percent less on average than those who had emerged into a more bountiful climate. When you add up all the earnings losses over the years, Kahn says, it’s as if the lucky graduates had been given a gift of about $100,000, adjusted for inflation, immediately upon graduation—or, alternatively, as if the unlucky ones had been saddled with a debt of the same size.
When Kahn looked more closely at the unlucky graduates at mid-career, she found some surprising characteristics. They were significantly less likely to work in professional occupations or other prestigious spheres. And they clung more tightly to their jobs: average job tenure was unusually long. People who entered the workforce during the recession “didn’t switch jobs as much, and particularly for young workers, that’s how you increase wages,” Kahn told me. This behavior may have resulted from a lingering risk aversion, born of a tough start. But a lack of opportunities may have played a larger role, she said: when you’re forced to start work in a particularly low-level job or unsexy career, it’s easy for other employers to dismiss you as having low potential. Moving up, or moving on to something different and better, becomes more difficult.
“Graduates’ first jobs have an inordinate impact on their career path and [lifetime earnings],” wrote Austan Goolsbee, now a member of President Obama’s Council of Economic Advisers, in The New York Times in 2006. “People essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don’t catch up.” Recent research suggests that as much as two-thirds of real lifetime wage growth typically occurs in the first 10 years of a career. After that, as people start families and their career paths lengthen and solidify, jumping the tracks becomes harder.
This job environment is not one in which fast-track jobs are plentiful, to say the least. According to the National Association of Colleges and Employers, job offers to graduating seniors declined 21 percent last year, and are expected to decline another 7 percent this year. Last spring, in the San Francisco Bay Area, an organization called JobNob began holding networking happy hours to try to match college graduates with start-up companies looking primarily for unpaid labor. Julie Greenberg, a co-founder of JobNob, says that at the first event, on May 7, she expected perhaps 30 people, but 300 showed up. New graduates didn’t have much of a chance; most of the people there had several years of work experience—quite a lot were 30-somethings—and some had more than one degree. JobNob has since held events for alumni of Stanford, Berkeley, and Harvard; all have been well attended (at the Harvard event, Greenberg tried to restrict attendance to 75, but about 100 people managed to get in), and all have been dominated by people with significant work experience.
When experienced workers holding prestigious degrees are taking unpaid internships, not much is left for newly minted B.A.s. Yet if those same B.A.s don’t find purchase in the job market, they’ll soon have to compete with a fresh class of graduates—ones without white space on their résumé to explain. This is a tough squeeze to escape, and it only gets tighter over time.
Strong evidence suggests that people who don’t find solid roots in the job market within a year or two have a particularly hard time righting themselves. In part, that’s because many of them become different—and damaged—people. Krysia Mossakowski, a sociologist at the University of Miami, has found that in young adults, long bouts of unemployment provoke long-lasting changes in behavior and mental health. “Some people say, ‘Oh, well, they’re young, they’re in and out of the workforce, so unemployment shouldn’t matter much psychologically,’” Mossakowski told me. “But that isn’t true.”
Examining national longitudinal data, Mossakowski has found that people who were unemployed for long periods in their teens or early 20s are far more likely to develop a habit of heavy drinking (five or more drinks in one sitting) by the time they approach middle age. They are also more likely to develop depressive symptoms. Prior drinking behavior and psychological history do not explain these problems—they result from unemployment itself. And the problems are not limited to those who never find steady work; they show up quite strongly as well in people who are later working regularly.
Forty years ago, Glen Elder, a sociologist at the University of North Carolina and a pioneer in the field of “life course” studies, found a pronounced diffidence in elderly men (though not women) who had suffered hardship as 20- and 30-somethings during the Depression. Decades later, unlike peers who had been largely spared in the 1930s, these men came across, he told me, as “beaten and withdrawn—lacking ambition, direction, confidence in themselves.” Today in Japan, according to the Japan Productivity Center for Socio-Economic Development, workers who began their careers during the “lost decade” of the 1990s and are now in their 30s make up six out of every 10 cases of depression, stress, and work-related mental disabilities reported by employers.
A large and long-standing body of research shows that physical health tends to deteriorate during unemployment, most likely through a combination of fewer financial resources and a higher stress level. The most-recent research suggests that poor health is prevalent among the young, and endures for a lifetime. Till Von Wachter, an economist at Columbia University, and Daniel Sullivan, of the Federal Reserve Bank of Chicago, recently looked at the mortality rates of men who had lost their jobs in Pennsylvania in the 1970s and ’80s. They found that particularly among men in their 40s or 50s, mortality rates rose markedly soon after a layoff. But regardless of age, all men were left with an elevated risk of dying in each year following their episode of unemployment, for the rest of their lives. And so, the younger the worker, the more pronounced the effect on his lifespan: the lives of workers who had lost their job at 30, Von Wachter and Sullivan found, were shorter than those who had lost their job at 50 or 55—and more than a year and a half shorter than those who’d never lost their job at all.
Journalists and academics have thrown various labels at today’s young adults, hoping one might stick—Generation Y, Generation Next, the Net Generation, the Millennials, the Echo Boomers. All of these efforts contain an element of folly; the diversity of character within a generation is always and infinitely larger than the gap between generations. Still, the cultural and economic environment in which each generation is incubated clearly matters. It is no coincidence that the members of Generation X—painted as cynical, apathetic slackers—first emerged into the workforce in the weak job market of the early-to-mid-1980s. Nor is it a coincidence that the early members of Generation Y—labeled as optimistic, rule-following achievers—came of age during the Internet boom of the late 1990s.
Many of today’s young adults seem temperamentally unprepared for the circumstances in which they now find themselves. Jean Twenge, an associate professor of psychology at San Diego State University, has carefully compared the attitudes of today’s young adults to those of previous generations when they were the same age. Using national survey data, she’s found that to an unprecedented degree, people who graduated from high school in the 2000s dislike the idea of work for work’s sake, and expect jobs and career to be tailored to their interests and lifestyle. Yet they also have much higher material expectations than previous generations, and believe financial success is extremely important. “There’s this idea that, ‘Yeah, I don’t want to work, but I’m still going to get all the stuff I want,’” Twenge told me. “It’s a generation in which every kid has been told, ‘You can be anything you want. You’re special.’”
In her 2006 book, Generation Me, Twenge notes that self-esteem in children began rising sharply around 1980, and hasn’t stopped since. By 1999, according to one survey, 91 percent of teens described themselves as responsible, 74 percent as physically attractive, and 79 percent as very intelligent. (More than 40 percent of teens also expected that they would be earning $75,000 a year or more by age 30; the median salary made by a 30-year-old was $27,000 that year.) Twenge attributes the shift to broad changes in parenting styles and teaching methods, in response to the growing belief that children should always feel good about themselves, no matter what. As the years have passed, efforts to boost self-esteem—and to decouple it from performance—have become widespread.
These efforts have succeeded in making today’s youth more confident and individualistic. But that may not benefit them in adulthood, particularly in this economic environment. Twenge writes that “self-esteem without basis encourages laziness rather than hard work,” and that “the ability to persevere and keep going” is “a much better predictor of life outcomes than self-esteem.” She worries that many young people might be inclined to simply give up in this job market. “You’d think if people are more individualistic, they’d be more independent,” she told me. “But it’s not really true. There’s an element of entitlement—they expect people to figure things out for them.”
Ron Alsop, a former reporter for The Wall Street Journal and the author of The Trophy Kids Grow Up: How the Millennial Generation Is Shaking Up the Workplace, says a combination of entitlement and highly structured childhood has resulted in a lack of independence and entrepreneurialism in many 20-somethings. They’re used to checklists, he says, and “don’t excel at leadership or independent problem solving.” Alsop interviewed dozens of employers for his book, and concluded that unlike previous generations, Millennials, as a group, “need almost constant direction” in the workplace. “Many flounder without precise guidelines but thrive in structured situations that provide clearly defined rules.”
All of these characteristics are worrisome, given a harsh economic environment that requires perseverance, adaptability, humility, and entrepreneurialism. Perhaps most worrisome, though, is the fatalism and lack of agency that both Twenge and Alsop discern in today’s young adults. Trained throughout childhood to disconnect performance from reward, and told repeatedly that they are destined for great things, many are quick to place blame elsewhere when something goes wrong, and inclined to believe that bad situations will sort themselves out—or will be sorted out by parents or other helpers.
In his remarks at last year’s commencement, in May, The New York Times reported, University of Connecticut President Michael Hogan addressed the phenomenon of students’ turning down jobs, with no alternatives, because they didn’t feel the jobs were good enough. “My first word of advice is this,” he told the graduates. “Say yes. In fact, say yes as often as you can. Saying yes begins things. Saying yes is how things grow. Saying yes leads to new experiences, and new experiences will lead to knowledge and wisdom. Yes is for young people, and an attitude of yes is how you will be able to go forward in these uncertain times.”
Larry Druckenbrod, the university’s assistant director of career services, told me last fall, “This is a group that’s done résumé building since middle school. They’ve been told they’ve been preparing to go out and do great things after college. And now they’ve been dealt a 180.” For many, that’s led to “immobilization.” Druckenbrod said that about a third of the seniors he talked to that semester were seriously looking for work; another third were planning to go to grad school. The final third, he said, were “not even engaging with the job market—these are the ones whose parents have already said, ‘Just come home and live with us.’”
According to a recent Pew survey, 10 percent of adults younger than 35 have moved back in with their parents as a result of the recession. But that’s merely an acceleration of a trend that has been under way for a generation or more. By the middle of the aughts, for instance, the percentage of 26-year-olds living with their parents reached 20 percent, nearly double what it was in 1970. Well before the recession began, this generation of young adults was less likely to work, or at least work steadily, than other recent generations. Since 2000, the percentage of people age 16 to 24 participating in the labor force has been declining (from 66 percent to 56 percent across the decade). Increased college attendance explains only part of the shift; the rest is a puzzle. Lingering weakness in the job market since 2001 may be one cause. Twenge believes the propensity of this generation to pursue “dream” careers that are, for most people, unlikely to work out may also be partly responsible. (In 2004, a national survey found that about one out of 18 college freshmen expected to make a living as an actor, musician, or artist.)
Whatever the reason, the fact that so many young adults weren’t firmly rooted in the workforce even before the crash is deeply worrying. It means that a very large number of young adults entered the recession already vulnerable to all the ills that joblessness produces over time. It means that for a sizeable proportion of 20- and 30-somethings, the next few years will likely be toxic.
No young people were present at a seminar for the unemployed held on November 4 in Reading, Pennsylvania, a blue-collar city about 60 miles west of Philadelphia. The meeting was organized by a regional nonprofit, Joseph’s People, and held in the basement of the St. Catharine’s parish center. All 30 or so attendees, sitting around a U-shaped table, looked to be 40 or older. But one middle-aged man, one of the first to introduce himself to the group, said he and his wife were there on behalf of their son, Errol. “He’s so disgusted that he didn’t want to come,” the man said. “He doesn’t know what to do, and we don’t either.”
I talked to Errol a few days later. He is 28 and has a gentle, straightforward manner. He graduated from high school in 1999 and has lived with his parents since then. He worked in a machine shop for a couple of years after school, and has also held jobs at a battery factory, a sandpaper manufacturer, and a restaurant, where he was a cook. The restaurant closed in June 2008, and apart from a few days of work through temp agencies, he hasn’t had a job since.
He calls in to a few temp agencies each week to let them know he’s interested in working, and checks the newspaper for job listings every Sunday. Sometimes he goes into CareerLink, the local unemployment office, to see if it has any new listings. He does work around the house, or in the small machine shop he’s set up in the garage, just to fill his days, and to try to keep his skills up.
“I was thinking about moving,” he said. “I’m just really not sure where. Other places where I traveled, I didn’t really see much of a difference with what there was here.” He’s still got a few thousand dollars in the bank, which he saved when he was working as a machinist, and is mostly living off that; he’s been trading penny stocks to try to replenish those savings.
I asked him what he foresaw for his working life. “As far as my job position,” he said, “I really don’t know what I want to do yet. I’m not sure.” When he was little, he wanted to be a mechanic, and he did enjoy the machine trade. But now there was hardly any work to be had, and what there was paid about the same as Walmart. “I don’t think there’s any way that you can have a job that you can think you can retire off of,” he said. “I think everyone’s going to have to transfer to another job.” He said the only future he could really imagine for himself now was just moving from job to job, with no career to speak of. “That’s what I think,” he said. “I don’t want to.”
Men and Family in a Jobless Age
In her classic sociology of the Depression, The Unemployed Man and His Family, Mirra Komarovsky vividly describes how joblessness strained—and in many cases fundamentally altered—family relationships in the 1930s. During 1935 and 1936, Komarovsky and her research team interviewed the members of 59 white middle-class families in which the husband and father had been out of work for at least a year. Her research revealed deep psychological wounds. “It is awful to be old and discarded at 40,” said one father. “A man is not a man without work.” Another said plainly, “During the depression I lost something. Maybe you call it self-respect, but in losing it I also lost the respect of my children, and I am afraid I am losing my wife.” Noted one woman of her husband, “I still love him, but he doesn’t seem as ‘big’ a man.”
Taken together, the stories paint a picture of diminished men, bereft of familial authority. Household power—over children, spending, and daily decisions of all types—generally shifted to wives over time (and some women were happier overall as a result). Amid general anxiety, fears of pregnancy, and men’s loss of self-worth and loss of respect from their wives, sex lives withered. Socializing all but ceased as well, a casualty of poverty and embarrassment. Although some men embraced family life and drew their wife and children closer, most became distant. Children described their father as “mean,” “nasty,” or “bossy,” and didn’t want to bring friends around, for fear of what he might say. “There was less physical violence towards the wife than towards the child,” Komarovsky wrote.
In the 70 years that have passed since the publication of The Unemployed Man and His Family, American society has become vastly more wealthy, and a more comprehensive social safety net—however frayed it may seem—now stretches beneath it. Two-earner households have become the norm, cushioning the economic blow of many layoffs. And of course, relationships between men and women have evolved. Yet when read today, large parts of Komarovsky’s book still seem disconcertingly up-to-date. All available evidence suggests that long bouts of unemployment—particularly male unemployment—still enfeeble the jobless and warp their families to a similar degree, and in many of the same ways.
Andrew Oswald, an economist at the University of Warwick, in the U.K., and a pioneer in the field of happiness studies, says no other circumstance produces a larger decline in mental health and well-being than being involuntarily out of work for six months or more. It is the worst thing that can happen, he says, equivalent to the death of a spouse, and “a kind of bereavement” in its own right. Only a small fraction of the decline can be tied directly to losing a paycheck, Oswald says; most of it appears to be the result of a tarnished identity and a loss of self-worth. Unemployment leaves psychological scars that remain even after work is found again, and, because the happiness of husbands and the happiness of wives are usually closely related, the misery spreads throughout the home.
Especially in middle-aged men, long accustomed to the routine of the office or factory, unemployment seems to produce a crippling disorientation. At a series of workshops for the unemployed that I attended around Philadelphia last fall, the participants were overwhelmingly male, and the men in particular described the erosion of their identities, the isolation of being jobless, and the indignities of downward mobility.
Over lunch I spoke with one attendee, Gus Poulos, a Vietnam-era veteran who had begun his career as a refrigeration mechanic before going to night school and becoming an accountant. He is trim and powerfully built, and looks much younger than his 59 years. For seven years, until he was laid off in December 2008, he was a senior financial analyst for a local hospital.
Poulos said that his frustration had built and built over the past year. “You apply for so many jobs and just never hear anything,” he told me. “You’re one of my few interviews. I’m just glad to have an interview with anybody, even a magazine.” Poulos said he was an optimist by nature, and had always believed that with preparation and hard work, he could overcome whatever life threw at him. But sometime in the past year, he’d lost that sense, and at times he felt aimless and adrift. “That’s never been who I am,” he said. “But now, it’s who I am.”
Recently he’d gotten a part-time job as a cashier at Walmart, for $8.50 an hour. “They say, ‘Do you want it?’ And in my head, I thought, ‘No.’ And I raised my hand and said, ‘Yes.’” Poulos and his wife met when they were both working as supermarket cashiers, four decades earlier—it had been one of his first jobs. “Now, here I am again.”
Poulos’s wife is still working—she’s a quality-control analyst at a food company—and that’s been a blessing. But both are feeling the strain, financial and emotional, of his situation. She commutes about 100 miles every weekday, which makes for long days. His hours at Walmart are on weekends, so he doesn’t see her much anymore and doesn’t have much of a social life.
Some neighbors were at the Walmart a couple of weeks ago, he said, and he rang up their purchase. “Maybe they were used to seeing me in a different setting,” he said—in a suit as he left for work in the morning, or walking the dog in the neighborhood. Or “maybe they were daydreaming.” But they didn’t greet him, and he didn’t say anything. He looked down at his soup, pushing it around the bowl with his spoon for a few seconds before looking back up at me. “I know they knew me,” he said. “I’ve been in their home.”
The weight of this recession has fallen most heavily upon men, who’ve suffered roughly three-quarters of the 8 million job losses since the beginning of 2008. Male-dominated industries (construction, finance, manufacturing) have been particularly hard-hit, while sectors that disproportionately employ women (education, health care) have held up relatively well. In November, 19.4 percent of all men in their prime working years, 25 to 54, did not have jobs, the highest figure since the Bureau of Labor Statistics began tracking the statistic in 1948. At the time of this writing, it looks possible that within the next few months, for the first time in U.S. history, women will hold a majority of the country’s jobs.
In this respect, the recession has merely intensified a long-standing trend. Broadly speaking, the service sector, which employs relatively more women, is growing, while manufacturing, which employs relatively more men, is shrinking. The net result is that men have been contributing a smaller and smaller share of family income.
“Traditional” marriages, in which men engage in paid work and women in homemaking, have long been in eclipse. Particularly in blue-collar families, where many husbands and wives work staggered shifts, men routinely handle a lot of the child care today. Still, the ease with which gender bends in modern marriages should not be overestimated. When men stop doing paid work—and even when they work less than their wives—marital conflict usually follows.
Last March, the National Domestic Violence Hotline received almost half again as many calls as it had one year earlier; as was the case in the Depression, unemployed men are vastly more likely to beat their wives or children. More common than violence, though, is a sort of passive-aggressiveness. In Identity Economics, the economists George Akerloff and Rachel Kranton find that among married couples, men who aren’t working at all, despite their free time, do only 37 percent of the housework, on average. And some men, apparently in an effort to guard their masculinity, actually do less housework after becoming unemployed.
Many working women struggle with the idea of partners who aren’t breadwinners. “We’ve got this image of Archie Bunker sitting at home, grumbling and acting out,” says Kathryn Edin, a professor of public policy at Harvard, and an expert on family life. “And that does happen. But you also have women in whole communities thinking, ‘This guy’s nothing.’” Edin’s research in low-income communities shows, for instance, that most working women whose partner stayed home to watch the kids—while very happy with the quality of child care their children’s father provided—were dissatisfied with their relationship overall. “These relationships were often filled with conflict,” Edin told me. Even today, she says, men’s identities are far more defined by their work than women’s, and both men and women become extremely uncomfortable when men’s work goes away.
The national divorce rate fell slightly in 2008, and that’s not unusual in a recession: divorce is expensive, and many couples delay it in hard times. But joblessness corrodes marriages, and makes divorce much more likely down the road. According to W. Bradford Wilcox, the director of the National Marriage Project at the University of Virginia, the gender imbalance of the job losses in this recession is particularly noteworthy, and—when combined with the depth and duration of the jobs crisis—poses “a profound challenge to marriage,” especially in lower-income communities. It may sound harsh, but in general, he says, “if men can’t make a contribution financially, they don’t have much to offer.” Two-thirds of all divorces are legally initiated by women. Wilcox believes that over the next few years, we may see a long wave of divorces, washing no small number of discarded and dispirited men back into single adulthood.
Among couples without college degrees, says Edin, marriage has become an “increasingly fragile” institution. In many low-income communities, she fears it is being supplanted as a social norm by single motherhood and revolving-door relationships. As a rule, fewer people marry during a recession, and this one has been no exception. But “the timing of this recession coincides with a pretty significant cultural change,” Edin says: a fast-rising material threshold for marrying, but not for having children, in less affluent communities.
Edin explains that poor and working-class couples, after seeing the ravages of divorce on their parents or within their communities, have become more hesitant to marry; they believe deeply in marriage’s sanctity, and try to guard against the possibility that theirs will end in divorce. Studies have shown that even small changes in income have significant effects on marriage rates among the poor and the lower-middle class. “It’s simply not respectable to get married if you don’t have a job—some way of illustrating to your neighbors that you have at least some grasp on some piece of the American pie,” Edin says. Increasingly, people in these communities see marriage not as a way to build savings and stability, but as “a symbol that you’ve arrived.”
Childbearing is the opposite story. The stigma against out-of-wedlock children has by now largely dissolved in working-class communities—more than half of all new mothers without a college degree are unmarried. For both men and women in these communities, children are commonly seen as a highly desirable, relatively low-cost way to achieve meaning and bolster identity—especially when other opportunities are closed off. Christina Gibson-Davis, a public-policy professor at Duke University, recently found that among adults with no college degree, changes in income have no bearing at all on rates of childbirth.
“We already have low marriage rates in low-income communities,” Edin told me, “including white communities. And where it’s really hitting now is in working-class urban and rural communities, where you’re just seeing astonishing growth in the rates of nonmarital childbearing. And that would all be fine and good, except these parents don’t stay together. This may be one of the most devastating impacts of the recession.”
Many children are already suffering in this recession, for a variety of reasons. Among poor families, nutrition can be inadequate in hard times, hampering children’s mental and physical development. And regardless of social class, the stresses and distractions that afflict unemployed parents also afflict their kids, who are more likely to repeat a grade in school, and who on average earn less as adults. Children with unemployed fathers seem particularly vulnerable to psychological problems.
But a large body of research shows that one of the worst things for children, in the long run, is an unstable family. By the time the average out-of-wedlock child has reached the age of 5, his or her mother will have had two or three significant relationships with men other than the father, and the child will typically have at least one half sibling. This kind of churning is terrible for children—heightening the risks of mental-health problems, troubles at school, teenage delinquency, and so on—and we’re likely to see more and more of it, the longer this malaise stretches on.
“We could be headed in a direction where, among elites, marriage and family are conventional, but for substantial portions of society, life is more matriarchal,” says Wilcox. The marginalization of working-class men in family life has far-reaching consequences. “Marriage plays an important role in civilizing men. They work harder, longer, more strategically. They spend less time in bars and more time in church, less with friends and more with kin. And they’re happier and healthier.”
Communities with large numbers of unmarried, jobless men take on an unsavory character over time. Edin’s research team spent part of last summer in Northeast and South Philadelphia, conducting in-depth interviews with residents. She says she was struck by what she saw: “These white working-class communities—once strong, vibrant, proud communities, often organized around big industries—they’re just in terrible straits. The social fabric of these places is just shredding. There’s little engagement in religious life, and the old civic organizations that people used to belong to are fading. Drugs have ravaged these communities, along with divorce, alcoholism, violence. I hang around these neighborhoods in South Philadelphia, and I think, ‘This is beginning to look like the black inner-city neighborhoods we’ve been studying for the past 20 years.’ When young men can’t transition into formal-sector jobs, they sell drugs and drink and do drugs. And it wreaks havoc on family life. They think, ‘Hey, if I’m 23 and I don’t have a baby, there’s something wrong with me.’ They’re following the pattern of their fathers in terms of the timing of childbearing, but they don’t have the jobs to support it. So their families are falling apart—and often spectacularly.”
In his 1996 book, When Work Disappears, the Harvard sociologist William Julius Wilson connected the loss of jobs from inner cities in the 1970s to the many social ills that cropped up after that. “The consequences of high neighborhood joblessness,” he wrote, are more devastating than those of high neighborhood poverty. A neighborhood in which people are poor but employed is different from a neighborhood in which many people are poor and jobless. Many of today’s problems in the inner-city ghetto neighborhoods—crime, family dissolution, welfare, low levels of social organization, and so on—are fundamentally a consequence of the disappearance of work.
In the mid-20th century, most urban black men were employed, many of them in manufacturing. But beginning in the 1970s, as factories moved out of the cities or closed altogether, male unemployment began rising sharply. Between 1973 and 1987, the percentage of black men in their 20s working in manufacturing fell from roughly 37.5 percent to 20 percent. As inner cities shed manufacturing jobs, men who lived there, particularly those with limited education, had a hard time making the switch to service jobs. Service jobs and office work of course require different interpersonal skills and different standards of self-presentation from those that blue-collar work demands, and movement from one sector to the other can be jarring. What’s more, Wilson’s research shows, downwardly mobile black men often resented the new work they could find, and displayed less flexibility on the job than, for instance, first-generation immigrant workers. As a result, employers began to prefer hiring women and immigrants, and a vicious cycle of resentment, discrimination, and joblessness set in.
It remains to be seen whether larger swaths of the country, as male joblessness persists, will eventually come to resemble the inner cities of the 1970s and ’80s. In any case, one of the great catastrophes of the past decade, and in particular of this recession, is the slippage of today’s inner cities back toward the depths of those brutal years. Urban minorities tend to be among the first fired in a recession, and the last rehired in a recovery. Overall, black unemployment stood at 15.6 percent in November; among Hispanics, that figure was 12.7 percent. Even in New York City, where the financial sector, which employs relatively few blacks, has shed tens of thousands of jobs, unemployment has increased much faster among blacks than it has among whites.
In June 1999, the journalist Ellis Cose wrote in Newsweek that it was then “the best time ever” to be black in America. He ticked through the reasons: employment was up, murders and out-of-wedlock births down; educational attainment was rising, and poverty less common than at any time since 1967. Middle-class black couples were slowly returning to gentrifying inner-city neighborhoods. “Even for some of the most persistently unfortunate—uneducated black men between 16 and 24—jobs are opening up,” Cose wrote.
But many of those gains are now imperiled. Late last year, unemployment among black teens ages 16 to 19 was nearly 50 percent, and the unemployment rate for black men age 20 or older was almost 17 percent. With so few jobs available, Wilson told me, “many black males will give up and drop out of the labor market, and turn more to the underground economy. And it will be very difficult for these people”—especially those who acquire criminal records—“to reenter the labor market in any significant way.” Glen Elder, the sociologist at the University of North Carolina, who’s done field work in Baltimore, said, “At a lower level of skill, if you lose a job and don’t have fathers or brothers with jobs—if you don’t have a good social network—you get drawn back into the street. There’s a sense in the kids I’ve studied that they lost everything they had, and can’t get it back.”
In New York City, 18 percent of low-income blacks and 26 percent of low-income Hispanics reported having lost their job as a result of the recession in a July survey by the Community Service Society. More still had had their hours or wages reduced. About one in seven low-income New Yorkers often skipped meals in 2009 to save money, and one in five had had the gas, electricity, or telephone turned off. Wilson argues that once neighborhoods become socially dysfunctional, it takes a long period of unbroken good times to undo the damage—and they can backslide very quickly and steeply. “One problem that has plagued the black community over the years is resignation,” Wilson said—a self-defeating “set of beliefs about what to expect from life and how to respond,” passed from parent to child. “And I think there was sort of a feeling that norms of resignation would weaken somewhat with the Obama election. But these hard economic times could reinforce some of these norms.”
Wilson, age 74, is a careful scholar, who chooses his words precisely and does not seem given to overstatement. But he sounded forlorn when describing the “very bleak” future he sees for the neighborhoods that he’s spent a lifetime studying. There is “no way,” he told me, “that the extremely high jobless rates we’re seeing won’t have profound consequences for the social organization of inner-city neighborhoods.” Neighborhood-specific statistics on drug addiction, family dysfunction, gang violence, and the like take time to compile. But Wilson believes that once we start getting detailed data on the conditions of inner-city life since the crash, “we’re going to see some horror stories”—and in many cases a relapse into the depths of decades past. “The point I want to emphasize,” Wilson said, “is that we should brace ourselves.”
The Social Fabric
No one tries harder than the jobless to find silver linings in this national economic disaster. Many of the people I spoke with for this story said that unemployment, while extremely painful, had improved them in some ways: they’d become less materialistic and more financially prudent; they were using free time to volunteer more, and were enjoying that; they were more empathetic now, they said, and more aware of the struggles of others.
In limited respects, perhaps the recession will leave society better off. At the very least, it’s awoken us from our national fever dream of easy riches and bigger houses, and put a necessary end to an era of reckless personal spending. Perhaps it will leave us humbler, and gentler toward one another, too—at least in the long run. A recent paper by the economists Paola Giuliano and Antonio Spilimbergo shows that generations that endured a recession in early adulthood became more concerned about inequality and more cognizant of the role luck plays in life. And in his book, Children of the Great Depression, Glen Elder wrote that adolescents who experienced hardship in the 1930s became especially adaptable, family-oriented adults; perhaps, as a result of this recession, today’s adolescents will be pampered less and counted on for more, and will grow into adults who feel less entitled than recent generations.
But for the most part, these benefits seem thin, uncertain, and far off. In The Moral Consequences of Economic Growth, the economic historian Benjamin Friedman argues that both inside and outside the U.S., lengthy periods of economic stagnation or decline have almost always left society more mean-spirited and less inclusive, and have usually stopped or reversed the advance of rights and freedoms. A high level of national wealth, Friedman writes, “is no bar to a society’s retreat into rigidity and intolerance once enough of its citizens lose the sense that they are getting ahead.” When material progress falters, Friedman concludes, people become more jealous of their status relative to others. Anti-immigrant sentiment typically increases, as does conflict between races and classes; concern for the poor tends to decline.
Social forces take time to grow strong, and time to dissipate again. Friedman told me that the phenomenon he’s studied “is not about business cycles … It’s not about people comparing where they are now to where they were a year ago.” The relevant comparisons are much broader: What opportunities are available to me, relative to those of my parents? What opportunities do my children have? What is the trajectory of my career?
It’s been only about two years since this most recent recession started, but then again, most people hadn’t been getting ahead for a decade. In a Pew survey in the spring of 2008, more than half of all respondents said that over the past five years, they either hadn’t moved forward in life or had actually fallen backward, the most downbeat assessment that either Pew or Gallup has ever recorded, in nearly a half century of polling. Median household income in 2008 was the lowest since 1997, adjusting for inflation. “On the latest income data,” Friedman said, “we’re 11 years into a period of decline.” By the time we get out of the current downturn, we’ll likely be “up to a decade and a half. And that’s surely enough.”
Income inequality usually falls during a recession, and the economist and happiness expert Andrew Clark says that trend typically provides some emotional salve to the poor and the middle class. (Surveys, lab experiments, and brain readings all show that, for better or worse, schadenfreude is a powerful psychological force: at any fixed level of income, people are happier when the income of others is reduced.) But income inequality hasn’t shrunk in this recession. In 2007–08, the most recent year for which data is available, it widened.
Indeed, this period of economic weakness may reinforce class divides, and decrease opportunities to cross them—especially for young people. The research of Till Von Wachter, the economist at Columbia University, suggests that not all people graduating into a recession see their life chances dimmed: those with degrees from elite universities catch up fairly quickly to where they otherwise would have been if they’d graduated in better times; it’s the masses beneath them that are left behind. Princeton’s 2009 graduating class found more jobs in financial services than in any other industry. According to Princeton’s career-services director, Beverly Hamilton-Chandler, campus visits and hiring by the big investment banks have been down, but that decline has been partly offset by an uptick in recruiting by hedge funds and boutique financial firms.
In the Internet age, it is particularly easy to see the bile that has always lurked within American society. More difficult, in the moment, is discerning precisely how these lean times are affecting society’s character. In many respects, the U.S. was more socially tolerant entering this recession than at any time in its history, and a variety of national polls on social conflict since then have shown mixed results. Signs of looming class warfare or racial conflagration are not much in evidence. But some seeds of discontent are slowly germinating. The town-hall meetings last summer and fall were contentious, often uncivil, and at times given over to inchoate outrage. One National Journal poll in October showed that whites (especially white men) were feeling particularly anxious about their future and alienated by the government. We will have to wait and see exactly how these hard times will reshape our social fabric. But they certainly will reshape it, and all the more so the longer they extend.
A slowly sinking generation; a remorseless assault on the identity of many men; the dissolution of families and the collapse of neighborhoods; a thinning veneer of national amity—the social legacies of the Great Recession are still being written, but their breadth and depth are immense. As problems, they are enormously complex, and their solutions will be equally so.
Of necessity, those solutions must include measures to bolster the economy in the short term, and to clear the way for faster long-term growth; to support the jobless today, and to ensure that we are creating the kinds of jobs (and the kinds of skills within the population) that can allow for a more broadly shared prosperity in the future. A few of the solutions—like more-aggressive support for the unemployed, and employer tax credits or other subsidies to get people back to work faster—are straightforward and obvious, or at least they should be. Many are not.
At the very least, though, we should make the return to a more normal jobs environment an unflagging national priority. The stock market has rallied, the financial system has stabilized, and job losses have slowed; by the time you read this, the unemployment rate might be down a little. Yet the difference between “turning the corner” and a return to any sort of normalcy is vast.
We are in a very deep hole, and we’ve been in it for a relatively long time already. Concerns over deficits are understandable, but in these times, our bias should be toward doing too much rather than doing too little. That implies some small risk to the government’s ability to continue borrowing in the future; and it implies somewhat higher taxes in the future too. But that seems a trade worth making. We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come. We have a civic—and indeed a moral—responsibility to do everything in our power to stop it now, before it gets even worse.
http://www.theatlantic.com/doc/201003/jobless-america-future
Atlantic: Dodd's Resistance To Volcker Plan Should Signal Its Death
Feb 3 2010, 12:15 pm
by Daniel Indiviglio
On Tuesday, Senate Banking Committee Chairman Christopher Dodd (D-CT) voiced concern over the so-called Volcker Plan during a committee hearing. The proposal, brainchild of former Federal Reserve Chairman Paul Volcker, has been championed by the Obama administration. It seeks to prevent banks from using customer deposits to trade for their own account ("prop trading") and caps their exposure to various liabilities. While many regulation advocates love the idea, others believe that eliminating prop trading would have done little to avoid the kinds of risks that led to the financial crisis and that it's hard to figure out how to limit banks' exposures to different kinds of products. And although Dodd is no opponent to the regulation in theory, he worries that the President may be reaching too far in advocating this plan.
As I've noted before, the Senate is having a very difficult time putting together a financial regulation bill that can pass. Dodd is rightly concerned that the President's ambitious proposal will make getting the legislation done even more difficult, if possible. Further, the Wall Street Journal reports:
AsiaTimes: Let's atomize Wall Street
THE BEAR'S LAIR
By Martin Hutchinson
Feb 3, 2010
The proposal by former Federal Reserve chairman Paul Volcker that proprietary trading should be spun off from deposit-taking banks is a worthwhile step in the direction of stabilizing the financial services business. However, when you consider that business in detail, it becomes clear that further breakups are necessary in order to remove the excessive risks from the US economic system.
Volcker became something of a hero to the left for his sponsorship of President Barack Obama's bank-bashing announcement. Indeed, I was very much hoping that Obama could ride this new-found enthusiasm through a defeat of Ben Bernanke in his senate confirmation vote, followed by a more or less unanimous senate approval of a Volcker nomination to replace
him as Fed chairman. Assuming Volcker hadn't suffered a Damascene conversion to sloppy monetary policy while I wasn't looking, Obama and the left would be suffering buyer's remorse within about an hour of Volcker's arrival at the Fed, but by that stage the deed would be done. I was practicing my Dr Evil laugh for this eventuality, but alas it was not to be.
There are three problems with the current setup on Wall Street: systemic risk, rent seeking and conflicts of interest. The Volcker proposal addresses the systemic risk problem to a great extent, but does not do much about the other two. For a complete solution, we thus need to go further.
When then Treasury secretary Larry Summers and former senator Phil Gramm (R-Texas), among others, pushed through repeal of the Glass-Steagall Act in 1999, they didn't give proper thought to the dangers of institutions funding a traders' casino with guaranteed deposits. The introduction of Glass-Steagall in 1934 had been highly damaging to the economy because it decapitalized the investment banks, killing off the capital markets for the remainder of the 1930s and playing a major role in prolonging the Great Depression. However, by 1999, the investment banks were more than adequately capitalized (provided they followed sound principles of risk management and leverage, which of course they increasingly didn't). Thus, the rationale for allowing commercial banking and investment banking to be combined was shaky at best. It should have caused further doubt that the trigger for Glass-Steagall repeal was the acquisition of the investment bank Salomon Brothers by Citigroup, itself a quagmire of conflicts of interest that had been bailed out from bankruptcy only eight years before.
However, restoring Glass-Steagall as it was would achieve nothing. After all, the two most serious failures of risk management in the 2008 crash were collateralized debt obligations, involving a mortgage bond market in which commercial banks' securitization operations have always been active, and credit default swaps, a product in which commercial banks were intimately involved from the first.
Conventional underwriting of corporate debt and equity securities, the activity prohibited to commercial banks by Glass-Steagall, was not the problem, as it might have been had the crash occurred with the bursting of the 1999 dot-com bubble. The principal risks involved in finance today are those incurred by traders, but those proliferate in both types of banking.
It's not clear how Volcker's ban on proprietary trading in banks benefiting from deposit insurance would work. Every bank foreign exchange desk and money desk trades on the bank's own account in almost every transaction it makes (relatively few transactions are pure brokerage between two counterparties.) Thus, however simple the bank's operations, it cannot avoid "proprietary trading". Of course you can ban separate "prop trading" desks, but, in a naughty world, that would drive the proprietary traders to integrate themselves into the operations of the various products concerned, thus negating the effect of the legislation.
The other problem with the Volcker proposal is that even without separate proprietary trading operations, the banks are undertaking risks which they don't manage properly. Wall Street risk management systems are based on assumptions of Gaussian randomness in markets that are demonstrably far from realistic. In particular, Wall Street risk management systems understate the risk of several highly risky products such as collateralized debt obligations and credit default swaps. This understatement is in the interest of bank management, which benefits from state bailouts when it all goes wrong. It is even more in the interest of traders, who by and large make the most money from trading the riskiest instruments, and hence welcome artificially large position limits for those instruments.
Since current Wall Street risk management methods are in the interest of those who work on Wall Street, they will not be changed except by regulatory means. Before their alteration, they will, even without proprietary trading, leave the Wall Street behemoths in continual danger of explosion.
Rent-seeking is another current problem of Wall Street not addressed by Volcker. This takes many forms, and has resulted from computerization and from the endless proliferation of derivative instruments. Basically, Wall Street houses, by their substantial market share in trading businesses, acquire insider information about money flows, then profit by trading on this information. Traders have always done this, of course, and there is no sensible way of making it illegal. In addition, genuine "crony capitalism" insider information about future finances and future government actions is as available as it always has been, but with larger trading volumes and fewer inhibitions it is more usable without technically contravening insider treading legislation.
Thus insider trading, almost all of it technically legal, has acquired an enormously magnified profit potential. This is the principal reason for Wall Street's greater share of the economy; the genuine value added to third parties from "hedging" or liquidity" is only a tiny fraction of the rents Wall Street can extract from these markets.
There is no complete solution to this problem, but the best palliative is a "Tobin tax", a modest ad valorem transaction tax on each trade. By this means, the profitability of "high speed trading" would be eliminated and many of the other insider trading strategies would be reduced in scope and profitability, particularly if the tax were levied on the nominal principal amount of a derivative and not on its theoretical value. This would in turn swing the power base within Wall Street away from traders and back towards bankers and corporate financiers, whose approach to life is more conducive to maximizing those houses' genuine economic value added.
The final problem in the Wall Street behemoths, that of conflicts of interest, requires no legislative solution, at least as far as the corporate customers are concerned, but only that the financing business remain adequately competitive. With behemoths doing corporate financing transactions, any of their customers is faced with huge conflicts in dealing with them. If a company provides them with sensitive corporate data, it may be subjected to a leveraged buyout. If a company entrusts them with a new financing, it may find their trading operation shorting it, either directly or indirectly. (Those mortgage originators and investors still in business, for example, can reasonably feel miffed with Goldman Sachs making a profit from shorting subprime mortgage bonds through the CDS market while it was at the same time issuing and selling new ones).
Wall Street pretends to operate internal "Chinese walls" through which sensitive information does not penetrate, but to rely on those is to put yourself entirely under the protection of Wall Street's ethical integrity, a security currently trading at a very substantial discount.
The solution to these conflicts of interest is "single capacity", the system under which the City of London acted until the passage of the Financial Services Act of 1986, surely among the most misguided pieces of legislation in human history. Under this system brokers, who sold securities, were kept separate from jobbers, who made markets in them. Both were separate from merchant bankers who arranged financings and carried out mergers and acquisition transactions.
When an underwriting took place, the merchant bank arranged the transaction and the brokers sold the underwriting to insurance companies and other large investment institutions, who earned additional income by backstopping deals in this way. "Proprietary trading" was undertaken by investment trusts, pools of money whose business was to maximize income for their investors, in a similar way to a US hedge fund. As for banking, that was done by the merchant banks if complicated, but the high volume simple transactions were carried out by the clearing banks, home of the nation's retail deposits but not known for their intellectual heavy lifting.
It worked beautifully, just as well as the modern system, indeed better. It cost far less, in terms of the wealth it extracted from the economy. It was much less risky. And there were few conflicts of interest; each participant in the business, having only one function and capability, was devoted to its own interest rather than torn between the interests of several participants in every transaction.
This system is to some extent returning anyway, with the increasing market share of "boutique" investment banks such as Greenhill & Co and Evercore Partners, which at least have fewer conflicts of interest than the behemoths. However, a regulatory "nudge" or two would be no bad thing.
As I said, Volcker had a good idea, but he did not go nearly far enough.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.
http://www.atimes.com/atimes/Global_Economy/LB03Dj01.html
TBI: Wall Street Trader: “Pretty Much Everyone Hates Obama.”
John Carney | Jan. 27, 2010, 2:07 PM
After a year in which his administration’s policies helped produce some of the best years on record for Wall Street firms, President Barack Obama has been struggling to recast himself as an adversary of the banks.
He seems to have succeeded in taking on this role with one important group—the bankers themselves.
“Pretty much everyone hates Obama,” a senior trader at a major Wall Street firm told us.
"He's never been popular but this is a whole new level," he said.
The trader explained that the thought the Obama administration’s plans were worse than unworkable.
“It’s one thing if he proposes something we don’t like, that we disagree with. But when he puts forth this thing, none of it backed with any thoughtfulness about how things work…it really pisses people off,” he said.
The trader was referring to the so-called Volcker Rule, which would ban banks from engaging in proprietary trading or owning hedge funds. He explained that the way banks carry out proprietary trading makes the ban unworkable.
“Every single trading desk that is engaged in market making also does proprietary trading, taking a position on the market. You cannot unscramble the egg,” he said.
He also said that the ban on hedge fund investing by banks was impractical.
“No institutional investor will ever go into an alternative investment product if the bank doesn’t also have skin the in game,” he said. “The whole concept doesn’t work.”
He critiqued the rule as misdirected, arguing that the problem at banks wasn’t prop trading and the crisis didn’t originate solely in commercial banks. What’s more, he explained that he thinks it is unwise to allow Goldman or Morgan Stanley to remain outside the rules if they choose to reject the bank label and cut themselves off from access to the discount window.
“Look at Bear, Lehman. They weren’t banks. But it was their collapse that bought everything to the edge,” he said. “And now the new rules may wind up exempting Goldman and Morgan Stanley? How does that make sense?”
He expects the final version of the rules will be very “watered-down.”
“London isn’t on board with the Volcker Rule. There’s no way they are going to put us at such a competitive disadvantage,” he said.
http://www.businessinsider.com/wall-street-trader-pretty-much-everyone-hates-obama-2010-1
NYDN: Quinn: Paterson Mobility Tax Proposal 'Outrageous' And 'Twisted' »
By Elizabeth Benjamin
February 9, 2010 2:59 PM
Council Speaker Christine Quinn today lambasted Gov. David Paterson's proposal to change the MTA payroll tax rate at the expense of city businesses.
Quinn unleashed a torrent of criticism on the change while chatting with DN City Hall Bureau Chief Adam Lisberg, calling it "outrageous, outrageous, outrageous, outrageous."
"It would be bad enough if they were just upping a tax they seem unable to get compliance on," the speaker said. "So we can't get them to comply - let's just make it bigger and see now if they'll comply?"
"Compliance is the problem," she continued. "Perhaps you need to go out and do some education on companies, on how to comply. But beyond that, it's bad enough for them that these taxes got raised, but you're actually going to raise New York City's businesses' taxes, and take all these other counties' down."
Why do we have to pay for absolutely everything in the state of New York? It's outrageous! It's outrageous! I mean, we're not a piggy bank! I mean, we're not an ATM machine for the state. We're willing to pay our fair share, and we do in greater amounts than our numerical, you know, whatever. But this is just above and beyond."
"And it's really - while we're at the same moment talking about eliminating MetroCards, cutting back on disabled Access-A-Rides, cutting back on bus lines and subway lines - at the same time, we're going to tell New York City workers who are getting less they're going to pay more. And they're going to pay more than other counties. It's just twisted."
Read more: http://www.nydailynews.com/blogs/dailypolitics/2010/02/quinn-paterson-new-mobility-ta.html#ixzz0fB0v0pjK
IN: NY Screwed IF Banker Pay Becomes 'NORMAL':
What IF Wall Street pay was 'normal'?
By Evan Cooper
February 10, 2010, 3:11 PM EST )
Investment News
Morgan Stanley CEO James Gorman has been put on the hot seat by the company's institutional investors over its compensation policies, according to a report in the Wall Street Journal.
“How dare you give so much of the pie to traders and bankers when we should be getting the spoils,” the investors essentially said.
If Morgan Stanley's shareholders and the owners of the other Wall Streets' giants get their way about pay, let's imagine the landscape that would emerge.
First, New York State and New York City would probably take the gas pipe — if Con Edison doesn't turn it off first.
Like addicts jonesing for heroin, both behemoth bureaucracies depend on Wall Street and its high salaries and bonuses for their tax fix. Since the state is basically a de-industrialized mini-Michigan north of the Big Apple's northern suburbs, and since practically every other kind of business (publishing, fashion, printing, electronics) that once marked New York City's vibrant local economy has fled because of taxes, Wall Street is the only game in town. No big Wall Street incomes, no big tax revenue.
Second, we'd probably see a population exodus.
If highly paid derivatives traders wind up making what mid-level insurance executives now earn, why and how will they put up with the City's high costs, crowding and endless struggle to lead an upper-middle-class life? Rather than the millions it now requires to lead a comfortable life in Manhattan, better to move to Columbus or Des Moines or somewhere normal and live like the rest of the nation's haut bourgeois. Would today's high-flyers miss the Metropolitan Opera, the museums and restaurants open past midnight? Yeah, but not that much.
Third, finance would become boring.
Since few people understand what Wall Street does — other than that it pays really well — the financial business retains a mystique that is way out of synch with reality. Sure, traders and investment bankers are crooks, according to prevailing public opinion, but they're brilliant and do fascinating work, or at least so goes the assumption.
Well, those of us who understand what goes on in front of the blinking screens know that most of it ain't rocket science. And the daily routine of most Wall Street buying and selling and associated recordkeeping is kind of dull. Start paying a muni arbitrager like a manufacturer's representative and he'll turn into the schmoe pretty girls now secretly think he is — but dare not admit.
Finally, bringing Wall Street's pay more in line with Main Street's would have a shocking and unexpected effect on the economy: not much would happen.
Companies would still raise capital, securities would trade and America would go on. Would we fall behind Latvia in financial innovation? Probably not. Would London take over? Maybe, but who'd want a snooty Brit investment banker when you could talk to a friendlier, cheaper American?
But fear not. Wal-Mart is not coming to Wall Street anytime soon. If there's one thing Wall Streeters know how to engineer, it's their compensation.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100210/FREE/100219986/1022/ONLINENEWS
WSJ: Goldman: We Won't Slash Pay for '10
By JOE BEL BRUNO
FEBRUARY 10, 2010, 3:00 P.M. ET
Goldman Sachs Group Inc. manage to defuse public outrage over pay by slashing executive compensation in 2009, but Chief Financial Officer David Viniar said investors shouldn't use that as a proxy for 2010 pay.
Mr. Viniar, speaking to investors at a conference, said Wall Street's biggest investment bank will pay employees based on performance, the firm's overall profit level and the economic environment. He received a $9 million all-stock bonus in 2009, along with other top executives like Chief Executive Lloyd Blankfein. Those shares can't be touched for five years.
Mr. Blankfein's bonus for 2009 was a fraction of the $68.5 million payout he got in 2007. Big Wall Street bonuses have come under attack in Washington and among voters. Executives at Goldman have said that top employees should be paid fairly.
"People ask me if this is the new normal," Mr. Viniar said at a Credit Suisse conference in Miami. "There is no formula. We tried to strike the balance right, and we'll try to strike the balance right this year."
In 2009, Goldman made the smallest compensation payout relative to revenue in its history as a public company. But staffers hardly went home empty-handed; the firm set aside $16.9 billion for compensation and benefits and employees made an average of $500,000 per person.
.The lower-than-expected compensation numbers knocked Goldman's executives from being the highest paid in the industry. Rival J.P. Morgan Chase & Co. said CEO James Dimon would receive an estimated $17 million in stock, salary and share options for the year.
Mr. Viniar also put to rest continued speculation that Goldman might abandon its status as a financial holding company.
Goldman became a bank holding company at the height of the financial crisis, giving it Federal Reserve oversight. Goldman switched to a financial holding company in August, allowing the firm to participate in some businesses from which retail banks are restricted.
"I think right now as we look at the regulatory environment, changing our status is an unrealistic outcome," Mr. Viniar said.
Write to Joe Bel Bruno at joe.belbruno@dowjones.com
http://online.wsj.com/article/SB10001424052748704140104575057160739573530.html?mod=WSJ_newsreel_business
WSJ: AIG Adopts New Pay Plan To Drive Away Key Employees
LOL...not really the headline, but might as well be
AIG Plans Revamp on Pay
By SERENA NG And JOANN S. LUBLIN
FEBRUARY 10, 2010, 5:16 P.M. ET
American International Group Inc. is rolling out a plan to revamp how it doles out annual incentive pay to its employees, as the government-controlled insurance giant moves away from retention bonuses that have proved controversial over the past year.
The new initiative, called a "forced distribution" system, is being pushed by Chief Executive Robert Benmosche. Under the plan, thousands of AIG employees will be ranked on a scale of 1 to 4 based on their performance relative to their peers, and their annual variable compensation, which may include bonuses, will be determined by their rank. Individuals ranked in the top 10% will get far more relative to their peers.
Similar forced-ranking systems have been used by large companies such as General Electric Co. under its previous chief executive, Jack Welch, to reward top performers and to weed out underperforming employees over time. Mr. Benmosche learned the method from an ex-GE executive when they worked at Chase Manhattan Bank in the 1970s, and implemented such a system at MetLife Inc. while he was CEO of the New York-based life insurer from 1998 to 2006.
AIG's situation, however, is starkly different from those companies. The insurer is struggling to repay more than $90 billion in U.S. taxpayer money and has lost a number of key employees since its September 2008 bailout, which continues to attract negative publicity. Some company insiders worry the new performance initiative could create additional anxiety among employees at a time when morale in parts of AIG remains low, according to people familiar with the matter.
Mr. Benmosche says he strongly believes employees ought to know where they stand within the company. "The risk is that it will make people nervous. But where people are worried about their jobs, I believe it's helpful to know if they are doing well and are in the top 80%, or if they need to work harder," he said in an interview Wednesday.
"I want to make sure we're paying the best people for their performance," he said, adding the company also needs to "better differentiate performance in order to show the American public we are not just giving money away."
The move could help appease AIG's overseer on compensation issues, U.S. pay czar Kenneth Feinberg, who has taken issue with AIG's previous plans to pay retention bonuses to some executives at the corporate level and insurance units so long as they stayed at the company.
Mr. Feinberg last year told the AIG CEO that the company ought to have a strong process that ensures the company pays for performance, instead of making retention awards that aren't tied to performance criteria, recalls Mr. Benmosche.
Under the plan, only 10% of the ranked employees will get the top "1" ranking and stand to receive much more year-end incentive pay, which could comprise variable salary and bonuses, than those with lower rankings.
About 20% of employees on the scale would be ranked "2," and 50% would be ranked "3." Individuals in these two categories would generally be considered to have performed well or within expectations and would get meaningful incentive pay commensurate with their rankings. A bottom group of 20% would be ranked "4" and receive lower variable pay. Details of the performance-management system have been planned at AIG since last fall. It is currently being implemented among an initial group of several thousand AIG staff, out of the more than 100,000 it employs world-wide.
Mr. Benmosche has made compensation a top priority since he started at AIG in August. At town-hall meetings over the last few months, he has told employees he wants them to be paid competitively and fairly for their work, in part through variable compensation. "We ought to have enough flexibility to make sure that if you shoot the lights out in a given year, we have enough variability to give you a big increase for that year," the 65-year old CEO declared last summer.
Mr. Benmosche said performance-appraisal systems previously in place at AIG weren't discriminating enough. In one case, he said, there was a ranking system with four categories, but about half of the people got the highest rating, and half got the second rank. "You can't have 50% in the top," he said.
Last week, AIG announced the hiring of Sandra Kapell, a former senior MetLife human-resources executive who is expected to help manage and coordinate the forced-ranking system's rollout.
At MetLife, some staffers there "hated" the system, says Mr. Benmosche.
AIG, he said, is unlikely to impose a requirement that underperformers leave. GE, meanwhile, has in recent years shifted away from a ranking system based on numerical categories that cuts the bottom 10% of employees, but still aims for "employee differentiation" in its performance appraisals, a spokeswoman says.
A forced-ranking system can change a corporate culture and "help drive consistency across large organizations," says Ravin Jesuthasan, leader of the talent-management consulting practice for Towers Watson, a human-resources consultancy that isn't involved in AIG's planned ranking effort. He adds the approach can work in turnaround situations by helping to foster more accountability, but could be risky if not communicated well or "if links to consequences like compensation and employment are not properly thought through."
http://online.wsj.com/article/SB10001424052748703455804575057604189369396.html?mod=WSJ_newsreel_business
WSJ:Japan's Kan Says He's Worried About China Bubble
FEBRUARY 5, 2010, 11:14 P.M. ET
IQALUIT, Nunavut (Dow Jones)--Japan's finance minister said Friday he and his Group of Seven counterparts didn't talk much about currencies during their dinner conversation earlier in the day, but he expressed worry about China's economic overheating.
"There wasn't much [conversation) over foreign exchange" during the dinner discussion, Naoto Kan told a group of reporters. But he added that he told other G-7 finance ministers that Japan is "paying attention to China's economic conditions, and we're concerned about [signs of] a bubble" in the mainland's economy.
-By Takashi Nakamichi, Dow Jones Newswires, 813-6269- 2770; takashi.nakamichi@dowjones.com.
http://online.wsj.com/article/BT-CO-20100205-715968.html?mod=WSJ_latestheadlines
News has been around, but the market suddenly woke up to it...we've seen that happen before
Nice buying into the close, could continue
Lol, I get lucky sometimes :). TBT has done well by me before, can be a great sleeper options trade
Not sexy, just solid
>>HERO +3.52% ($3.82), Looks promising, JMHO:
Also has a sizeable short position...could be a problem for any sustainable gains, unless very good news forces a short cover
Has $2.50 and $5 calls, but no volume on options. Strictly a stock play, imho
HERO
Short Interest (Shares Short) 7,333,100
Days To Cover (Short Interest Ratio) 2.3
Short Percent of Float 7.87 %
Short Interest - Prior 7,839,600
Short % Increase / Decrease -6.46 %
% From 52-Wk High ($ 7.28 ) -90.58 %
% From 52-Wk Low ($ 1.07 ) 71.99 %
% From 200-Day MA ($ 5.01 ) -31.15 %
% From 50-Day MA ($ 4.76 ) -24.61 %
Price % Change (52-Week) -1.60 %
Shares Float 93,137,119
Total Shares Outstanding 114,649,249
% Owned by Insiders 2.80 %
% Owned by Institutions 75.40 %
Market Cap. $ 437,960,131
>>KEG +3.56% ($9.32), NICE CHART, imho:
However, large short position and increase in shorts causes me pause...will keep KEG on close watch
No volume on the options, strictly a stock play
KEG
Short Interest (Shares Short) 6,277,700
Days To Cover (Short Interest Ratio) 5.0
Short Percent of Float 5.20 %
Short Interest - Prior 5,849,000
Short % Increase / Decrease 7.33 %
% From 52-Wk High ($ 11.15 ) -19.64 %
% From 52-Wk Low ($ 2.12 ) 77.25 %
% From 200-Day MA ($ 8.35 ) 10.41 %
% From 50-Day MA ($ 9.81 ) -5.26 %
Price % Change (52-Week) 139.40 %
Shares Float 120,769,386
Total Shares Outstanding 123,942,776
% Owned by Insiders 2.60 %
% Owned by Institutions 90.30 %
Market Cap. $ 1,155,146,672