AI
Thursday, October 27, 2011 6:43:48 AM
It’s Consumer Spending, Stupid
Timothy Goodman
By JAMES LIVINGSTON
Published: October 25, 2011
AS an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.
This is, to put it mildly, a controversial claim. Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth.
The general public seems to agree. According to a New York Times/CBS News poll in May, a majority of Americans believe that increased corporate taxes “would discourage American companies from creating jobs.”
But history shows that this is wrong.
Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.
In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.
The architects of the Reagan revolution tried to reverse these trends as a cure for the stagflation of the 1970s, but couldn’t. In fact, private or business investment kept declining in the ’80s and after. Peter G. Peterson, a former commerce secretary, complained that real growth after 1982 — after President Ronald Reagan cut corporate tax rates — coincided with “by far the weakest net investment effort in our postwar history.”
President George W. Bush’s tax cuts had similar effects between 2001 and 2007: real growth in the absence of new investment. According to the Organization for Economic Cooperation and Development, retained corporate earnings that remain uninvested are now close to 8 percent of G.D.P., a staggering sum in view of the unemployment crisis we face.
So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.
Why, then, do so many Americans support cutting taxes on corporate profits while insisting that thrift is the cure for what ails the rest of us, as individuals and a nation? Why have the 99 percent looked to the 1 percent for leadership when it comes to our economic future?
A big part of the problem is that we doubt the moral worth of consumer culture. Like the abstemious ant who scolds the feckless grasshopper as winter approaches, we think that saving is the right thing to do. Even as we shop with abandon, we feel that if only we could contain our unruly desires, we’d be committing ourselves to a better future. But we’re wrong.
Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)
We don’t need the traders and the C.E.O.’s and the analysts — the 1 percent — to collect and manage our savings. Instead, we consumers need to save less and spend more in the name of a better future. We don’t need to silence the ant, but we’d better start listening to the grasshopper.
James Livingston, a professor of history at Rutgers, is the author of “Against Thrift: Why Consumer Culture Is Good for the Economy, the Environment and Your Soul.”
© 2011 The New York Times Company
http://www.nytimes.com/2011/10/26/opinion/its-consumer-spending-stupid.html
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Sen. Sessions Wants To Cut Food Stamp Program, Claiming It Has ‘Surged Out Of Control’
By Alex Seitz-Wald on Oct 20, 2011 at 5:15 pm
Sen. Jeff Sessions (R-AL) is pushing a new amendment [ http://sessions.senate.gov/public/index.cfm?FuseAction=PressShop.NewsReleases&ContentRecord_id=18e11168-0afb-bca7-edbc-9957eee956a1&Region_id=&Issue_id= ] that would make it more difficult for people to receive food stamps by restricting eligibility requirements and eliminating a planned $9 billion funding increase for the program. Sessions says his plan is intended to reduce the deficit and combat fraud, which he claims is rampant. From ABC News’ Top Line today:
SESSIONS: No program in our government has surged out of control more dramatically than food stamps. And nothing is being done about it. [...] Multimillion dollar lottery winners are getting food stamps because the money is considered to be an asset not an income. One of the fast and furious gun buyers –
HOST: But hold on, for ever lottery winner that has food stamps, there’s probably a lot more people who really need them who have them, right?
SESSIONS: Well look, do you think there are four times as many people who need food stamps today as in 2001. That answers itself. [...] We cannot do this. We do not have the money. Congress doesn’t understand that we can’t afford to double the program every three years.
Watch it [ http://www.youtube.com/watch?v=AFY9wl1x3AY ]:
In fact, the food stamp program has been critical [id.] for reducing poverty and pumping money into local economies during the down economy, so cutting it now would not only take food out of peoples’ mouths, but could slow down the recovery. No one is trying to “double the program every three years” as Sessions claims. (Currently, nearly one in five [ http://blogs.wsj.com/economics/2011/02/02/some-43-million-americans-use-food-stamps/ ] Alabamians is on Food Stamps.)
And while the senator suggests the program has grown due to fraud, in fact, errors in the food stamp program — the Supplemental Nutrition Assistance Program (SNAP) –are currently at an all-time low [ http://www.cbpp.org/cms/index.cfm?fa=view&id=3450 ], accounting for less than three percent of the program’s cost. According to the Center for Budget and Policy Priorities:
To ensure that benefits are provided only to eligible households and in the proper amounts, SNAP has one of the most rigorous quality control systems of any public benefit program and, in recent years, has achieved its lowest error rates on record. In fiscal year 2009, even as caseloads were rising, states set new record lows for error rates. The net loss due to errors equaled only 2.7 percent of program costs in 2009. There is no evidence that program errors are driving up SNAP spending.
It’s worth noting that while Sessions claims the country can’t afford to feed the hungry, he has fought to preserve the Bush tax cuts for wealthy [ http://www.factcheck.org/2011/07/sessions-wrong-on-bush-tax-cuts/ ], subsides for big oil companies [ http://hotair.com/archives/2011/05/19/sessions-reid-has-no-reason-to-assume-debt-ceiling-agreement-will-include-oil-tax-hikes/ ], and demanded new tax cuts for corporations [ http://www.huffingtonpost.com/2011/02/04/sessions-lower-corporate-tax-rates_n_818827.html ], all of which also contribute to the deficit.
© 2011 Center for American Progress Action Fund (emphasis in original)
http://thinkprogress.org/economy/2011/10/20/349131/jeff-sessions-food-stamps-out-of-control/ [with comments]
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EU Banks Warn of Credit Drought Amid Push to Raise Capital
By Anne-Sylvaine Chassany and Simon Kennedy - Oct 25, 2011 6:00 PM CT
A top lobbyist for France’s largest bank says European lawmakers will have only themselves to blame if pressure to bolster capital too quickly results in more Boeing Co. planes at the expense of European rival Airbus SAS.
“In the case of the French banks, activities where they were leaders like aircraft leasing or shipping financing will be partly taken over by U.S. or Chinese banks,” Dominique Graber, co-head of BNP Paribas SA’s public and prudential affairs, told the European parliament’s committee on economic and monetary affairs [ http://www.europarl.europa.eu/wps-europarl-internet/frd/vod/player?eventCode=20111011-1500-COMMITTEE-ECON&language=en&byLeftMenu=researchcommittee&category=COMMITTEE&format=wmv#anchor1 ] in Brussels on Oct. 11. “One will also not be surprised if later on more Boeings than Airbuses get funded.”
European banks say they have to cut assets to help satisfy a government push to boost capital faster than planned to insulate them against the sovereign debt crisis. That may trigger a credit crunch for companies and consumers throughout the 17-nation euro zone, helping to push its economy into recession, say Citigroup Inc. and Deutsche Bank AG analysts.
Leaders meet today in Brussels to approve a plan to increase lenders’ capital by about 100 billion euros ($139 billion). Banks say they will more likely achieve the new requirements by shrinking rather than raising cash from shareholders, a scenario they want to avoid partly because their share prices have fallen 30 percent this year.
Threats Are ‘Pernicious’
“Threatening there will be fewer loans for Airbus aircraft is pernicious,” said Christophe Nijdam, an AlphaValue bank analyst in Paris. “Aircraft leasing isn’t a big amount in BNP Paribas’s balance sheet, but imagine the impact of such a comment on German or French lawmakers with an Airbus plant in their constituencies. Banks have other ways to boost capital than reduce lending to businesses. They could cut their trading books for example.”
Banks are using the threat of lower lending to influence talks with regulators, just as demand for financing declines in a slower economy. Lenders reported a net decrease in loan applications by non-financial firms in the third quarter, the first drop in more than a year, according to the European Central Bank.
“This whole tune sounds familiar, and it’s always been the case ahead of major recapitalization exercises that we see these statements of banks,” said Christian Gattiker, head of research at Bank Julius Baer & Co. in Zurich.
Europe Versus U.S.
Banks are more important to the European economy than they are in the U.S., according Bank of America Corp. economist Laurence Boone. She calculates that loans to the private sector totaled 145 percent of gross domestic product in 2007, more than double that of the U.S., where companies rely more on stock and bond markets for capital.
James Ferguson, head of strategy at Arbuthnot Securities Ltd. in London, draws parallels between Europe’s current situation and the credit crunches suffered in recent decades by Japan, the U.S. and the U.K.
“History shows that bank recapitalizations provide the catalyst for the credit crunch,” he said in an Oct. 20 note. “Japan learned this in 1998, and the U.S. and the U.K. in 2008. Continental Europe’s lesson starts now.”
Banks across Europe have announced they will trim more than 775 billion euros from their balance sheets in the next two years to reduce short-term funding needs and achieve the 9 percent in regulatory capital required by the Basel Committee on Banking Supervision ahead of schedule, according to data compiled by Bloomberg. They may be required by policy makers today to meet this ratio by the end of June, two people with knowledge of the talks said.
‘Incredibly Worrying’
So-called bank deleveraging could reach 5 trillion euros in the next three to five years, according to Alberto Gallo, head of European credit strategy at Royal Bank of Scotland Group Plc in London.
“It is incredibly worrying that this wall of deleveraging will, in fact, continue to add additional pressure onto the European economies,” John Moran, head of bank restructuring at Ireland’s Finance Ministry, said in a speech in Dublin Oct. 12. There is “an absolute necessity to avoid excessively speedy deleveraging across the system.”
The ECB reported on Oct. 6 that the toughening of credit standards by euro-zone banks “picked up significantly” in the third quarter. A net 16 percent of banks said they tightened loan terms to non-financial firms, compared with 2 percent in the previous three months and predicted more constraint in the current quarter. Eighteen percent said they had done the same for consumers buying homes, double that of the second quarter.
Moving Toward Recession
The ECB’s third-quarter data show the biggest restriction of credit since the third quarter of 2009 and that loan officers are signaling it will get worse in the first quarter of next year, according to an analysis by Guillaume Menuet, a Citigroup economist.
Such constraint “will play a part” along with tighter fiscal policy in tipping the euro area into its second recession in three years, Menuet said. He estimates the economy will contract 0.3 percent in the current quarter before shrinking about 0.1 percent in each of the next three quarters. The economy expanded 0.2 percent in the second quarter from the previous three months, according to the most recent data.
“The recession has already started,” Eric Chaney, Axa SA’s chief economist, said in an interview with Bloomberg Television in Paris on Oct. 14. “There is a credit crunch. Banks are not lending as much as companies would like, especially in peripheral countries.”
Rates Rising
In Spain, one in four companies were rejected for loans in 2010, compared with 10 percent in 2007, according to a survey by the country’s national statistics institute published in May. The average interest rate on new company loans of as much as 1 million euros rose to 4.7 percent in July from 4.57 percent in June, and 3.88 percent in December, the Bank of Spain reported.
The EU proposals “will produce a contraction of credit since many institutions will opt to reduce their balances,” Banco Santander SA Chairman Emilio Botin said in a speech on Oct. 18 at the bank’s headquarters outside Madrid.
Santander expects lending at its Spanish branch network to drop 3 percent a year through 2013, it said in an analyst presentation in September.
In Ireland, 55 percent of loan applications by companies succeeded last year, compared with 95 percent in 2007, according to a May survey [ http://www.cso.ie/releasespublications/documents/services/2010/accfi_2010.pdf ] by the country’s Central Statistics Office.
France, Germany
Companies in countries at the heart of Europe, including France and Germany, are facing more selective banks demanding more expensive terms. A net 28 percent of French corporate treasurers judged it was “difficult” to get bank financing, according to an October survey by the French Association of Corporate Treasurers [ http://www.afte.com/files/afte/COE_AFTE_2011_10_0.pdf ]. In July, a net 1.4 percent of the respondents said it was “easy.”
“We’re seeing a similar trend as in 2008 when things suddenly and massively deteriorated,” Richard Cordero, the association’s head in Paris, said in an interview. “Banks are reducing their balance sheets, and it doesn’t bode well in terms of getting access to credit.”
Airbus said Sept. 19 it’s concerned the European debt crisis may hurt airlines’ ability to raise bank financing for aircraft purchases. Suppliers may also be hit, Airbus Chief Executive Officer Thomas Enders said at a conference last week.
“We see some troubling signs of lack of capital, especially with some of our smaller suppliers,” Enders, 52, said in Toulouse, France, on Oct. 18. “They’re the ones who get hit first when banks tighten up their capital.”
Financing Alternatives
French banks provide 15 percent to 20 percent of commercial aircraft financing, according to Bertrand Grabowski, managing director of DVB Bank SE, which is among the biggest aircraft financiers in Europe. On Sept. 22, European Aeronautic, Defence & Space Co., Airbus’s parent, sought to reassure investors that other lenders could fill the gap if European banks retrench.
“We have seen many new banks entering or re-entering the aviation market,” EADS Chief Financial Officer Hans Peter Ring said in an e-mailed statement then.
Regulators created a framework that makes businesses such as aircraft leasing harder, BNP Paribas CEO Baudouin Prot said in a Sept. 22 interview with French newspaper Les Echos.
“All the banks will have to adapt, notably in the markets that are far from their base,” Prot said. “We won’t, however, abandon the expertise accumulated over decades in businesses that are useful to the real economy.”
Societe Generale
Pascal Henisse, a spokesman for BNP Paribas in Paris, declined to comment further.
“We’re going to continue to finance the French economy,” Societe Generale CEO Frederic Oudea, 48, said in an interview with French channel BFM TV on Oct. 24. He pointed out that the volume of loans provided by the French banks to companies and households grew 6 percent annually through August.
“If you give banks 18 months time to reach a certain capital quota, then they’ll try to reach that through a reduction in business,” Commerzbank AG CEO Martin Blessing, 48, said in an interview with German newspaper Bild Zeitung on Oct. 21. “That would hamper lending to companies.”
His comment echoed Deutsche Bank CEO Josef Ackermann, 63, who said on Oct. 13 that banks may be forced to restrict lending “due to possible debt haircuts in the euro zone.”
Regulators say the risk of reduced lending is worth taking in light of a bigger concern about the banks’ ability to find short-term funding on the markets at a time when investors are questioning their sovereign debt holdings.
‘Excessive Fear’
“It’s a risk that exists,” French Central Bank Governor Christian Noyer said in an interview on French channel TV5 Monde on Oct. 16. “But the risk that’s more important today is that the banks are subject to excessive fear from investors making it hard for them to find funding.”
The chances of a credit crunch would also shift “higher than 50 percent” if banks don’t boost capital, Julius Baer’s Gattiker told Bloomberg Television’s “On the Move” with Francine Lacqua on Oct. 19.
Bank of America’s Boone says the threat of a credit contraction similar to 2008 remains small. Her banking-analyst colleagues expect loan growth to decrease to 2.6 percent next year from 3.3 percent in 2011. If that comes to pass, then ECB studies suggest the effect of such a decline on economic growth would be to reduce it from Bank of America’s 0.8 percent forecast next year to 0.77 percent or 0.63 percent, depending on the study, she said.
Hiring Constrained
Small and medium-sized companies say they are particularly vulnerable because they lack the cash and ability to issue bonds that larger companies have, according to strategists at Credit Suisse Group AG’s private-banking division.
Edward Hamilton, owner of Cheltenham, U.K.-based advertising agency Artful Ltd., said he can’t hire more staff and is missing contracts because his bank is seeking to reduce his company’s credit line. Hamilton, who employs half a dozen people, said his confidence in the future is at its lowest in 30 years of running the business.
“They are trying to reduce the overdraft facility so that they can stave off their losses on their loans to Greece,” he said in a phone interview. “I am not going to put myself in a position where I am paying twice as much for a loan from a bank. I will find the money elsewhere.”
More than 30 percent of small businesses say they have been missing opportunities because they were denied bank financing, Andrew Cave, head of the U.K.’s Federation of Small Businesses, said in an interview.
‘Money in the System’
“Banks have the money to be able to carry on businesses in more lucrative investment banking,” he said. “There’s still money in the system. It’s just a choice the banks make as to where they place that money.”
Maurizio Guidi, co-owner of EUSolar Srl, a builder of solar plants in northern Italy, said he has been losing contracts for three months because his clients, including farms and small companies, can’t get bank loans.
“Last month we lost a contract with an agriculture business because the company didn’t obtain a credit line to finance the plant,” Guidi said in an interview. “They were solvent and without particular problems, but the bank told them that they are not willing to lend money for more than 10 years. Banks only borrow money for short periods and at higher costs. I’m in the business since 2005, and I think that a new credit crunch period is around the corner.”
The banks’ lending argument may backfire, pushing politicians to press lenders to raise cash from shareholders, an option they want to avert because it would be dilutive and, if they were to use government money, lead to policy makers having more say in their operations.
“The banks need to deleverage, but if they choose to deleverage by cutting assets not by raising equity then it will have negative consequences for the economy,” Simon Maughan, head of sales at MF Global Holdings Ltd. in London. “It’s much better to force a deleveraging through more equity even if that means it has to be forcibly injected in the banks.”
To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net; John Fraher in London at jfraher@bloomberg.net
©2011 BLOOMBERG L.P.
http://www.bloomberg.com/news/2011-10-25/banks-warn-of-fewer-airbuses-in-sky-as-credit-crunch-looms-across-europe.html
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Timothy Goodman
By JAMES LIVINGSTON
Published: October 25, 2011
AS an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.
This is, to put it mildly, a controversial claim. Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth.
The general public seems to agree. According to a New York Times/CBS News poll in May, a majority of Americans believe that increased corporate taxes “would discourage American companies from creating jobs.”
But history shows that this is wrong.
Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P. What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.
In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.
The architects of the Reagan revolution tried to reverse these trends as a cure for the stagflation of the 1970s, but couldn’t. In fact, private or business investment kept declining in the ’80s and after. Peter G. Peterson, a former commerce secretary, complained that real growth after 1982 — after President Ronald Reagan cut corporate tax rates — coincided with “by far the weakest net investment effort in our postwar history.”
President George W. Bush’s tax cuts had similar effects between 2001 and 2007: real growth in the absence of new investment. According to the Organization for Economic Cooperation and Development, retained corporate earnings that remain uninvested are now close to 8 percent of G.D.P., a staggering sum in view of the unemployment crisis we face.
So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.
Why, then, do so many Americans support cutting taxes on corporate profits while insisting that thrift is the cure for what ails the rest of us, as individuals and a nation? Why have the 99 percent looked to the 1 percent for leadership when it comes to our economic future?
A big part of the problem is that we doubt the moral worth of consumer culture. Like the abstemious ant who scolds the feckless grasshopper as winter approaches, we think that saving is the right thing to do. Even as we shop with abandon, we feel that if only we could contain our unruly desires, we’d be committing ourselves to a better future. But we’re wrong.
Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)
We don’t need the traders and the C.E.O.’s and the analysts — the 1 percent — to collect and manage our savings. Instead, we consumers need to save less and spend more in the name of a better future. We don’t need to silence the ant, but we’d better start listening to the grasshopper.
James Livingston, a professor of history at Rutgers, is the author of “Against Thrift: Why Consumer Culture Is Good for the Economy, the Environment and Your Soul.”
© 2011 The New York Times Company
http://www.nytimes.com/2011/10/26/opinion/its-consumer-spending-stupid.html
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Sen. Sessions Wants To Cut Food Stamp Program, Claiming It Has ‘Surged Out Of Control’
By Alex Seitz-Wald on Oct 20, 2011 at 5:15 pm
Sen. Jeff Sessions (R-AL) is pushing a new amendment [ http://sessions.senate.gov/public/index.cfm?FuseAction=PressShop.NewsReleases&ContentRecord_id=18e11168-0afb-bca7-edbc-9957eee956a1&Region_id=&Issue_id= ] that would make it more difficult for people to receive food stamps by restricting eligibility requirements and eliminating a planned $9 billion funding increase for the program. Sessions says his plan is intended to reduce the deficit and combat fraud, which he claims is rampant. From ABC News’ Top Line today:
SESSIONS: No program in our government has surged out of control more dramatically than food stamps. And nothing is being done about it. [...] Multimillion dollar lottery winners are getting food stamps because the money is considered to be an asset not an income. One of the fast and furious gun buyers –
HOST: But hold on, for ever lottery winner that has food stamps, there’s probably a lot more people who really need them who have them, right?
SESSIONS: Well look, do you think there are four times as many people who need food stamps today as in 2001. That answers itself. [...] We cannot do this. We do not have the money. Congress doesn’t understand that we can’t afford to double the program every three years.
Watch it [ http://www.youtube.com/watch?v=AFY9wl1x3AY ]:
It’s shockingly ignorant at best and dishonest at worst for Sessions — the ranking GOP member of the Senate Budget Committee — to completely ignore the role the economy has played on food stamp usage. The cost of the program has jumped because more Americans are out of work and wages are down, thus more people need assistance [ http://www.csmonitor.com/USA/Society/2010/1026/Recession-officially-over-use-of-food-stamps-stays-at-record-high ]. Food prices have also gone up, adding additional costs. But the cost of the program will come down on its own [ http://www.cbpp.org/cms/index.cfm?fa=view&id=3450 ] as the economy recovers and more people can afford to feed themselves.
In fact, the food stamp program has been critical [id.] for reducing poverty and pumping money into local economies during the down economy, so cutting it now would not only take food out of peoples’ mouths, but could slow down the recovery. No one is trying to “double the program every three years” as Sessions claims. (Currently, nearly one in five [ http://blogs.wsj.com/economics/2011/02/02/some-43-million-americans-use-food-stamps/ ] Alabamians is on Food Stamps.)
And while the senator suggests the program has grown due to fraud, in fact, errors in the food stamp program — the Supplemental Nutrition Assistance Program (SNAP) –are currently at an all-time low [ http://www.cbpp.org/cms/index.cfm?fa=view&id=3450 ], accounting for less than three percent of the program’s cost. According to the Center for Budget and Policy Priorities:
To ensure that benefits are provided only to eligible households and in the proper amounts, SNAP has one of the most rigorous quality control systems of any public benefit program and, in recent years, has achieved its lowest error rates on record. In fiscal year 2009, even as caseloads were rising, states set new record lows for error rates. The net loss due to errors equaled only 2.7 percent of program costs in 2009. There is no evidence that program errors are driving up SNAP spending.
It’s worth noting that while Sessions claims the country can’t afford to feed the hungry, he has fought to preserve the Bush tax cuts for wealthy [ http://www.factcheck.org/2011/07/sessions-wrong-on-bush-tax-cuts/ ], subsides for big oil companies [ http://hotair.com/archives/2011/05/19/sessions-reid-has-no-reason-to-assume-debt-ceiling-agreement-will-include-oil-tax-hikes/ ], and demanded new tax cuts for corporations [ http://www.huffingtonpost.com/2011/02/04/sessions-lower-corporate-tax-rates_n_818827.html ], all of which also contribute to the deficit.
© 2011 Center for American Progress Action Fund (emphasis in original)
http://thinkprogress.org/economy/2011/10/20/349131/jeff-sessions-food-stamps-out-of-control/ [with comments]
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EU Banks Warn of Credit Drought Amid Push to Raise Capital
By Anne-Sylvaine Chassany and Simon Kennedy - Oct 25, 2011 6:00 PM CT
A top lobbyist for France’s largest bank says European lawmakers will have only themselves to blame if pressure to bolster capital too quickly results in more Boeing Co. planes at the expense of European rival Airbus SAS.
“In the case of the French banks, activities where they were leaders like aircraft leasing or shipping financing will be partly taken over by U.S. or Chinese banks,” Dominique Graber, co-head of BNP Paribas SA’s public and prudential affairs, told the European parliament’s committee on economic and monetary affairs [ http://www.europarl.europa.eu/wps-europarl-internet/frd/vod/player?eventCode=20111011-1500-COMMITTEE-ECON&language=en&byLeftMenu=researchcommittee&category=COMMITTEE&format=wmv#anchor1 ] in Brussels on Oct. 11. “One will also not be surprised if later on more Boeings than Airbuses get funded.”
European banks say they have to cut assets to help satisfy a government push to boost capital faster than planned to insulate them against the sovereign debt crisis. That may trigger a credit crunch for companies and consumers throughout the 17-nation euro zone, helping to push its economy into recession, say Citigroup Inc. and Deutsche Bank AG analysts.
Leaders meet today in Brussels to approve a plan to increase lenders’ capital by about 100 billion euros ($139 billion). Banks say they will more likely achieve the new requirements by shrinking rather than raising cash from shareholders, a scenario they want to avoid partly because their share prices have fallen 30 percent this year.
Threats Are ‘Pernicious’
“Threatening there will be fewer loans for Airbus aircraft is pernicious,” said Christophe Nijdam, an AlphaValue bank analyst in Paris. “Aircraft leasing isn’t a big amount in BNP Paribas’s balance sheet, but imagine the impact of such a comment on German or French lawmakers with an Airbus plant in their constituencies. Banks have other ways to boost capital than reduce lending to businesses. They could cut their trading books for example.”
Banks are using the threat of lower lending to influence talks with regulators, just as demand for financing declines in a slower economy. Lenders reported a net decrease in loan applications by non-financial firms in the third quarter, the first drop in more than a year, according to the European Central Bank.
“This whole tune sounds familiar, and it’s always been the case ahead of major recapitalization exercises that we see these statements of banks,” said Christian Gattiker, head of research at Bank Julius Baer & Co. in Zurich.
Europe Versus U.S.
Banks are more important to the European economy than they are in the U.S., according Bank of America Corp. economist Laurence Boone. She calculates that loans to the private sector totaled 145 percent of gross domestic product in 2007, more than double that of the U.S., where companies rely more on stock and bond markets for capital.
James Ferguson, head of strategy at Arbuthnot Securities Ltd. in London, draws parallels between Europe’s current situation and the credit crunches suffered in recent decades by Japan, the U.S. and the U.K.
“History shows that bank recapitalizations provide the catalyst for the credit crunch,” he said in an Oct. 20 note. “Japan learned this in 1998, and the U.S. and the U.K. in 2008. Continental Europe’s lesson starts now.”
Banks across Europe have announced they will trim more than 775 billion euros from their balance sheets in the next two years to reduce short-term funding needs and achieve the 9 percent in regulatory capital required by the Basel Committee on Banking Supervision ahead of schedule, according to data compiled by Bloomberg. They may be required by policy makers today to meet this ratio by the end of June, two people with knowledge of the talks said.
‘Incredibly Worrying’
So-called bank deleveraging could reach 5 trillion euros in the next three to five years, according to Alberto Gallo, head of European credit strategy at Royal Bank of Scotland Group Plc in London.
“It is incredibly worrying that this wall of deleveraging will, in fact, continue to add additional pressure onto the European economies,” John Moran, head of bank restructuring at Ireland’s Finance Ministry, said in a speech in Dublin Oct. 12. There is “an absolute necessity to avoid excessively speedy deleveraging across the system.”
The ECB reported on Oct. 6 that the toughening of credit standards by euro-zone banks “picked up significantly” in the third quarter. A net 16 percent of banks said they tightened loan terms to non-financial firms, compared with 2 percent in the previous three months and predicted more constraint in the current quarter. Eighteen percent said they had done the same for consumers buying homes, double that of the second quarter.
Moving Toward Recession
The ECB’s third-quarter data show the biggest restriction of credit since the third quarter of 2009 and that loan officers are signaling it will get worse in the first quarter of next year, according to an analysis by Guillaume Menuet, a Citigroup economist.
Such constraint “will play a part” along with tighter fiscal policy in tipping the euro area into its second recession in three years, Menuet said. He estimates the economy will contract 0.3 percent in the current quarter before shrinking about 0.1 percent in each of the next three quarters. The economy expanded 0.2 percent in the second quarter from the previous three months, according to the most recent data.
“The recession has already started,” Eric Chaney, Axa SA’s chief economist, said in an interview with Bloomberg Television in Paris on Oct. 14. “There is a credit crunch. Banks are not lending as much as companies would like, especially in peripheral countries.”
Rates Rising
In Spain, one in four companies were rejected for loans in 2010, compared with 10 percent in 2007, according to a survey by the country’s national statistics institute published in May. The average interest rate on new company loans of as much as 1 million euros rose to 4.7 percent in July from 4.57 percent in June, and 3.88 percent in December, the Bank of Spain reported.
The EU proposals “will produce a contraction of credit since many institutions will opt to reduce their balances,” Banco Santander SA Chairman Emilio Botin said in a speech on Oct. 18 at the bank’s headquarters outside Madrid.
Santander expects lending at its Spanish branch network to drop 3 percent a year through 2013, it said in an analyst presentation in September.
In Ireland, 55 percent of loan applications by companies succeeded last year, compared with 95 percent in 2007, according to a May survey [ http://www.cso.ie/releasespublications/documents/services/2010/accfi_2010.pdf ] by the country’s Central Statistics Office.
France, Germany
Companies in countries at the heart of Europe, including France and Germany, are facing more selective banks demanding more expensive terms. A net 28 percent of French corporate treasurers judged it was “difficult” to get bank financing, according to an October survey by the French Association of Corporate Treasurers [ http://www.afte.com/files/afte/COE_AFTE_2011_10_0.pdf ]. In July, a net 1.4 percent of the respondents said it was “easy.”
“We’re seeing a similar trend as in 2008 when things suddenly and massively deteriorated,” Richard Cordero, the association’s head in Paris, said in an interview. “Banks are reducing their balance sheets, and it doesn’t bode well in terms of getting access to credit.”
Airbus said Sept. 19 it’s concerned the European debt crisis may hurt airlines’ ability to raise bank financing for aircraft purchases. Suppliers may also be hit, Airbus Chief Executive Officer Thomas Enders said at a conference last week.
“We see some troubling signs of lack of capital, especially with some of our smaller suppliers,” Enders, 52, said in Toulouse, France, on Oct. 18. “They’re the ones who get hit first when banks tighten up their capital.”
Financing Alternatives
French banks provide 15 percent to 20 percent of commercial aircraft financing, according to Bertrand Grabowski, managing director of DVB Bank SE, which is among the biggest aircraft financiers in Europe. On Sept. 22, European Aeronautic, Defence & Space Co., Airbus’s parent, sought to reassure investors that other lenders could fill the gap if European banks retrench.
“We have seen many new banks entering or re-entering the aviation market,” EADS Chief Financial Officer Hans Peter Ring said in an e-mailed statement then.
Regulators created a framework that makes businesses such as aircraft leasing harder, BNP Paribas CEO Baudouin Prot said in a Sept. 22 interview with French newspaper Les Echos.
“All the banks will have to adapt, notably in the markets that are far from their base,” Prot said. “We won’t, however, abandon the expertise accumulated over decades in businesses that are useful to the real economy.”
Societe Generale
Pascal Henisse, a spokesman for BNP Paribas in Paris, declined to comment further.
“We’re going to continue to finance the French economy,” Societe Generale CEO Frederic Oudea, 48, said in an interview with French channel BFM TV on Oct. 24. He pointed out that the volume of loans provided by the French banks to companies and households grew 6 percent annually through August.
“If you give banks 18 months time to reach a certain capital quota, then they’ll try to reach that through a reduction in business,” Commerzbank AG CEO Martin Blessing, 48, said in an interview with German newspaper Bild Zeitung on Oct. 21. “That would hamper lending to companies.”
His comment echoed Deutsche Bank CEO Josef Ackermann, 63, who said on Oct. 13 that banks may be forced to restrict lending “due to possible debt haircuts in the euro zone.”
Regulators say the risk of reduced lending is worth taking in light of a bigger concern about the banks’ ability to find short-term funding on the markets at a time when investors are questioning their sovereign debt holdings.
‘Excessive Fear’
“It’s a risk that exists,” French Central Bank Governor Christian Noyer said in an interview on French channel TV5 Monde on Oct. 16. “But the risk that’s more important today is that the banks are subject to excessive fear from investors making it hard for them to find funding.”
The chances of a credit crunch would also shift “higher than 50 percent” if banks don’t boost capital, Julius Baer’s Gattiker told Bloomberg Television’s “On the Move” with Francine Lacqua on Oct. 19.
Bank of America’s Boone says the threat of a credit contraction similar to 2008 remains small. Her banking-analyst colleagues expect loan growth to decrease to 2.6 percent next year from 3.3 percent in 2011. If that comes to pass, then ECB studies suggest the effect of such a decline on economic growth would be to reduce it from Bank of America’s 0.8 percent forecast next year to 0.77 percent or 0.63 percent, depending on the study, she said.
Hiring Constrained
Small and medium-sized companies say they are particularly vulnerable because they lack the cash and ability to issue bonds that larger companies have, according to strategists at Credit Suisse Group AG’s private-banking division.
Edward Hamilton, owner of Cheltenham, U.K.-based advertising agency Artful Ltd., said he can’t hire more staff and is missing contracts because his bank is seeking to reduce his company’s credit line. Hamilton, who employs half a dozen people, said his confidence in the future is at its lowest in 30 years of running the business.
“They are trying to reduce the overdraft facility so that they can stave off their losses on their loans to Greece,” he said in a phone interview. “I am not going to put myself in a position where I am paying twice as much for a loan from a bank. I will find the money elsewhere.”
More than 30 percent of small businesses say they have been missing opportunities because they were denied bank financing, Andrew Cave, head of the U.K.’s Federation of Small Businesses, said in an interview.
‘Money in the System’
“Banks have the money to be able to carry on businesses in more lucrative investment banking,” he said. “There’s still money in the system. It’s just a choice the banks make as to where they place that money.”
Maurizio Guidi, co-owner of EUSolar Srl, a builder of solar plants in northern Italy, said he has been losing contracts for three months because his clients, including farms and small companies, can’t get bank loans.
“Last month we lost a contract with an agriculture business because the company didn’t obtain a credit line to finance the plant,” Guidi said in an interview. “They were solvent and without particular problems, but the bank told them that they are not willing to lend money for more than 10 years. Banks only borrow money for short periods and at higher costs. I’m in the business since 2005, and I think that a new credit crunch period is around the corner.”
The banks’ lending argument may backfire, pushing politicians to press lenders to raise cash from shareholders, an option they want to avert because it would be dilutive and, if they were to use government money, lead to policy makers having more say in their operations.
“The banks need to deleverage, but if they choose to deleverage by cutting assets not by raising equity then it will have negative consequences for the economy,” Simon Maughan, head of sales at MF Global Holdings Ltd. in London. “It’s much better to force a deleveraging through more equity even if that means it has to be forcibly injected in the banks.”
To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net; John Fraher in London at jfraher@bloomberg.net
©2011 BLOOMBERG L.P.
http://www.bloomberg.com/news/2011-10-25/banks-warn-of-fewer-airbuses-in-sky-as-credit-crunch-looms-across-europe.html
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