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

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Why 'Occupy Wall Street'?

 

Steve Denning, Contributor

RADICAL MANAGEMENT: Rethinking leadership and innovation

Image by AFP/Getty Images via @daylife

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

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

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

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

Yet many bankers think they’re not paid enough

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

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

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

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

What is the basis for these financial rewards?

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

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

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

It wasn’t always this way

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

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

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

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

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

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

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

Slum lords in pin-striped suits

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

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

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

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

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

Follow Steve Denning on Twitter @stevedenning

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

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Job growth fails to dent US unemployment rate

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

Al Jazeera and agencies

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

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

Economists had expected Friday's report to say that the economy only replaced 60,000 jobs in September.
The private sector accounted for all of the the gains, which were boosted in part by the return of 45,000 telecommunications workers who had been on strike in August.

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

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

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

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

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

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

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

Growing frustration

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

In depth coverage of US financial crisis protests

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

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

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

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

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

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

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Think Twice About Paying Off Your Mortgage, Retirees!

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Retirees: Think Twice About Paying Off Your Mortgage

NEW YORK (CNBC) -- The countdown to retirement is on for millions of baby boomers and, thanks to a lifetime of diligent saving, some have amassed enough wealth to pay off their mortgages and live debt free. 


Conventional wisdom says it's best to pay off your mortgage before retirement, but given the low-interest rate environment, and the need to preserve cash in an unstable economy, that strategy is no longer absolute.

"Paying off your house is one goal, but having a zero-mortgage liability is not the answer for everyone," says Jennie Fierstein, a certified financial planner (CFP) in Westborough, Mass. "If you don't have a stream of resources to replenish it, you might do yourself a disservice by taking money out of the bank to pay off your mortgage."

Retirees themselves, it seems, are equally torn as to the most prudent course of action.

According to the Center for Retirement Research at Boston College, 41% of U.S. households aged 60 to 69 in 2007 maintained a mortgage. Of these, 51% had sufficient assets to repay their loans.

When it pays to borrow
 
While most financial planners agree that owning your home free and clear during retirement is a worthy goal, Elaine Bedel, with Bedel Financial Consulting in Indianapolis, says there are times when it makes more financial sense to keep your money in the market and use the earnings to pay off your loan.

That's particularly true, she says, if you need to invest (however conservatively) for growth.

"There are a few of my clients who feel like if they don't take the risk to get the growth, they're not going to be able to meet their retirement objectives and live the lifestyle they want," says Bedel. "If you take a big chunk out of your nest egg and the income it was generating was being used to meet your mortgage payments, as well as additional living expenses, that may not be the right thing to do."

CFP Fierstein agrees, noting most retirees are advised to withdraw no more than 4% from their nest egg each year to ensure they won't outlive their income.

Thus, if you take $200,000 out of a $500,000 portfolio to pay off your house, your income based on that 4% drawdown rate would drop to $12,000 from $20,000 per year. (The $20,000, of course, would have had to help pay for your mortgage.)

"It's very dangerous to tie up all your money in your house, because your house is not going to generate
income," says Fierstein. "It's nice security, but you lose flexibility and depending on how conservatively you invest your remaining portfolio you may not have enough income to live on."



What's your rate?

When determining whether to pay off or keep your mortgage, you should also consider your interest rate.

If the average after-tax return on your investments is greater than the after-tax cost of your mortgage, it may make sense to keep your money invested, says Fierstein.

Don't forget to factor in the effect of the mortgage-interest tax deduction.

If you're in the 30% tax bracket and you're able to claim the full deduction, a 5% loan is really only costing you roughly 3.5%.

Thus, you'd only have to earn 4% on your investments to make it worth your while. (Given the low interest-rate environment, however it's nearly impossible to achieve that rate of return on more conservative, fixed-income products such as bonds and certificates of deposit.)

"It's hard to find comparable risk-free investments, so you have to be able to stomach a loss if you want to go that route," says Jean Setzfand, AARP's vice president of financial security. "You can't get a plain vanilla CD anymore, because those rates are too low."

Getting close
 
If you're nearing retirement but haven't yet quit, the case for keeping your mortgage and continuing to invest is more clear -- at least until you part ways with the boss.

According to a 2007 study by the Federal Reserve, directing extra money towards your low-interest mortgage loan at the expense of continued contribution to your 401(k) is a costly mistake.

Image via Wikipedia
Some 38% of the U.S. households that are accelerating their mortgage payments instead of saving in a tax-deferred account, such as a 401(k) or traditional IRA, are making the "wrong choice," it concluded.

For those households, reallocating their savings towards a tax-deferred account instead would yield a mean benefit of 11 cents to 17 cents per dollar, depending on the choice of investment assets in the account. In all, the study notes, "those misallocated savings are costing U.S. households as much as $1.5 billion per year."

When to pay it off

Despite the limited scenarios in which keeping a mortgage during retirement might make sense, AARP's Setzfand and financial planners Bedel and Fierstein agree that most retirees would be better off eliminating debt (however low the interest rate) for the peace of mind it affords.

Money, after all, isn't just about the math.

"I think for the general population our guidance is still the old adage of paying off your mortgage before you retire," says Setzfand of AARP. "There isn't anything as safe as being rid of that mortgage and that burden before you hit a period of your life where you're not bringing in a paycheck."

Indeed, mortgages consume 20% to 30% of the typical household's fixed expenses.

While some maintain that using savings to pay off one's mortgage is unwise, as it leaves you less cash on hand for unexpected expenses, such as medical costs and home repairs, Anthony Webb, the research economist who authored the Center for Retirement Research study, believes that argument lacks validity.

Households "need to consider what they would do if the bad event actually happened," he writes. To wit, how they "would maintain their mortgage payments once their financial assets had been spent."

Remember, too, says Bedel, you can always take out a home equity line of credit on your paid off home, which can satisfy the need for cash reserves.

If you can't pay off your mortgage in full without depleting your nest egg, says Fierstein, at least shoot for a more manageable monthly payment.

"I strongly advocate trying to pay down your mortgage, so when you reach retirement you're not faced with a standard of living crisis," she says. "There is some wisdom to paying off a portion of your mortgage so you have minimal payments and some left over in an emergency fund."

A generation ago, retirement planners often started with the premise of a paid off home, using Social Security, company pensions, and other income sources to help their clients cover living expenses.

Today, however, with interest rates at historic lows and many retirees chasing returns to offset losses incurred during the market meltdown, a mortgage-free retirement is not necessarily the long-term goal.

Deciding what makes sense for you depends on your financial profile, interest rate, and your ability to stomach risk.

-- Written by Shelly K. Schwartz, special to CNBC

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Putting finance to work

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 The financial sector must be transformed and serve the real economy

THINK ASIAN By ANDREW SHENG

FINANCE is a service industry, but in the past three decades it seems to have gone its own way.

The functions of the finance sector are to protect property rights for the real sector, improve resource allocation, reduce transaction costs, help manage risks and help discipline borrowers. Financial intermediaries are agents of the real sector. Bankers were traditionally among the most trusted members of the community because they looked after other peoples' money.

The divide between bankers and their customers (the real sector) is epitomised by a recent report which said that the mantra of a large British bank is about “increasing share of wallet of existing customers”. It recalls Woody Allen's joke that the job of his stockbroker was to manage his money until it was all gone. And despite what bankers say, a lot more would have gone between 2007 and 2009 without massive bailouts from the public purse.

The heart of the problem is the principal-agent relationship, where trust is everything. The real sector (the principal) trusts the finance sector to manage its savings, and the banks, as agents, have a fiduciary duty to their customers. Agency business is a big public utility because the intermediary does not take risks, which are those of his customers. All this changed when the drive for short-term profits pushed banks more and more into proprietary trading for their own profits. All this was in the name of capital efficiency, a misnomer for increasing leverage.

In the past 30 years, with growth in technology and financial innovation, finance morphed from a service agent to a self-serving principal that is larger than the real sector itself. The total size of financial assets (stock market capitalisation, debt market outstanding and bank assets, excluding derivatives) has grown dramatically from 108% of global GDP in 1980 to over 400% by 2009 . If the notional value of all derivative contracts were included, finance would be roughly 16 times the size of the global real sector, as measured by GDP. The agent now dwarfs the real sector in economic and, some say, political power.

Can finance be a perpetual profit machine that makes more money than the real sector? In the US, finance's share of total corporate profits grew from 10% in the early 1980s to 40% in 2006. Since wages and bonuses make up between 30% to 70% of financial sector costs, there are tremendous incentives to generate short-term profits at higher risks, particularly through leverage.



The key thrusts of the post-crisis reforms in the financial sector are - caps on leverage, strengthened capital and liquidity, more transparency in linking remuneration with risks, and a macro-prudential and counter-cyclical approach to systemic risks. What the current reforms have not addressed is the increasing concentration of the finance industry at the global level and increasing political power that may sow the seeds for another Too Big to Fail (TBTF) failure in the next crisis.

In 2008, the 25 largest banks in the world accounted for US$44.7 trillion in assets equivalent to 73% of global GDP and 42.7% of total global banking assets . In 1990, none of the top 25 banks had total assets larger than their “home” GDP. By 2008, there were seven , with more than half of the 25 banks having assets larger than 50% of their “home” GDP.

Post-crisis, the concentration level has increased as there were mergers with failed institutions. With this rate of growth and concentration, the largest global financial institutions simply outgrew the ability of their host nations and the global regulatory structure to underwrite and supervise them. Such concentration of wealth and power is a political issue, not a regulatory one.

Finance is not independent of the real sector, but interdependent upon the real sector. It is a pivotal amplifier of the underlying weaknesses in the real sector that led to the financial crisis over-consumption, over-leverage and bad governance. In the past 30 years, the finance sector has helped print money, encouraging its customers and itself (particularly through shadow banking) to take on more leverage in the search for yield. Instead of exercising discipline over borrowers and investors, it did not exercise discipline over its own leverage and risks.

Unfortunately, there was also supervisory failure. To bail out the financial sector from its own mistakes, advanced countries, already burdened by rising welfare expenses, have doubled their fiscal deficits to over 100% of GDP.

In spite of these trends, we should not demonise finance or blame the regulators, but examine the real structural and systemic issues facing the world and how finance should respond. The greatest opportunity for finance is the rise of the emerging markets.

An additional one billion in the working population and middle class over the next two to three decades will have more to spend and more to invest. At the same time, the world needs to address the massive stress on natural resources arising from new consumption, which is likely to be three times current levels. Ecologically, financially and politically, the present model of over-consumption funded by over-concentrated leverage is unsustainable.

Indeed, to replicate the existing unsustainable financial model in the emerging markets may invite a bigger global crisis.

Sustainable finance hinges on sustainable business and on a more inclusive, greener, sustainable environment.

Financial leaders need to address a world where consumption and investment will fundamentally change.

To arrive at a greener and more inclusive, sustainable world, there will be profound changes in lifestyles, with greener products, supply chains and distribution channels.

Social networking is changing consumer and investor feedback so that industry, including finance, will become more networked and more attuned to demographic and demand changes.

As community leaders, finance should lead that drive for a more inclusive, sustainable future.

The greatest transformation of the financial sector is less likely to be driven by regulation than by the enlightened self-interest of the financial community.

Only when trust is restored, when finance cannot thrive independently of the real sector, will we have sustainable finance.

The incentive issues are very clear. If financial engineers are paid far more than green engineers, will a green economy emerge first or asset bubbles?

■ Andrew Sheng is president of the Fung Global Institute.

Stronger Malaysian ringgit seen

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Stronger ringgit seen

BY DALJIT DHESI daljit@thestar.com.my

Economists expect the ringgit to strengthen further against the US dollar

PETALING JAYA: Economists expect the ringgit to further strengthen against the greenback and attract extensive capital inflow into the region. It will also lead to possible further hikes in statutory reserve requirement (SRR) to stem excess liquidity if the global financial volatility worsens following the US credit rating downgrade.

Standard and Poor's (S&P's) had last Friday downgraded the world's largest economy a notch lower to AA+ from a triple A rating since the credit rating was issued to the US in 1917.

MIDF Research chief economist Anthony Dass said he expected the ringgit to strengthen against the US dollar at an average 2.97 for the year supported by a combination of healthy economic fundamentals and strong inflow of liquidity.

Stronger ringgit: Dass expects the ringgit to trade at an average 2.97 to the greenback for the year.

He added that the stronger ringgit against the US dollar would help cushion some level of imported inflation, which would give some breathing space for Bank Negara on further raising the overnight policy rate (OPR), which now stood at 3%.

“We have now placed a 30% odd for the OPR to stay at 3% for the rest of the year and expect the central bank to raise it by another 25 basis points (bps) in the second half of this year,” Dass said.

Much depends on the direction of the ringgit, the global commodity and food prices, liquidity and whether there will be further relaxation of subsidies.

Underpinned by healthy economic fundamentals and benefiting from the regional net inflow of funds, liquidity inflow into Malaysia has been strong, forcing the central bank to raise the SRR by 300 bps to 4% between April-June 2011. SRR are non-interest deposits kept at the central bank to mop up excess liquidity in the financial system.

With lingering uncertainties on the global front, Dass said he expected Malaysia, like other Asian ex-Japan economies, to continue to see inflow of funds. While this would strengthen the ringgit, he said ample liquidity would add pressure on inflation, adding that he was not ruling out the possibility of further hikes in SRR by another 50 bps to 100 bps should the inflow of liquidity pose a problem.

RAM Holdings economist Jason Fong, in response to a query from Starbiz, said if the financial volatility in the US turned out to be very significant and persistent, the impact on its external markets, including Malaysia, could be substantial.



One of the worst case scenarios would entail extensive capital flight from US-centric assets, he said. In this scenario, he added that there would be considerable decline in the value of the US dollar, causing an appreciation of US-denominated assets, particularly commodities.

The US financial volatility might also cause investors to put their money into safe haven assets such as precious metals, like gold, Fong noted.



Furthermore, he said if there were further US debt rating downgrade within the next two years as pointed out by S&P, then banks (depending on its portfolio weightings in US Treasuries) might slow down lending activities to meet international banking guidelines and this could slow domestic lending and cause consumption and investment to decline.

Fong said a larger-than-usual capital inflow would likely put upward pressure on the ringgit, causing Malaysia's exports to be more uncompetitive.

He said the rating agency maintained its economic growth forecast of 5.6% for Malaysia this year but acknowledged that the downside risk to growth had risen in the last few months.

This included a prolonged US slowdown coupled with a deteriorating external economic environment, he noted.

AmResearch Sdn Bhd director of economic research Manokaran Mottain reckons that the impact on Malaysia from the US credit rating downgrade will be minimal as the local economy is more domestic-oriented.

Countries more exposed to US Treasuries, including Japan and China, would face the brunt in the near term. China would be pressured to ease the grip on a weaker yuan policy, he added.

For Malaysia, the biggest impact will be in the currency market, with the ringgit rallying again towards RM2.93 per dollar again. The ringgit was traded at RM3.019 to a US$1 yesterday.

In the medium term, a possible quantitative easing (QE3) in the US would lead to the appreciation of the regional currencies, including the ringgit - which is expected to rally towards RM2.90 per dollar before settling between the RM2.80-RM2.90 range for this year.

Manokaran, who is maintaining the country's gross domestic product forecast at 5% this year, said the Government had trimmed its exposure to the G3 and plans to boost domestic demand. Apart from the US, the G3 also include Japan and the European Union.

What's left to trust in the world of money? Stop fooling around Govermnt Debts!

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Jeremy Warner

What's left to trust in the world of money?

America's inability to address its fiscal challenges – Sunday night's "bipartisan debt deal" offers only a temporary, sticking plaster solution – has raised afresh an old conundrum.

Relative to GDP, US sovereign debt has been far higher than it is today, but in the past America has been able to rely on fast growth and demilitarisation to return borrowing to tolerable levels. Neither of these things seem likely to come to the rescue this time around. Photo: REUTERS

If even US Treasuries are now regarded as a credit risk, is there anything left at all in the world of money that can be trusted?

The answer to this question is almost certainly no, but far from being a calamitous conclusion to reach, this might be viewed as a positive development which will in time restore market disciplines to a global monetary system which became based on make believe.

In fact, the idea of the sovereign as a "risk free asset" is a comparatively recent development which has no basis in historical experience. Even in a country such as Britain with no history of default (we'll ignore the case of war loans, which is arguable), government bonds have hardly proved a reliable form of investment.

True enough, coupons have been paid and maturities honoured, but the currency and inflation risks have proved extreme. On any medium to long term view, you would have done much better out of property and equities.

Among members of the eurozone, the concept of the sovereign as a safe haven asset is an even shorter lived phenomenon. The widening of spreads we've seen in the past year and a half of financial crisis is as nothing compared to the way it was before the single currency was launched.

Those countries with weak governance were punished for their lack of competitiveness with high interest rates and repeated currency crises. It was a brutal, but reasonably effective form of discipline.

But once the euro had been established, all countries, bad as well as good, came to enjoy the same low interest rates that Germany had earned from years of hair shirted fiscal rectitude. Bond yields converged not because anyone believed the single currency's fiscal rules would make all countries like Germany, but because markets expected that countries which got themselves into difficulties would be bailed out. They have so far been proved entirely correct in this assumption.

Peer group pressure

The abolition of sovereign currencies removed the pressures that markets normally exert on governments to take unpopular, austerity measures. Market disciplines were replaced by peer group pressure from European finance ministers, only a few of whom were in any position to lecture their colleagues on sound financial policies. Once even Germany started to break the rules, the game was up.

All this was brilliantly predicted by Norman Lamont, a former UK Chancellor in the chapter Why I am Against the Single Currency from his book In Office, published nearly twelve years ago.

Increasingly tortuous attempts to prevent wide scale default fail to acknowledge the underlying reality; membership of the single currency has allowed some countries to borrow far in excess of their ability ever to repay.

But it is not all the fault of the euro. Risk compression was a worldwide phenomenon during the boom. In the hunt for yield, investors became oblivious to the dangers. By the end, almost everything was regarded as entirely risk free. Credit rating agencies were corrupted into the process by giving top notch ratings to fundamentally unsafe assets. These judgements then became embedded in regulatory requirements and central bank collateral rules, making everything seem safer than it really was.

 Sovereign downgrades

Today, the rating agencies are accused of deepening the debt crisis with repeated sovereign downgrades, but if anything, their pronouncements understate the reality. Their discomfort is nowhere more apparent than with US sovereign debt. Even assuming the latest settlement – which envisages a $2.1trillion (£1.3 trillion) fiscal consolidation over ten years – is ratified, it's not enough to put public debt back on a sustainable trajectory.

It's perfectly true that relative to GDP, US sovereign debt has been far higher than it is today, but in the past America has been able to rely on fast growth and demilitarisation to return borrowing to tolerable levels. Neither of these things seem likely to come to the rescue this time around.

When Standard & Poor's placed the US on negative watch last month, it suggested that a consolidation of perhaps as much as $4 trillion would be required to safeguard the nation's triple A rating.

Heading for a downgrade

Implicitly, then, America is heading for a downgrade regardless of the fact that the immediate threat of default has been removed. Will S&P have the guts to go through with its threat? I'll believe it when I see it. Already S&P has appeared to backtrack in evidence to Congress.

The major rating agencies enjoy an unhealthily cosy relationship with the major sovereigns, and can usually be persuaded to do the "right thing" in the interests of financial stability. As ever, sweeping the issue under the carpet will only make the eventual crisis even worse.

But perhaps oddly, the immediate blow to America if the big agencies do decide to downgrade is likely to be more psychological than real; it may not matter too much for bond yields.


Despite loss of its triple A rating and central government debt in excess of 200pc of GDP, Japan continues to enjoy the lowest sovereign bond yields anywhere in the world.

This apparent paradox is explained by the fact that when there is generalised risk aversion, where consumers are reluctant to spend and companies won't invest, the consequent savings surplus tends to flow into the only place it can – government debt.

Some of the same phenomenon is occurring in the US right now. Much as China threatens to withdraw its support for the US dollar in protest at policies which it thinks debase the currency, it really has no option but to continue buying US Treasuries as long as it maintains such a big trade surplus with the US. The capital surplus is merely the mirror image of the trade surplus.

Dominant reserve currency status in any case gives the US unrivalled access to international borrowing. Dollar hegemony may not last for much longer, but for the time being there are no viable alternatives. 

This is both a blessing and a curse for the US – a blessing because it allows the country to keep borrowing at reasonable rates almost regardless of underlying public debt dynamics, and a curse because it maintains the addiction to debt.

If nothing is done, the façade will eventually break; that's the point at which to run for the hills. Food, property, energy – these are the things that retain value when money dies. - Telegraph

Govt debts – it’s time to stop fooling around

Plain Speaking - By Yap Leng Kuen

INDEBTEDNESS has become an unsavoury word, especially when an important economy like the United States faces potential default if its US$14.3 trillion debt ceiling is not raised in time.

As at press time, an agreement was reached on raising the debt limit; however, the uncertainty created during the stalemate prior to the agreement had cast an element of doubt in the markets over the long term viability of US Treasuries and a possible downgrade of US' credit rating.

The debt ceiling has been raised before; however, the severity of the problems faced by Greece and other countries with high debt levels has caused the US situation to be viewed with concern.

In fact, post-2008 financial crisis, government debt has become a major issue. In a research update, McKinsey Global Institute said while global debt and equity hit new highs, more than a third of growth last year was government debt.

According to McKinsey, the overall amount of global debt grew by US$5 trillion last year, with global debt to gross domestic product (GDP) increasing from 218% in 2000 to 266% in 2010.

Government bonds outstanding rose by US$4 trillion in 2010 while other forms of debt had mixed growth, said McKinsey.

The move to downsize debt needs to be backed up by a concrete and consistent plan that shows not just commitment but also conviction of all parties involved.

Countries with high levels of debt must show that they are not only able to save others but also themselves.

Part of a government's credibility lies in its ability to manage its finances. Simply put, this involves lowering or containing its costs while increasing revenue.

Much effort should be spent on plugging the leakages while taking pains that taxpayers, who usually bear the brunt of others' mistakes, are not disadvantaged.

Postponing the problem by merely raising the limit for another time just makes matters worse; the issue of indebtedness becomes more serious and future governments end up inheriting the problem rather than spending productive hours on new areas of growth.

To get the cooperation of taxpayers to sacrifice for another round of austerity drive will probably not be easy. They may question why they have to pay for the excesses when they had already paid on previous bailouts for the big boys.

It is therefore time to stop “fooling around” with the finances and really get down to work on solid improvements. A transparent approach with proper timelines that can be accessed by all will certainly help.

Once people see something concrete coming up, they will be more convinced and committed towards the common goal.

Moreover, money allocated in a fair and equitable manner will result in better support from taxpayers.

Associate editor Yap Leng Kuen recognises that managing a country is far more complex than a family although the same dose of common sense is required.

US Financial sector layoffs rise, more cuts ahead

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By Lauren Tara LaCapra

NEW YORK | Tue Jun 21, 2011 4:48pm EDT
 

(Reuters) - U.S. financial firms have been cutting staff dramatically this year, with more layoffs expected to come from Wall Street, according to a report on Tuesday.

Unlike the widespread layoffs stemming from the financial crisis of 2008 that was followed by hiring when markets recovered, the 2011 reductions appear to be more permanent.

Challenger, Gray & Christmas, an employment consulting firm, said the financial sector has outlined 21 percent more job cuts so far this year than it did in 2010. Banks, insurance firms and brokers have outlined plans to eliminate 11,413 positions through May, according to publicly available information cited by Challenger, compared with 9,431 during the same period a year ago.

Wall Street has long been characterized by fickle hiring patterns, but John Challenger, head of the consulting group, said new cuts reflect fundamental changes in the business structure and returns of financial firms.

"They will not be as profitable in the future as they were in the past," he said. "That means they're just not going to be able to afford the workforce levels that they had when they were more profitable."

Most cuts to date have occurred in retail banking operations, reflecting subdued economic activity and loan growth. Mergers have also led to headcount reductions as smaller regional banks combine forces.

However, Challenger expects layoffs at large investment and commercial banks to accelerate through the rest of 2011.



Regulatory restrictions and declines in trading volume have challenged the business models and profitability of large investment banks such as Goldman Sachs Group Inc and Morgan Stanley.

Goldman reported an annualized return on shareholders equity of 15 percent during the first quarter, adjusted for special items, compared with more than 30 percent before the crisis erupted. Morgan Stanley, which now has a 20 percent return-on-equity target, delivered an annualized ROE of 6.2 percent in the first quarter.

Wall Street stocks have fallen along with profits in recent months. Goldman shares are down 19 percent so far this year, and Morgan Stanley's are off 17 percent. The KBW Bank Index of large-cap financials is down a more moderate 8.8 percent.

(Reporting by Lauren Tara LaCapra; editing by Andre Grenon)Newscribe : get free news in real time