What strikes me about this article is the similarities to the US in 1929 after the crash. People in China are losing everything, throwing themselves out of windows and wondering how they will survive. Then there are a few choice comments by typically smug financial types (from Credit Suisse and Morgan Stanley) who say "tough luck." It's not that I don't agree to some extent, but hey, look at Wall Street or City bankers in London and see how "tough luck" has worked out for them. Yea, they're really hurting with taxpayer bailouts as they continue to luxurious lifestyles on other peoples money. Hard times, indeed.
The small Chinese investors, much like American investors, have every right to be angry. The Chinese government (like in the US, UK and EU) loved the cash generated by the stock market and the prestige of a fast-growing market was an added bonus. Governments are always much too happy to feed a bubble and then when it goes 'poof' they run for the hills, so yes, the Chinese, the Americans and everywhere else have every damned reason to be angry. It's irresponsible for governments anywhere to promote bubbles and they ought to live with the consequences. Of course, this sad story also helps put the government outrage over the Olympic protests into proper perspective. (Hint, think Saddam Hussein if you want to see the American version of this old distraction.) China has many more problems to come and their stock market crash is only the beginning.
This is a government who has major problems across the board. It's no wonder the leadership likes the Tibet situation, because it helps stir up nationalism and divert attention from even larger problems. While the communist government has done a commendable job raising the living standards for millions of people, they have also left millions behind. When an economy grows, so do expectations. Overall it's a good problem to have provided a government is reaching out to everyone. (In the US, we can also relate since the broad majority of Americans have been left behind for the last three decades.)
Since the Shanghai market has lost half of its value since last October, Beijing has delivered a typically knee jerk response - much like our GOP - and lowered taxes on stock. Just like in the US the tax cuts are going to a slim minority at the top and so far this has been well received. Will the good times last? Probably about as long as the GOP good times lasted though the end result in China will be more ground shaking than the meek response we tend to see in the US. Leaving tens or hundreds of millions behind in a country that has never had a peaceful transition from one system to the next should be a real reason for concern within the communist leadership. Bubbles burst, it's just a fact of life. How a country bounces back is the difference maker.
If anything could make China forget about the Olympics, it's the fall of their stock market. This is actually serious and could cause much more significant changes in their system.
But China's stock market bubble has burst, leaving 150 million share investors waking up to their worst hangover ever. The combined effect of a vertigo-inducing rise in inflation, new regulations and a slowdown in the US economy has brought share prices down as quickly as they went up. Indeed, after further falls this week, Chinese shares are worth just half what they were last October, when the market peaked
One problem is the strength of the Chinese economy – and the inflationary pressures that has brought. Fears that government initiatives to tackle inflation will damage corporate profits has wiped $1.9 trillion off the value of Chinese companies since the beginning of the year. "The dive is the reflection of investors' mounting concern about the economic scenario," said Zhang Ling, a fund manager based in Beijing. "Runaway inflation is pretty bad for the economy and equities, raising costs and slowing earnings growth."
Nor does the outlook for the global economy help confidence in China, which has built much of its boom on exports, the demand for which may now dry up. The rising cost of global commodities also threatens profits.
The Arizona Republican and presumptive presidential nominee today urged Congress to institute a “gas-tax holiday” by suspending the 18.4 cent federal gas tax and 24.4 cent diesel tax from Memorial Day to Labor Day....
Relief — or fewer jobs? According to a white paper circulated on Capitol Hill last week by the U.S. Transportation Department, every $1 billion of federal highway investment supports 34,779 jobs.
Many economists have also questioned the wisdom of suspending or cutting gas taxes; doing so, they say, simply stimulates more consumption of gasoline.
It's understandable that many politicians depend on a teleprompter but c'mon, shouldn't a presidential candidate know at least something about the problem? Is it asking too much for Mr. Straight Talk to actually give straight talk? Telling us we have a problem is obvious to anyone in the country, so we're going to need more than stumbling through a Phil Gramm prepared speech. It's bad enough that on McCain's big issue - the unpopular war in Iraq - he never managed to keep a watch on taxpayer spending but the economy will be so much more critical and McCain has no idea. Maybe it's because of his connection to the Keating 5 scandal/S&L bailout but considering the importance of the credit crisis, he's shockingly out of touch. If anyone ought to remember those problems which were ALSO tied to lack of regulation, it ought to be McCain. But no, he just parrots the "let industry self regulate" rubbish until you want to scream.
Come November, Iraq is going to be important but way down on the list of important topics for America and McCain has nothing to offer on the key topic that will be on the minds of voters. What about the economy? What exactly does McCain have to offer? I'm not seeing much of anything.
The Bank of England said it would offer five billion pounds of three-day funds later on Monday in an exceptional fine-tuning operation designed to bring overnight interest rates down.
"This action is being taken in response to conditions in the short-term money markets this morning," the Bank said in a statement.
The stereotype of unions and union workers is unfair and misleading, for a variety of reasons. Ezra has a great story -- and analysis -- about an elevator conversation (always good times!) that's highly instructive and also pretty entertaining. Go read.
From the penthouse to the outhouse. So much for the previously high flying $4 billion property fund. The real estate crash continues to takes its toll.
Scottish Equitable said yesterday that 129,000 small investors in its £2bn property fund will not be able to access their money for up to a year, although payments relating to regular income already being paid, retirements and death claims will not be affected.
It said the fund, invested in London office blocks and shopping centres across Britain, no longer had sufficient cash reserves to meet demands from investors wanting to withdraw their money. Its "buffer fund" was down to 1% of its total assets, instead of the usual 10-15%.
The UK in many ways is more like the US than Europe, with credit being one major similarity. In France, house/flat loans generally require 30%-40% cash upfront and then terms of 10-12 years, with 15 or more years much less common. Credit cards to anyone breathing just doesn't exist. Compare that to the UK which has been high flying for years with an easy credit model closer to what we have in the US. The UK economy has been booming compared to Euroland though so has spending on credit. 2008 may be the year that changes. More on the credit issues facing the UK after the jump.
The latest figures indicate that 23 per cent of people – 9.5 million adults – were finding their current level of debt "unmanageable". Although the Bank of England cut the base rate of interest last month, an estimated 1.4 million people will still have to pay more for their home loans when their fixed-rate deals come to an end this year, costing an extra £150 to £250 a month.
Tomorrow, Grant Thornton will forecast that 10,000 individuals will hit the financial wall each month in 2008, with 28,000 individuals sliding into insolvency in the first quarter. As many as one third of bankruptcies in the first three months of the year will be caused by "excessive Christmas spending".
Mike Gerrard, the head of Grant Thornton's personal insolvency practice, said: "Sadly, many individuals spend up on credit at Christmas and pay no heed to the financial warning bells. Come January, they find themselves in a situation where previous financial woes are compounded by the bills arriving from the festive season and in these situations insolvency becomes the only way out."
Mike Naylor, a personal finance expert at uSwitch.com, remarked: "People have enjoyed easy access to cheap credit for quite some time, but for some, the party really could be over." He said those with a poor credit record would experience a particularly tough time.
In a survey last month, the Bank of England found that more than one fifth of those whose mortgage deals had come to an end last year struggled to meet higher payments.
Experts predict a rise in Individual Voluntary Agreements (IVAs), a less stringent form of bankruptcy, because banks are once again accepting them after quibbling with their terms last year. Bankruptcies are also expected to be more readily accepted by individuals because they have become so commonplace and so their stigma has fallen.
A housing bubble and government (over)spending is not just an American problem. The Blair legacy is now taking its toll and Gordon Brown is going to have more explaining to do.
The UK's current account deficit leapt by almost 50 per cent in the third quarter, hitting a record £20bn and raising fresh concerns about the stability of the country's economy.
The deficit was almost twice as large as expected, as the strong pound saw the level of imports far exceed exports, and the levels of investment fell. More troubling news on the UK economy, after the jump.
Public sector borrowing also hit a new high of £11.2bn last month, up from £9.1bn at the same time last year, while gross mortgage lending fell by 7.7 per cent during the month, confirming the slowdown in the housing market.
Jonathan Loynes of Capital Economics said the data showed the UK economy to be "dangerously unbalanced". "This morning's flurry of UK data paints a worrying picture of a dangerously unbalanced economy," he said. "The UK's external position now looks pretty much as bad as that in the US, suggesting the pound needs to fall sharply like the US dollar."
Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, added: "What is really shocking about these figures is that they reveal that the Exchequer was running a large current deficit before the credit crisis hit home, when the economy was doing very well and it should have been showing a large current surplus.
"Now, the economy is slowing sharply and the public finances will deteriorate equally rapidly. The first hit will come in February when the January tax receipts will be published. These will be well down on last January's figure, which was of course swollen by huge City bonuses and profits last year. We have revised our forecast of this year's current deficit up to £16bn, twice the Treasury pre-Budget report forecast of £8bn. As if the Chancellor had not got enough problems on his plate already."
In the spirit of easing into the week, an absolutely hilarious (and sometimes cringe-inducing) analysis of the sub-prime debacle:
As a side note, while my economic expertise is limited, to say the least, I remember a few years ago the problem of questionable mortgages being discussed in terms of interest-only ARMs. I remember reading about them and thinking, basically, that people wouldn't be able to make the payments on them when the payments ballooned simply because not everybody on the planet was going to be making way more money in just a few years (and, of course, the additional notion that not all people with ARMs would be able to flip). But it's not like all ARM buyers had bad credit -- plenty of the ARMs were to people with decent credit who were simply buying far above their (respectable, in many cases) means.
Which makes me wonder a little bit why the whole thing has been reframed as a "subprime" problem rather than one of the mortgage structures more generally, unless a much larger proportion of ARMs than I remember were actually subprime . . .
That's according to one early estimate, which puts buying slightly above 2006 numbers. Retailers are all delivering upbeat assessments though analysts are still cautious. Some analysts are suggesting the early start to the shopping day will result in thinner crowds on Friday afternoon, possibly slowing down business. (Wouldn't they be out for the same length of time, just arriving home earlier?)
How were the crowds near you? Were people buying or looking? It may take a few days, possibly a couple of weeks, before some firm numbers are calculated.
Plenty of bailouts for bad business to go around. Were regulators awake anywhere in recent years? The US may have a long list of billion dollar bailouts but Europe isn't looking very brilliant either with UBS, Barclays, Northern Rock, Lloyds, Societe General, Credit Suisse and now the bailout by Banque Populaire and Caisse d'Epargne for CIFG.
Who will join the party next? How many years will this excessive greed and regulatory ignorance set everyone back? Sure, this seems like a great bunch to let regulate Social Security. We really need these banks taking helping us out and it's just so obvious that they will do better than the government. Go ahead and tell how much better they will be. Just let the dust settle first and count up the billions down the drain.
In theory many union workers have drifted back to work though according to the Metro website, disruptions continue. (Different Metro lines in Paris have different unions, with some more radical than others.) In the mean time streets are full of bad drivers from the suburbs and velib bikes continue to be in demand by commuters. Support for Sarkozy continues to remain high and a strong majority support him in addressing this issue.
The issue here is fairness. Most people in France no longer support easier retirement plans that were based on work conditions that made sense years ago (when coal was used, for example) but are out of step with the times. The system in France needs reform and the left failed miserably to offer their own ideas which is why they lost so badly in the recent elections. Even today the left is disorganized and lacks support. The elections in May weren't a 51/49 split as we've seen in the US presidential elections but an old fashioned blowout. As much as the French hate change, they demanded change at the polls and they still support that position.
Moving forward, this may not be the "Thatcher moment" that the media wants but the system in France will change. It has to change. France is currently listed as the worst market in the world for business-labor relations and that doesn't help anyone in any way. France needs to solve this problem if it wants to get the economy rolling again because decades of 8%-10+% unemployment just won't cut it any longer.
Northern Rock led the way with the banking problems and now could be leading the way for taxpayer bailouts of banking greed and incompetence. Why should taxpayers pay for such failures? Nobody in Washington better get the same idea for the Wall Street failures. Wall Street created the problems and Wall Street can pay for their mistakes, on their own.
A nationwide strike in France against proposed changes to state transportation workers should give Sarkozy his first real taste of conflict with the powerful unions. In the past this was generally the point where the president (Chirac) would fold up and forget about change but I suspect 2007 is different from 1995. Ten years ago, most working families in France probably felt relatively secure with their jobs and support for such nationwide strikes was very high. Today, there is so much angst among working families about their job status so it remains to be seen how much support the unions will this time.
The heart of this strike is over the unions accepting changes to their pension plan and bringing them in line with the majority of French workers. In its current form, the union workers receive retirement after 37.5 years as opposed to 40 for others. What the unions may be discounting, besides the shorter working life, is that a painfully high number of workers outside of the unions are sacked in their 50s, never being able to reach 40 years of contributions. The unions are seeking to protect their hard fought victories but it remains to be seen how sympathetic the rest of the country will be in light of their own struggles. Sarkozy has a very supportive media on his side (think the US media after 9/11) though this is not a country that likes change. There's more to come in this battle.
The question now is whether we have hit a critical cost or not. Some suggest consumers won't significantly change their habits until it crosses $100, followed by $120 per barrel but time will tell. What this ought to be doing is pushing Washington to step up plans to develop alternative energies because we will not figure this out over night and need to be serious about this before the problems become more painful.
Biofuels may or may not be the answer though in their current form, they are triggering too many problems such as the high cost of corn and threaten the food source for too many poor around the world. There is no reason to be forced into one solution or another because there are many options to explore, but we need to help entrepreneurs explore those options now.
UPDATE: Overseas trading has oil approaching $88 per barrel today.
There's nothing wrong with international trade and there are benefits for everyone when it's fair. Bush and the GOP love talking about free trade and the extensive benefits of free trade though they too easily dismiss the downside of supposed free trade, which can negatively impact both Americans as well as people in other countries. When powerful countries dump massively subsidized products on poor countries, selling for less than break even for locals, that's not fair and only leads to more poverty and suffering. When an American job is outsourced to someone who takes half (or less) to do the same job (and can still live comfortably) overseas, is that fair? Painting this as a black and white issue is false but what we've come to expect from Bush.
The issue of trade and disrupting the livelihoods of people is not something we should take lightly. Free trade is much more complex than initially concluded by Washington and there's no need to keep repeating the same mistake, just because that's what Bush and the GOP want to do. Just because Bush says free trade is great and the benefits are wonderful for everyone, doesn't mean it's true. We could use a lot more debate and discussion these days instead of business as usual. I hope that as a country, we have moved on beyond the dictatorial relationship between a power hungry administration and a lapdog congress. There is nothing wrong with finding a middle ground, though it seems like such a long lost art in Washington but one we need to rediscover. We live in a democracy so let's start acting like one.
Whether it's Mr. Bubble or Republicans, the pro-free trade crowd always makes it sound so easy and as if it made 100%, perfect sense. What bad could come from free trade? It sounds so, well, free and isn't freedom what America is all about? If only it was so easy. The down to earth reality is that there is always a hitch, something that makes it not quite as "free" in reality as it is on paper and this is yet another example.
People in Costa Rica are worried, just like many in the US, that such a free trade agreement will damage the local system and take away jobs. What makes these "free" trade agreements difficult is that when you combine the size of the US farms (for example) and then add to that the healthy benefits of government subsidies to those farms, it's not really much of a free trade system where everyone receives an equal opportunity. It's also quite different from the whingers at Boeing and Airbus who complain every time the other side receives billions from their respective governments.
Across Africa and the developing world the complaints are similar, with governments often signing up for these great new trade agreements despite rarely found benefits to the local populations. Global trade can deliver a lot of great benefits, many of the benefits that the "free" traders talk about but the system we offer today is anything but fair and needs to be updated. It's time to move away from holding the small and poor nations over a barrel and serving big business interests and start thinking more about how these agreements actually impact humans. The possibilities exist but we need to modernize the first draft and start addressing real world issues instead of theory.
