USA > History > 2010 > Economy (IV)

John Sherffius

Boulder Daily Camera

Colorado

Cagle

15 September 2010

More on the Mortgage Mess

October 31, 2010
The New York Times

Ben Bernanke, chairman of the Federal Reserve, said recently that federal regulators are “looking intensively” at banks’ foreclosure practices. An investigation is long overdue, though it shouldn’t take a lot of digging.

Consumer advocates, the press, investors and homeowners have already compiled a compelling list of transgressions: conflicts of interest that have banks pushing foreclosures, without a good-faith effort to modify troubled loans. Dubious fees that inflate mortgage balances. The hundreds of thousands of flawed foreclosure affidavits that violated homeowners’ legal protections. The misplaced documents. And it goes on.

For years these problems have been the focus of research reports, Congressional testimony and court cases. Regulators, however, looked the other way, which is how we got into the mortgage mess.

What makes the latest scandals so outrageous is that even after the financial meltdown and taxpayer bailout— and all those vows about accountability — the regulators are still behind the curve. The fundamental problem is that the banks’ drive to profit from the foreclosure process is all too often at odds with the interests of mortgage investors, homeowners and the economy’s health.

That is a big reason that the Obama administration’s antiforeclosure effort, with its voluntary participation by banks, has fallen so short.

Here is the background. The big banks — Bank of America, JPMorgan Chase, Citibank, Wells Fargo — service most of the nation’s home mortgages for investors who own the loans. They are paid a fee by the investors and also make money from fees on delinquent loans.

Servicers are obligated to manage the loans in the best interest of the investors. That means modifying a troubled loan, if reduced payments would bring in more money over time than a foreclosure. Or foreclosing if a borrower cannot make the payments on a modified loan.

If only it worked that way in practice.

Take, for example, underwater borrowers — the millions of Americans who owe more on their loans than their homes are worth. For them, the best modification is often to reduce the loan’s principal balance, lowering the monthly payment and restoring some equity. That could be best for investors too, because even reduced payments are often better than a foreclosure sale. A bank’s servicing fee is based on the principal balances of the loan — a strong incentive not to reduce a troubled borrower’s balance.

Another conflict occurs when the bank that services a primary mortgage is also the owner of a second lien on the same property. Resolving a troubled first mortgage generally requires a write-down of the second lien, a step that banks have been loath to take.

Banks also profit from late fees and other default-related charges assessed on borrowers. And there is an additional incentive to pile on charges, since the bigger the loan balance, the higher the fee to manage the loan. A group of prominent investors — including Freddie Mac, the Federal Reserve Bank of New York and Pimco, the world’s largest bond fund — recently accused Bank of America of fee-padding. The bank denies wrongdoing.

High default charges harm homeowners because they make it increasingly difficult to catch up on late payments and avoid foreclosure. They also disadvantage investors, because the servicer collects the charges from the foreclosure sale before the investors see any money. Everyone loses, except the bank.

Mr. Bernanke said that the regulators’ findings would be released in November. What is also needed is real enforcement — and new rules and possibly new laws — to make banks change their ways.

More on the Mortgage Mess, NYT, 31.10.2010, http://www.nytimes.com/2010/11/01/opinion/01mon1.html

How the Banks

Put the Economy Underwater

October 30, 2010
The New York Times
By YVES SMITH

IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.

Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.

The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”

Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.

However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.

When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.

This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.

A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.

The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.

Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.

Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.

As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.

Other serious abuses are coming to light. Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.

The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.

That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?

There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.

The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.

Yves Smith is the author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism.”

    How the Banks Put the Economy Underwater, NYT, 30.10.2010, http://www.nytimes.com/2010/10/31/opinion/31smith.html

What It Takes to Buy a House in Foreclosure

October 29, 2010
The New York Times
By RON LIEBER

ATLANTA — As in any economic downturn, the wave of home foreclosures has attracted voracious opportunists — investors among them who are buying, fixing and then renting the places out.

In their wake are aspiring owner-occupants. How hard could it be, they ask, to pick up one of these houses on the cheap and make it livable?

For an answer, consider Jennifer Kuzara, 32, a grants manager for a nonprofit organization here. From early 2009 to early this year, she spent about 1,000 hours on her foreclosure project. The gang of helpers she assembled included two real estate agents, a banker, an architect, a contractor and her parents.

To stand a chance of making the project work in the neighborhoods where she was willing to live, she needed $100,000 in cash. Ultimately, Ms. Kuzara and her parents were exposed to a fair bit of risk, all in the name of a bungalow in a middle-class neighborhood.

And while the specifics are particular to Ms. Kuzara, plenty of people in foreclosure-ridden markets in Florida, Arizona, Nevada and elsewhere are in for a house hunt that is going to look a lot like hers. The headlines may be raising all sorts of questions about whether the foreclosures were legitimate. But there will always be people who want to buy when things are really cheap and are willing to press ahead when the quest seems most challenging.

So this is the story of what it will take for their search to have a happy ending.

It began in 2006, when Ms. Kuzara had nearly six figures in student loan debt and the housing market was at its most heated. She was virtually certain that she would never be able to afford a home. “I remember thinking that it might have been the end of my American dream,” Ms. Kuzara said.

Two years later, after she had finished her Ph.D. course work in anthropology at Emory University, and begun full-time work in the nonprofit field, the housing market began to turn. Not long after, a friend was considering buying a foreclosed home as an investment property and encouraged Ms. Kuzara to look at the listings.

Through another friend, Ms. Kuzara found Lisa Iakovides and her business partner, Michael Redwine, real estate agents at a company called Atlanta Intown. They established some price parameters and some items that would be deal breakers, like mold and crooked rooflines.

Then they shopped for neighborhoods. One, East Atlanta, made the short list, even though Ms. Kuzara hit the floor of Mr. Redwine’s car one day when she heard gunshots on the way back from visiting a home there. She and Ms. Iakovides hadn’t even started up the walkway of a house in another neighborhood, Peoplestown, when a neighbor loudly made her feelings known about white people moving in.

Other homes told stories in subtler ways. “Squatters had taken them all over,” Ms. Kuzara said. “Some moved in furniture and their families. But there was one where I never would have known until I opened up a closet and saw a little stack of sleeping bags and blankets. And on the top ledge there was a knife, a fork and a spoon.”

Ms. Kuzara vowed to leave cookies and a nice note for whomever was living there if she bought that home, but she didn’t get it or many others. By the time she entered the fray, investors were already swarming. She bid on at least 10 homes over six months and lost them all.

The house she finally bought had been divided in half and turned into apartments, which might have been why she did not have to fight so hard for it.

The 1,100-square-foot bungalow sits high on a small piece of property in the Edgewood neighborhood. It is one of those places where you can walk a few blocks to the left and find two stores with a fine malt liquor selection, then stroll 10 minutes to the right to Bed Bath & Beyond for high thread-count sheets to sleep off the hangover. Ms. Kuzara’s block has a halfway house for former substance abusers next door and a beautifully renovated home across the street with an alarm service sign planted prominently out front.

Ms. Iakovides managed to get a preliminary $39,000 offer accepted by the bank on the home in early August 2009, and she began trying to set a closing date. Ms. Kuzara drove by the home each day, planning the renovation.

But one day she found the front door wide open and called her real estate agents in a panic, worried that vandals were casing the place or that squatters would take up residence. Without really asking the bank’s permission, the agents called a contractor to padlock the door. “Who would we have asked?” Mr. Redwine said, incredulously, as if the bank that still owned the house was actually going to return his calls.

Ms. Kuzara’s next step was to get together the money to pay for the place and the $60,000 or so in repair work. After trying early on in her hunt to cobble together various combinations of tax credits, down payment assistance programs and government loans, it became clear that most banks preferred all-cash offers for their foreclosed homes.

But Ms. Kuzara had no cash. Her parents, Mark and Jennie, had some savings but not nearly enough. So her parents borrowed $25,000 at about 8 percent interest against a life insurance policy and $50,000 more at a lower rate from his 401(k) and bought the $39,000 home themselves. They used the remaining money for the renovation, planning all along to sell it to Ms. Kuzara as soon as the repairs were done.

For that to work, however, Ms. Kuzara would need to qualify for a mortgage to buy it from her parents. She had no money for a down payment, though. To qualify for the Federal Housing Administration loan that she needed, the home, postrenovation, would have to be appraised at a high enough amount that her parents could give her some of the newly created equity for a down payment while still getting all their money back.

And therein lay the risk. Because Ms. Kuzara bought one of the worst homes on a nice block, her agents were convinced that the renovation could yield an appraisal at the value that the bank required.

It helped that they had ushered in a contractor they had worked with before, whom they could count on to stay within the strict budget. Under his supervision, the renovations were finished in less than two months.

Then came the deciding moment: the appraisals. One came in at $130,000, while the other was for $145,000. As a result, the bank allowed Ms. Kuzara to borrow $100,000 to buy the home from her parents and thus make them whole. Then she used some of the remaining, newly created equity for the required down payment.

Ms. Kuzara moved in a year ago this weekend, and today the cozy house has three bedrooms, two baths, a front porch for dinner parties and a backyard for her two dogs. She’s furnished the place with chairs from consignment stores and thrift shops and has assembled a nice collection of vintage cookware and dishes.

She pays $828 a month on her 30-year fixed-rate mortgage, including taxes and insurance, and she has a roommate who chips in $500 month.

Including the weeks when she painted every inch of the interior, Ms. Kuzara spent about 1,000 hours on her foreclosure project — poring over listings, researching every last one in county databases, visiting houses and making her eventual home habitable.

So anyone who wants to do what she did needs to be ready to put in that much time. You may need a source of funds or willing co-conspirators like Ms. Kuzara’s parents. And you will need a team of people who know the rules of the foreclosure game cold.

The odds of success are certainly long. But for those with the patience to pull it off, it sure seems a whole lot of fun to play this game and win.

“It turned out to be a sweet little house,” said Mark Kuzara, Jennifer’s father. “And I think somewhere down the road, she’ll sell that house and come out pretty nicely on it.”

    What It Takes to Buy a House in Foreclosure, NYT, 29.10.2010, http://www.nytimes.com/2010/10/30/your-money/30money.html

U.S. Hears Echo of Japan’s Woes

October 29, 2010
The New York Times
By MARTIN FACKLER and STEVE LOHR

TOKYO — In the annals of economic policy blunders, the one in which Hiroshi Kato played a hand in early 1997 ranks among the biggest in recent Japanese history.

Mr. Kato led a government advisory committee that concluded that the economy, which was then finally starting to rebound from the collapse of its 1980s land and stock bubbles, was healthy enough to raise the national consumption tax to 5 percent from 3 percent.

Aimed at reducing deficits, the tax increase instead quickly snuffed out the fragile recovery, pushing Japan to the brink of a financial meltdown and thrusting the nation deeper into the economic morass from which it has yet to emerge even today.

“Our sins are large,” Mr. Kato, now president of Kaetsu University in Tokyo, said ruefully. “I hope the rest of the world can learn from this mistake.”

And indeed, the lessons of Japan’s long stagnation are well known to American policy makers like the treasury secretary, Timothy F. Geithner, and the chairman of the Federal Reserve, Ben S. Bernanke, who have studied Japan’s policy missteps.

In 1999, Mr. Bernanke, then an academic, tartly criticized Japanese officials for mishandling their 1990s financial crisis, saying Japan’s plight was “self induced.” Partly because of that expertise, American policy makers have long been confident, even during the darkest days of the current financial crisis, that the United States could avoid the fate of Japan and its two lost decades.

But now, with growing signs that the United States might be a lot closer to a Japan-style slump than previously thought, that confidence is waning.

In the United States, a robust recovery remains stubbornly elusive, and Mr. Bernanke is said to be ready to take new, unconventional steps to increase the money supply in order to maintain the uncertain growth of the past year. He is also said by close associates to favor further fiscal measures to stimulate the economy. But in the current political climate, with Republicans poised to make strong gains in the midterm elections while preaching fiscal austerity, the prospect of more federal stimulus spending seems remote, and it is unclear if monetary policy alone will be enough to restore healthy growth.

Partly as a result, some economists now predict that it could take years or even a decade for the American economy to regain the levels of employment and vigor achieved before the 2008 crisis. The growing political pressure for cuts in federal spending — along with plunging consumer confidence and companies that seem more intent on cutting costs and hoarding cash than investing in new growth — have led economists to talk of the United States’ entering a grim new era of austerity.

That is very close to what befell Japan two decades ago, when the seemingly invincible Asian economic juggernaut fell into a deep rut of chronically anemic demand and corrosive price declines, known as deflation, from which it has never fully recovered. The parallels are so striking, and unsettling, that economists are now taking a renewed look at Japan for insights on how the United States can avoid the deflation trap.

“There has been a political and intellectual arrogance in the United States that it won’t happen to us,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. “We shouldn’t be so smug. You can get there without being Japan.”

Indeed, the financial crisis that crippled Japan’s once high-flying economy appears an eerie precursor of the one that struck much of the global economy in 2008. In Japan, a huge expansion in credit created twin price bubbles in the land and stock markets that, when they burst in the late 1980s and early 1990s, left banks and other companies drowning in failed real estate investments.

But perhaps the most alarming part is what came next: a collapse in demand that pushed prices and ultimately wages into a self-reinforcing deflationary spiral, which made already stingy individuals and businesses even less willing to use money, because falling prices meant that cash itself gained in value.

Japan has remained trapped in this spiral despite the equivalent of trillions of dollars in stimulus spending, more than a decade of near-zero interest rates and even unconventional steps by the central bank similar to those now contemplated by Mr. Bernanke, like purchasing corporate and government bonds to increase the money supply.

Despite the strong parallels, there are still reasons to think the United States can escape what has been called Japanification.

The United States and Japan are very different, culturally and politically, and Japan faces a host of unique problems that have sapped its vitality, like a rapidly aging populace that has created generational tensions, and the closing of its doors to immigration and the youthful labor and fresh ideas that can bring. Economists say the dynamic United States economy has shaken off seemingly intractable slumps before, as in the frightening recession of 1980-82, when conditions and the prospects for recovery seemed, for a while, every bit as bleak as they do now.

However, some warn that the United States could still get it wrong, especially if the midterm elections produced a sharply divided political landscape.

“The danger is if the U.S. plunges into policy paralysis just like Japan in the 1990s,” said Shumpei Takemori, an economist at Keio University in Tokyo. “Ideological divides and political divides can make bold policy action impossible.”

In fact, some economists warn that the United States may be deeper into Japan-style stagnation than is widely realized. Simon Johnson, a former chief economist at the International Monetary Fund, estimates that the total output of the American economy this year will be no higher by his estimate than it was in 2006.

“We’ve already lost half a decade,” said Mr. Johnson, now a professor at the Massachusetts Institute of Technology.

In addition, economists say, Japan had one advantage the United States does not. With its high savings rate, the government could borrow from its own domestic sources at minuscule rates to finance trillions of dollars in stimulus projects. By contrast, the United States has to sell its government bonds to foreign investors, who are likely to demand higher interest rates as its national debt grows.

Leading Japanese economists also said their nation’s many failures — like the 1997 tax increase — yielded one crucial lesson on combating the aftereffects of a financial panic: the need to avoid policy flip-flops.

“The lesson is that there is a proper sequence for pulling a nation out of a financial crisis,” said Heizo Takenaka, an economist who was the architect of the successful cleanup of Japan’s banking system in the early 2000s. “First, you restore growth before worrying about deficits.”

However, Mr. Takenaka acknowledged that while the banking problems have been largely fixed, Japan has yet to come up with a strategy for restoring growth, which he says is the only way to end deflation.

This month, Japan’s central bank pushed its benchmark rate back down to zero. However, central bankers here argue that it is not enough just to loosen monetary policy when a lack of borrowers and new investment means there is no demand for money to start with. And this points to another feature of Japan’s experience that may already be visible in the United States: the paradox of a stagnant economy that is awash in cash.

This occurs when companies and individuals stop spending and banks stop lending for fear that anemic growth and rising bankruptcies will result in defaults. This is particularly apparent in regional economies outside Tokyo, which remains relatively vibrant.

In a healthy economy, banks typically lend out more money than they have on deposit. But in Osaka, Japan’s third largest city and commercial hub, nearly two decades of hoarding of cash created the unusual situation in 2002 of deposits at all the city’s banks surpassing their outstanding volume of loans. Since 1997, the total amount of loans by the city’s banks has fallen by a third, to $530 billion, while deposits have risen by 20 percent, to $767 billion.

“Deflation has made everyone very conservative and eager to hold cash,” said Hiroshi Tanaka, a senior director at Osaka Shinkin Bank. “We have too much cash and nowhere to invest it all.”

This has created distortions in Japan’s economy. One is a sharp drop in the number of times cash changes hands in normal business and spending transactions. This so-called velocity of money has dropped to about a third the level of the United States, according to figures from the Mizuho Research Institute in Tokyo.

Another distortion is Japan’s so-called dresser savings — the piles of cash that individuals keep at home for fear that their banks may also go bankrupt. These stashes are estimated to total about $370 billion, according to Akira Otani, a researcher at the Bank of Japan.

Economists see early signs that the United States is heading down the same path. Recent data shows a surge in savings rates to 6.4 percent in June from less than 1 percent in 2005, reflecting consumers’ reluctance to spend, and continued disinflation.

The picture is not entirely bleak for the United States, where the constant drive to innovate can produce bursts of growth that few economists or anyone else can see coming. While Japan was seen once as an unstoppable powerhouse, the picture was altered by wave after wave of technological innovation in the United States — the personal computer industry, then the Internet and Web businesses, smart phones, and mobile software. That dynamism, economists note, is often wrenching. But it also means that investment dollars and people shift more rapidly to new opportunities. In Japan, though, such painful payroll cuts and corporate deaths were postponed for years.

The American approach to economic adjustment is “shock treatment,” said Edward J. Lincoln, director of the Center for Japan-U.S. Business and Economic Studies at New York University, while “Japan favors stability and the corporate socialization of the pain.”

“Deep down inside, as an American,” Mr. Lincoln said, “I tend to think that the United States’ approach makes for a healthier economy in the long run.”

Martin Fackler reported from Tokyo, and Steve Lohr from New York.

    U.S. Hears Echo of Japan’s Woes, NYT, 29.10.2010, http://www.nytimes.com/2010/10/30/world/asia/30japan.html

Bernanke’s Reluctance to Speak Out Rankles Some

October 28, 2010
The New York Times
By SEWELL CHAN

WASHINGTON — The Federal Reserve is all but certain next week to begin a multibillion-dollar effort to coax the recovery along, but privately, Ben S. Bernanke, the chairman, worries that more is needed to turn the sluggish economy around and revive employment.

He believes that without the Obama administration’s $787 billion stimulus program, the nation would have been worse off, and that Congress needs to continue to prop up the economy in the short run. He agrees that fiscal measures to support the recovery would probably make the Fed’s unconventional monetary policy more potent.

But Mr. Bernanke has been reluctant to prominently voice those views, which were gleaned from testimony, speeches and interviews with people close to him over the last several months. His predecessor, Alan Greenspan, did not display such hesitation, advocating for the Bush tax cuts of 2001 and 2003.

Mr. Bernanke is uncomfortable in that role, which he believes to be outside his purview, even — or especially — in an election season dominated by economic anxiety. He has not ruled out weighing in when a bipartisan budget commission named by President Obama delivers its report in December, but it seems unlikely that he will intervene in the battle over the Bush tax cuts.

The hesitance of Mr. Bernanke, who was President George W. Bush’s chief economic adviser for six months before becoming Fed chairman in 2006, has sharply divided economists.

Some say he could guide the debate, and give a lift to the White House, by speaking out against the aggressive budget-cutting proposed by many Republican candidates, particularly those backed by the Tea Party movement.

Others assert that Mr. Bernanke needs to be more outspoken in warning of the dangers posed by the country’s unsustainable debt burden. Still others say the Fed should stay out of the way, given its failure to prevent the financial crisis and the longest recession since the 1930s.

What is clear is that Mr. Bernanke is intent on not embroiling the Fed in a partisan brawl, and that he believes the central bank should weigh in on fiscal policy in only the broadest terms — even if past chairmen like Marriner S. Eccles in the 1930s, Arthur F. Burns in the ’70s and Paul A. Volcker in the ’70s and ’80s at times broke that mold.

“The chairman’s relative reticence is unusual, but it reflects the difficult circumstances in which the Fed now operates,” said Iwan W. Morgan, a University of London historian who studies American fiscal policy. “Its credibility, which was so high in the Volcker and early Greenspan years owing to its success in constraining inflation, is now at its lowest ebb since the inflationary 1970s.”

Mark W. Olson, who served with Mr. Bernanke on the Fed’s board of governors and is now co-chairman of Treliant Risk Advisors in Washington, acknowledged that “fiscal policy decisions could either exacerbate or negate monetary policy decisions,” but said that Mr. Bernanke wanted to avoid the “oracle trap” into which Mr. Greenspan sometimes fell.

Mr. Greenspan’s reputation as a sage, developed over 18 years as chairman, has lost its luster, owing not only to his aversion to regulation and his decision to keep interest rates low after the 2001 recession, but also to his support for the tax cuts, which he has since renounced, saying the cuts should be allowed to expire.

“For a long time, Alan Greenspan’s pronouncements were viewed in Congress and elsewhere as if orchestrated on Mount Sinai, and there seems a consensus now is that this was a mistake,” said Bernard Shull of Hunter College in New York.

As a scholar of the Depression, Mr. Bernanke chastised Japan for being too timid in combating deflation and advocated overwhelming force as a response to financial crises — advice he has followed at the Fed.

But Mr. Bernanke, who was confirmed to a second term in January by an uncomfortably narrow margin, has been adroit in avoiding fiscal controversy.

At a pair of Congressional hearings in September, for example, he gave each party a message it wanted to hear. He told Democrats that the government should maintain short-term fiscal support for the recovery. He assured Republicans of the need to rein in deficits and stabilize debt levels. And when pressed, he declined to be precise.

“I’m reluctant to take positions on specific tax and spending measures,” he told Representative Spencer T. Bachus of Alabama, the top Republican on the House committee that oversees the Fed. “I’m sure you can understand my position on that.”

However, Mr. Bernanke has spoken of the budgetary challenges posed by an aging population. And he came the closest he has in a while to advocating fiscal measures in an Oct. 4 speech in Providence, R.I., when he suggested that the government adopt fiscal rules — in essence surrendering some of Congress’s and the president’s discretion.

Congress already uses so-called pay-go rules, which require that spending increases or tax cuts be offset within a 10-year horizon, but there are significant exemptions. Moreover, the rules are intended only to prevent projected deficits from getting worse and do not require Congress “to reduce the ever-increasing deficits that are already built into current law,” Mr. Bernanke noted.

Of the dozen economists interviewed for this article, those who favored additional stimulus tended to want Mr. Bernanke to speak out.

“Further short-run fiscal expansion paired with credible measures to deal with longer-term deficits would be a good idea,” said Alan J. Auerbach, a professor of economics and law at the University of California, Berkeley. “The political difficulty of accomplishing this puts pressure not only on the Fed but also on our trade policy, where we are forced to lean more heavily on China.”

William G. Gale, of the Brookings Institution, said additional federal spending would be more effective than new debt purchases by the Fed — a strategy known as quantitative easing — and that Mr. Bernanke should at least explain the connection between the two.

“By pursuing quantitative easing, he is committing to monetary expansion,” Mr. Gale said. “He has the right to say that he has made the commitment, and now it is time for Congress to make a similar commitment.”

Other economists say the Fed has already gotten dangerously close to the Treasury Department, given their collaboration under Mr. Bush in bailing out Wall Street, and in propping up the housing market.

“The distinction and separation of monetary and fiscal policy has almost disappeared,” said Alberto F. Alesina, an economics professor at Harvard. “This is, I believe, dangerous.”

Another Harvard professor, Martin S. Feldstein, who like Mr. Bernanke is a former chairman of the White House Council of Economic Advisers, said, "There have been times when the Fed has in effect said: If fiscal policy is tightened, the Fed will be able to lower interest rates. That does not apply now."

    Bernanke’s Reluctance to Speak Out Rankles Some, NYT, 28.10.2010, http://www.nytimes.com/2010/10/29/business/economy/29fed.html

The Mortgage Morass

October 26, 2010
The New York Times

The mortgage mess just keeps getting messier. Last week, Bank of America announced that it had performed a “thorough review” of its processes, found nothing amiss and would soon restart 102,000 pending foreclosures. On Sunday, the bank acknowledged that it had in fact found errors in its filings, and would resume foreclosures only in a deliberate manner as new and corrected paperwork was submitted to the courts.

The repeated recalibration cast further doubt on Bank of America’s procedures and the ability of the entire industry to clean up this mess.

The immediate issue is robo-signing, in which employees at Bank of America, JPMorgan Chase and other banks falsely attested to having verified the facts in what may turn out to be hundreds of thousands, or more, court foreclosure filings. That has brought to light other problems, including crucial documents that have been lost or improperly transferred — raising questions about the banks’ legal standing to foreclose as well as the value of securities backed by these mortgages.

The state courts will have to resolve the question of whether banks can foreclose with defective or substitute documents. Courts will also have to rule on any disputes between banks and investors over mortgage securities, a complex and contentious process if it comes to that. The Obama administration needs to do a lot more to get hold of this crisis, before it gets any worse.

Last week, Bank of America also acknowledged receiving a letter from mortgage investors — including Freddie Mac and the Federal Reserve Bank of New York — demanding that it repurchase tens of billions of dollars in problem loans that were bundled into securities.

Investors can demand that banks repurchase loans that did not meet underwriting guidelines or were inadequately vetted or processed. The repurchases are important to taxpayers, because — through Fannie, Freddie and the Fed — the government now owns or backs a large number of problem loans and related securities. If the banks do not take the hit, the taxpayers will.

Fannie and Freddie have increased their repurchase demands on lenders over the past year, but banks are sure to resist large repurchases, setting up more clashes and disruption.

Bank of America has said it does not believe it is at fault for the loans’ poor performance. Freddie Mac and the Fed should push their claims hard.

The Obama administration needs to ensure that the taxpayers’ interests come first. Until now, the White House has focused far more energy on shoring up the banks — a stance that may have made sense in the thick of the financial crisis but is increasingly suspect now.

The administration has called on banks to correct the problems in their foreclosure paperwork. More is needed, including a plan to impose coherence on the increasingly chaotic mortgage system.

The White House needs to work with Congress to ensure that no foreclosures proceed — not just those with questionable paperwork — without homeowners’ first being offered fair and timely loan modifications. The Housing and Urban Development secretary, Shaun Donovan, has promised tougher action, but has been short on details and even refrained from naming the banks that have been laggards in loan workouts.

The administration and federal regulators should also acknowledge the potential hit to banks’ finances from the coming wave of litigation and repurchases. They should be taking precautions right now, say, by initiating more robust monitoring or new stress tests to gauge whether banks need to raise more capital to absorb the costs of any court fights and buying back bad loans.

The markets are relatively calm for now. That is the time to get ahead of problems that are not going away.

    The Mortgage Morass, NYT, 26.10.2010, http://www.nytimes.com/2010/10/26/opinion/26tue1.html

Divide on U.S. Deficit Likely to Grow After Election

October 25, 2010
The New York Times
By JACKIE CALMES

WASHINGTON — A midterm campaign that has turned heavily on the issue of the mounting federal debt is likely to yield a government even more split over what to do about it, people in both parties say, with diminished Democrats and reinforced Republicans confronting internal divisions even as they dig in against the other side.

In the weeks after next Tuesday’s elections, the White House and a lame-duck Congress will face immediate decisions testing the balance of power — on extending the Bush-era tax rates, approving overdue spending bills to keep the government operating and, possibly, debating the recommendations that President Obama has directed a bipartisan debt-reduction commission to offer by December.

The report of the 18-member commission, which includes a dozen senior members of Congress, six from each party, will help determine whether a bipartisan consensus exists to deal with the unsustainable combination of fast-growing entitlement programs like Social Security and Medicare and inadequate tax revenues.

The group has delayed making decisions until after the election, to avoid leaks that would become campaign fodder, but even some of its members doubt they can muster the 14 votes needed to send a package to Congress for a vote; at best they hope options left on the table, or agreed to by the chairmen — Erskine B. Bowles, a White House chief of staff to President Bill Clinton, and Alan K. Simpson, the former Republican Senate leader from Wyoming — will find support in the spending-and-tax debates.

In interviews, a number of Democrats and Republicans agreed on one thing: For all the pre-election talk that a divided government could force the parties to work together, especially on cutting annual deficits, the opposite could just as well be true.

David Cote, the chief executive of Honeywell International and a member of the debt commission, said in an interview that “the thing that shocked me” was that the debt crisis had been predicted for decades because of the costs of federal benefits for the baby boom generation. “We need to have a more thoughtful, nuanced discussion about what we’re going to do and what exactly does this mean,” Mr. Cote said. “And I don’t see that happening. It seems like everybody wants to just argue.”

Democrats are all but certain to lose a number of seats and perhaps their majorities. Most of the casualties will be fiscally conservative Democrats from Republican-leaning areas, leaving a smaller, more solidly liberal caucus less inclined to support cost-saving changes in future Social Security benefits, for example.

Republicans’ ranks will almost certainly be strengthened by a wave of conservatives, including Tea Party loyalists, who are opposed to raising any taxes and to compromising with Democrats generally — a stand Congressional Republican leaders have adopted. And incumbents otherwise inclined to make deals are now wary, Republicans say privately, mindful of colleagues who lost primary challenges from Tea Party candidates.

Both parties also face internal rifts that could hinder any grand bargain to reduce the annual deficits adding to the accumulated debt, which by decade’s end will reach economically dangerous levels as more retirees claim Medicare and Social Security.

Most Republicans, especially those likely to be in Congress or running for president, are taking a hard line against tax increases, eager to court the Tea Party and antitax conservatives generally. But a growing minority is arguing that the projected debt is too great to shrink with spending cuts alone unless popular benefits and military programs are put under the knife.

“Everything has got to be on the table for discussion,” said Senator Saxby Chambliss, Republican of Georgia, who with Senator Mark Warner, Democrat of Virginia, has formed a group of anti-deficit senators to promote the recommendations from the debt-reduction commission.

Given the coming influx of novice lawmakers, Mr. Chambliss said in an interview, “there are a lot of things people are going to have to be educated about, on the spending side as well as the revenue side.” He added: “They’re thinking we can come in and eliminate earmarks and everybody’s going to be happy on the spending side. Gee, that just scratches the surface.”

Yet the conservative blowback was fierce this month after Gov. Mitch Daniels of Indiana, a budget director for President George W. Bush and a potential 2012 Republican presidential candidate, suggested keeping an open mind about a consumption tax like the value-added tax used in Europe and a tariff on imported oil.

That kind of reaction cannot be lost on others. Two Republicans on the fiscal commission are Representatives Dave Camp of Michigan and Paul D. Ryan of Wisconsin, who are in line to lead the tax-writing Ways and Means Committee and the Budget Committee, respectively, if Republicans win a House majority. But they must be elected by other House Republicans in December and, Republicans say, a deal with Democrats on deficit-reduction measures could threaten that.

Democrats differ among themselves on whether to extend all the Bush tax cuts as Republicans demand, or just those for households with annual incomes below $250,000 as Mr. Obama wants. Over 10 years, an extension for the middle class would cost more than $3 trillion while extending rates for the rich, too, would cost $700 billion more; together the nearly $4 trillion is more than half the debt projected in the decade to 2020.

Many Democrats, backed by a wide range of economists, say that with unemployment stuck at nearly 10 percent, more stimulus spending is needed — for the unemployed, struggling states and cities and job-creating public works projects — before focusing on deficits. The fiscal commission is considering delaying any deficit-reduction proposals until perhaps 2012.

Democrats are also split on fixing Social Security’s long-term solvency. Mr. Obama had wanted to tackle the issue early, and he created the debt commission by executive order — after Senate Republicans blocked legislation — partly in the hope that it would propose future benefit and payroll tax changes he could embrace. Some Democrats say he will have all the more reason to lead that charge after the elections, to signal a more centrist, fiscally conservative course. Yet liberal groups have already formed a big coalition to lobby against any such move.

What could result is “deficit reduction by gridlock,” said John Podesta, the president of the progressive Center for American Progress and a chief of staff in the Clinton White House.

That would be the outcome if Republicans, as expected, block additional unemployment aid and if the parties deadlock in the lame-duck session over pending appropriations and the Bush tax cuts that expire Dec. 31. That would leave lower spending levels in place for the fiscal year 2011 and force Mr. Obama and Republicans to try to reach a tax compromise next year.

But that sort of immediate deficit reduction, said Robert Greenstein, the founder of the left-leaning Center on Budget and Policy Priorities, “will hurt the economy more than help it without doing very much to deal with the long-term problem, which is where the real issue is.”

    Divide on U.S. Deficit Likely to Grow After Election, NYT, 25.10.2010, http://www.nytimes.com/2010/10/26/us/politics/26fiscal.html

Bank of America Reports $7.3 Billion Loss, Citing Charges

October 19, 2010
The New York Times
By NELSON D. SCHWARTZ

Bank of America, the nation’s biggest bank, announced Tuesday that operating profit rebounded in the third quarter, helped by improved credit conditions among consumers and businesses.

On a noncash basis for the quarter, the bank reported a loss of $7.3 billion because of a $10.4 billion write-down in the value of its credit card unit, attributed to federal regulations that limit debit fees and other charges.

Without the one-time charge, the bank earned $3.1 billion, or 27 cents a share. Wall Street had been expecting earnings of 16 cents a share, according to Thomson Reuters.

Analysts said the improving credit environment was a healthy sign, both for the bank and the broader economy. The bank set aside $5.4 billion in the quarter for credit losses, $2.7 billion less than the previous quarter and $6.3 billion less than the period a year ago.

“The biggest thing is that credit quality improved way more than anybody thought,” said Chris Kotowski, an analyst with Oppenheimer & Company. “That is the holy grail — anything else you can deal with. The one thing that kills value for banking institutions is when credit quality spirals out of control, so this should be the key to the stock doing well for the next year or two.”

Indeed, a substantial portion of the profit gain came from the expectation of lower losses among credit card and mortgage borrowers, rather than new business, as the bank was able to recapture money it had earlier set aside. It released $1.8 billion from reserves, compared with a release of $1.45 billion in the second quarter.

In recent days, Bank of America shares have been hammered as investors worried about the impact of legal challenges to home foreclosures. After halting foreclosures across the country, Bank of America said Monday it was resuming the process in 23 states where court approval is required for a foreclosure to proceed.

One critical worry over the last week was that investors would force the bank to repurchase now-toxic mortgage backed securities, arguing that they were put together improperly.

These so-called “put-backs,” some analysts warned, could total tens of billions of dollars, undermining earnings for years to come. But the $872 million charge recorded for put-backs in the quarter indicates the threat is manageable, Mr. Kotowski said.

In the same quarter a year ago, Bank of America reported a loss of $2.2 billion, or 26 cents a share.

“We are adapting to the regulatory environment, credit quality continues to improve, and we are managing risk and building capital,” the chief executive, Brian T. Moynihan, said in a statement. “We are realistic about the near-term challenges, and optimistic about the long-term opportunity.”

Bank of America became the third major bank to report third-quarter earnings. JPMorgan Chase reported a $4.4 billion profit for the third quarter while Citigroup reported earnings of $2.2 billion, its third profitable quarter in a row.

    Bank of America Reports $7.3 Billion Loss, Citing Charges, NYT, 19.10.2010, http://www.nytimes.com/2010/10/20/business/20bank.html

Income Inequality: Too Big to Ignore

October 16, 2010
The New York Times
By ROBERT H. FRANK

PEOPLE often remember the past with exaggerated fondness. Sometimes, however, important aspects of life really were better in the old days.

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

Adam Smith, the father of modern economics, was a professor of moral philosophy at the University of Glasgow. His first book, “A Theory of Moral Sentiments,” was published more than 25 years before his celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.

Some moral philosophers address inequality by invoking principles of justice and fairness. But because they have been unable to forge broad agreement about what these abstract principles mean in practice, they’ve made little progress. The more pragmatic cost-benefit approach favored by Smith has proved more fruitful, for it turns out that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries.

Recent research on psychological well-being has taught us that beyond a certain point, across-the-board spending increases often do little more than raise the bar for what is considered enough. A C.E.O. may think he needs a 30,000-square-foot mansion, for example, just because each of his peers has one. Although they might all be just as happy in more modest dwellings, few would be willing to downsize on their own.

People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

In a recent working paper based on census data for the 100 most populous counties in the United States, Adam Seth Levine (a postdoctoral researcher in political science at Vanderbilt University), Oege Dijk (an economics Ph.D. student at the European University Institute) and I found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.

For example, even after controlling for other factors, these counties had the largest increases in bankruptcy filings.

Divorce rates are another reliable indicator of financial distress, as marriage counselors report that a high proportion of couples they see are experiencing significant financial problems. The counties with the biggest increases in inequality also reported the largest increases in divorce rates.

Another footprint of financial distress is long commute times, because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work. The counties where long commute times had grown the most were again those with the largest increases in inequality.

The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

ECONOMISTS who say we should relegate questions about inequality to philosophers often advocate policies, like tax cuts for the wealthy, that increase inequality substantially. That greater inequality causes real harm is beyond doubt.

But are there offsetting benefits?

There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being. Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.

In short, the economist’s cost-benefit approach — itself long an important arrow in the moral philosopher’s quiver — has much to say about the effects of rising inequality. We need not reach agreement on all philosophical principles of fairness to recognize that it has imposed considerable harm across the income scale without generating significant offsetting benefits.

No one dares to argue that rising inequality is required in the name of fairness. So maybe we should just agree that it’s a bad thing — and try to do something about it.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.

    Income Inequality: Too Big to Ignore, NYT, 16.10.2010, http://www.nytimes.com/2010/10/17/business/17view.html

How Countrywide Covered the Cracks

October 16, 2010
The New York Times
By GRETCHEN MORGENSON

ON June 27, 2006, Countrywide Financial, the nation’s largest mortgage lender, was about to close its books on a record-breaking six-month run. The housing market was on fire and Countrywide’s earnings were soaring. Despite all the euphoria inside the company, some executives noticed that Angelo R. Mozilo, the company’s brash and imperious chief executive, seemed subdued.

At a town hall meeting that day with 110 of the company’s highest-ranking executives in Calabasas, Calif., Mr. Mozilo sat alone on a stage, fielding questions and offering rosy predictions about his company’s prospects. But then he struck a sober note in response to a question from one of his colleagues.

The questioner wanted to know what, if anything, worried Mr. Mozilo, according to a participant.

“I wake up every day frightened that something is going to happen to Countrywide,” Mr. Mozilo said.

A year and a half later, that day arrived. In January 2008, Countrywide, the company he had built from a two-man mortgage operation into a lending behemoth, had to sell itself to Bank of America at a bargain price because it was being smothered by losses tied to a mountain of sketchy loans.

Yet almost until the moment Countrywide was taken over, Mr. Mozilo was publicly buoyant about its ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide’s prospects and practices, according to e-mail and interviews.

What Mr. Mozilo, now 71, knew about Countrywide’s problems, and precisely when he knew it, was what eventually led the Securities and Exchange Commission to file civil securities fraud charges against him last year. And on Friday, in the Los Angeles courtroom of John F. Walter, a federal District Court judge, representatives for Mr. Mozilo and for two of his top lieutenants — David Sambol, Countrywide’s former president, and Eric Sieracki, the company’s former chief financial officer — settled those charges.

As part of the settlement, Mr. Mozilo and his co-defendants didn’t admit to any wrongdoing. But Mr. Mozilo agreed to pay $67.5 million in a penalty and reparations to investors and is permanently banned from serving as an officer or a director of a public company. Mr. Sambol is paying $5.52 million in a penalty and reparations and agreed to a three-year ban from serving as an officer or director of a public company. Mr. Sieracki agreed to pay a $130,000 penalty.

The settlement is a signal event in the credit crisis and its aftermath, including the foreclosure debacle that is now rattling the mortgage market and upending the lives of average homeowners. Although Goldman Sachs settled securities fraud charges earlier this year, Mr. Mozilo is the first prominent chief executive to be held personally accountable for questionable business practices that contributed to the housing bubble, the dizzying financial machinations that surrounded it, and a ruinous lending spree that ultimately threatened to undermine the nation’s economy.

Mr. Mozilo and his two former colleagues were accused of misrepresenting the company’s declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company’s loans were becoming increasingly risky.

The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company’s problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol’s sales produced $40 million, the government says.

Lawyers for Mr. Mozilo declined to comment. Mr. Sambol’s lawyer said his client had “put the matter behind him for the benefit of his family and loved ones.” Mr. Sieracki’s lawyer noted that the S.E.C. had decided not to pursue fraud charges against his client and that his client had not been barred from serving at a public company. Bank of America is paying Mr. Mozilo’s legal bills. Countrywide is paying $5 million toward Mr. Sambol’s repayment to investors and $20 million of Mr. Mozilo’s reparations.

The S.E.C.’s legal team, led by John M. McCoy III, associate regional director of the enforcement division, said the settlement amounted to a hard-won victory.

In a statement on Friday, Mr. McCoy said: “This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company.”

Battered by widespread criticism that it failed to corral scam artists like Bernard L. Madoff and to effectively police Wall Street as a whole during the years leading up to the credit crisis, the S.E.C. may now regain some stature as a successful litigator and investor advocate from its settlement with Mr. Mozilo.

“As is the case with most settlements, this is a compromise where nobody comes out a complete winner,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels. “The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo’s side, he is probably satisfied to have this behind him. He suffers a considerable stain on his reputation, has to pay a substantial amount of money but retains significant wealth and at the age of 71 may find the possibility of being an officer or director of another public company less enticing.”

COUNTRYWIDE FINANCIAL began operations in 1969, when Mr. Mozilo and his mentor, David Loeb, refugees from an established mortgage lender, decided to start their own loan originator. The company grew slowly at first, but by 2004, Countrywide was the nation’s largest home lender, generating annual revenue of $8.6 billion. Mr. Mozilo ran the company alone after Mr. Loeb retired in 2000. (Mr. Loeb died in 2003.)

An up-by-the-bootstraps entrepreneur — his father was a butcher in the Bronx — Mr. Mozilo was obsessed with wresting market share away from his buttoned-down rivals in the staid world of banking.

“I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he told The New York Times in 2005. “We’re always underestimated. And we still are. I am. I must say, it bothered me when I was younger — their snobbery and their looking down on us.”

In an industry that favored low-key behavior and conservative dress, Mr. Mozilo stood apart. He offered blunt opinions about banking and was open about his corporate aspirations. To complement his ever-present tan, he wore flashy clothes and drove expensive cars like Rolls-Royces that were often painted in a shade of gold.

Still, he managed his business for most of its history with a tight focus on the bottom line and on vigilant lending practices.

For years, Countrywide specialized in plain-vanilla, fixed-rate loans. As recently as 2003, such mortgages accounted for 95 percent of the company’s loans, according to regulatory filings. Countrywide was the biggest supplier of mortgage loans to Fannie Mae, the federally backed mortgage finance giant that was also hobbled in the credit crisis.

In 2004, Countrywide’s sober-minded lending style changed significantly. It began aggressively offering loans to first-time home buyers and to borrowers with modest incomes. These mortgages were known in the industry as “affordability products,” but that ho-hum designation belied the potential financial dangers embedded in the loans if borrowers — particularly low-income borrowers — wound up unable to pay their debts.

Even so, Countrywide embraced such loans with gusto. For example, adjustable-rate mortgages — those with a low introductory rate that could ratchet up in later years — accounted for about 18 percent of Countrywide’s business in 2003. But a year later, they made up 49 percent of its loans.

Subprime loans also grew in 2004, to 11 percent of its originations, up from 4.6 percent in 2003. These loans often required no down payments and very little documentation of borrowers’ incomes, assets or employment; they generated immense profits to Countrywide but, again, presented a bevy of risks. And even when the going got rough for some homeowners, Countrywide didn’t hesitate to take a hard line with borrowers who fell behind.

A born salesman, Mr. Mozilo promoted his company’s prospects wherever he went. In front of a crowd of investors or analysts, he would predict what Countrywide would generate in profits five years down the road and how many of its competitors the company would vanquish. No matter what, Countrywide would survive, he vowed.

“Over the entire history of this country, housing prices have never gone down nationally. They have gone down in some local areas, but never nationally,” he told an interviewer for CNBC in early 2005. “Secondly, any homeownership over the 10 years has proved to be the best investment that you could ever make. Over any 10-year period, housing prices go up.”

Later that year, he was equally optimistic when he again visited CNBC’s studios.

“From our perspective — and we’ve been doing this for 38 years — we’re still in a terrific mortgage market,” he said. “So the road ahead to us appears to be extremely vibrant, very sound.”

Even as the wheels were coming off of the Countrywide cart in 2007, Mr. Mozilo’s upbeat public pronouncements continued.

“I think you have to keep things in perspective. You know, there’s an old saying that you don’t know who’s swimming naked until the tide goes out, and obviously the tide’s gone out,” he told CNBC in March 2007, when a number of once-successful subprime lenders were plunging toward bankruptcy. “I think it’s a mistake to apply what’s happening to them to the more diversified financial services companies such as Countrywide.”

When Bank of America invested $2 billion in Countrywide in August 2007 — a move that caused many analysts to question Countrywide’s financial wherewithal and its ability to remain independent — Mr. Mozilo again struck an optimistic note.

“Countrywide’s future’s going to be great. You know, it’s always been great,” he told CNBC at the time. “So I think, down the line, this is going to be a better company, a more profitable company and a company that’s going to be a great investment for shareholders as we continue down the line. Because the market ultimately will come to us. This is America. People want to own homes.”

PRIVATELY, however, Mr. Mozilo had long been worried about some of the loans his company favored, as indicated by e-mails he sent to his deputies. And this gulf between Mr. Mozilo’s private views and his public proclamations went to the heart of the S.E.C.’s case against him.

Beginning in 2005, for example, he fretted about lending practices at Countrywide, e-mail messages show. One target of his ire was the “pay-option adjustable-rate mortgage,” a loan that let borrowers pay a fraction of the interest owed and none of the principal during an introductory period. These loans put homes within many borrowers’ financial grasp — at least initially.

When a borrower made only modest payments, the shortfall was added to the principal balance on the loan, meaning that the mortgage would grow in size. Given this arithmetic, borrowers could wind up owing more than their homes were worth.

In 2004, pay-option A.R.M.’s accounted for 6 percent of Countrywide’s originations. Two years later, they accounted for 21 percent of its loans. The loans were moneymakers for Countrywide; internal company documents show that the company made gross profit margins of more than 4 percent on such loans, double the 2 percent generated on standard loans backed by the Federal Housing Administration.

Countrywide pushed the lucrative loans hard. A sales document called “Pay Option A.R.M.’s Made Simple” asked rhetorically what kinds of customers would be interested in these loans. “Anyone who wants the lowest possible payment!” was one of the answers.

But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company’s pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.’s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: “Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies.”

Two months later, and just one day after he talked up his company’s pay-option A.R.M.’s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They “are going to experience a payment shock which is going to be difficult if not impossible for them to manage,” he said.

And in September 2006, Mr. Mozilo wrote an e-mail saying the company had no way to assess the risks of holding pay-option A.R.M.’s on its balance sheet. “The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales,” he wrote.

Another Countrywide product that concerned Mr. Mozilo was its so-called 80/20 loan, named for the fact that the combination allowed a borrower to receive money covering 100 percent of a home’s purchase price.

Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide’s 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective.

“In all my years in the business, I have never seen a more toxic product,” he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. “With real estate values coming down ... the product will become increasingly worse.”

Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company’s lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.

Mr. Mozilo had always been a big seller, and rarely a buyer, of the Countrywide shares he was granted as a part of his compensation. The timing of some of his sales, however, has drawn the scrutiny of the S.E.C.

For example, on Sept. 25, a day before writing the e-mail about how Countrywide was “flying blind” on pay-option A.R.M.’s, he set up a new planned stock-selling program for himself, known as a 10b-5 plan, the S.E.C. said.

Such plans allow executives to sell stock regularly, without running afoul of regulations governing the sale of stock around significant corporate announcements. Mr. Mozilo also set up plans enabling a family foundation and a trust he oversaw to sell shares.

Altogether, the S.E.C. said, from November 2006 to October 2007, he sold more than five million Countrywide shares under his personal plan. His gains were $140 million, the S.E.C. said.

Mr. Mozilo has long maintained that his stock sales were not unusual, and in the past Countrywide has said that it and Mr. Mozilo were battered by economic forces beyond their control.

“No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today,” a Countrywide spokesman told The Times in 2007. “Countrywide is proud of its role in making homeownership affordable to lower-income households.”

But lawyers and analysts say Friday’s settlement means that Mr. Mozilo’s legacy is likely to be something quite different from that of a banker who brought homeownership to the masses.

“Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company,” said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. “That is a significant punishment and does not look good for his legacy.”

    How Countrywide Covered the Cracks, NYT, 16.10.2010, http://www.nytimes.com/2010/10/17/business/17trial.html

Avoid Foreclosure Market Until the Dust Settles

October 15, 2010
The New York Times
By RON LIEBER

Are you out of your mind to even consider buying a foreclosed property right now?

Todd Phelps and Paul Whitehead didn’t think they were last month when they were the winning bidders in a foreclosure auction on the steps of the main Riverside, Calif., county courthouse. They thought they had won the lottery.

For years, they had been living in a rent-controlled apartment in Santa Monica and waiting out the housing bubble in hopes of buying a weekend getaway in the Palm Springs area. And on Sept. 10, they thought they had finally done it, getting a house for $137,000.

Several days later, however, they realized that what they had really bought was a second mortgage from Wachovia on a house that still had an enormous, unpaid primary loan. In other words, they did not own the home free and clear, and the auction company wouldn’t give back their $137,000 check.

The tale is certainly enough to give anyone pause, especially as several banks slow or halt their foreclosure proceedings amid questions about how they cut corners to speed up the process. Still, roughly half the recent home sales in hard-hit states like California, Arizona and Nevada have been foreclosures or short sales, according to RealtyTrac. Anyone wanting to buy homes in those and other states hit hard by the housing crisis will probably encounter these sorts of properties.

And the houses will be tempting for scores of first-time homebuyers, second-home seekers and people looking to get an early jump on buying a retirement home while prices and interest rates are low.

So given the pitfalls, are they crazy? The answer is no, not always. But it’s important to keep something in mind.

“The whole foreclosure process is adversarial, even though it’s nonjudicial in many areas,” said Tom Cahraman, the presiding judge in Riverside County. “One person is losing their home, and another person is trying to get a new home at a discount price.”

He’s absolutely right. Strap on the body armor, and think hard about the following five factors if you find foreclosed homes even remotely enticing.

THE LOAN First of all, many banks that own foreclosed properties would prefer that you stay far away from their listings. In fact, they may sell a property for less money to an investor who can pay all cash.

You, on the other hand, will probably need a mortgage, and your need for bank approval can delay the sales process because your lender may hesitate when you say you’re interested in a foreclosed property.

“Lenders will usually only give you a loan on homes that are pretty ready to be lived in,” said Andy Tolbert of Oneir HD Realty in Longwood, Fla., who represents buyers shopping for foreclosed and other homes and invests in distressed property herself. “If the carpet is ripped out and the toilets are missing, they are not going to give the loan.”

This is especially important to consider if you’re using a Federal Housing Administration or Veterans Administration loan, where there may be particularly stringent requirements. “I have seen V.A. lenders require torn carpet to be repaired or replaced because they see it as a hazard to the new occupants,” said Mike Goblet, a mortgage broker with United Mortgage Financial Group in Mesa, Ariz.

There are some exceptions. The F.H.A. offers a mortgage called a 203(k) that may allow you to borrow money to buy and substantially rehabilitate a foreclosed property. But it could take a while to find a bank that offers the loan and to get your project approved. Some sellers, meanwhile, won’t let you buy with F.H.A. loans.

THE AUCTION PROCESS Foreclosure auctions can be a dangerous place for people who don’t know what they’re doing or are relying on help from people who are sloppy or negligent.

Mr. Phelps and Mr. Whitehead had a real estate broker who was supposed to be checking the records of the home they wanted to buy at auction. But the broker did not discover, or did not report to them, the fact that the property had several claims against it.

They considered suing the broker, but first turned to the auction company, Executive Trustee Services, a unit of GMAC Mortgage (one of the companies that suspended many foreclosures in recent weeks). At the company’s Burbank, Calif., office, a representative told Mr. Phelps that all sales were final and that Executive Trustee was merely a middleman. Mr. Phelps asked for further documentation and was told that he could have it when he returned with a subpoena. Classy, no? Gina Proia, a spokeswoman for the company, did not respond to requests for comment.

The couple also wrote plaintive letters to executives at Wachovia, now part of Wells Fargo, because both defaulted loans attached to the home they were trying to buy came from that bank. (The auction company was working on the bank’s behalf.)

After a couple of rounds of e-mail and phone inquiries on my part, the bank decided to give Mr. Phelps and Mr. Whitehead their money back. “Given the circumstances, we have decided to rescind the sale on the property and return the funds to the buyers,” Vickee J. Adams, a Wells Fargo spokeswoman, wrote in an e-mail on Friday.

Meanwhile, the couple, having nearly lost most of their life savings, now realize that they were in way over their heads bidding for homes at auction and were lucky to get their money back. “Trust no one,” Mr. Phelps said. “We didn’t get involved when the market was going crazy and everyone was getting subprime mortgages, and we felt like we were smart and that this was our reward for sitting on the sidelines. But there are enough bargains to be had on a straight sale.”

THE INSPECTION Let’s say you do manage to get a loan, resist the auctions and take the straight sale approach, shopping through a real estate agent. You’ll want to make any bid for a home contingent on a thorough inspection from someone familiar with foreclosed properties.

Mold may be your first concern, especially in more humid climates, given that many foreclosed homes have been uninhabited for months.

Then there’s sabotage. You should arrange (or have the real estate agent arrange) to have the power and water turned back on before the inspection if possible. Why? The previous owner (or vandals who have been in the home since) may have cut wires behind walls or poked holes in pipes in various places. Having running water and power can make these things easier to detect.

The pour-concrete-down-the-toilet trick is one that most good inspectors know to look for. But Jon Bolton of The Inspectagator in Oviedo, Fla., recently ran into a bit of destructive ingenuity he’d never encountered.

“Someone went on the roof with a bag of cement and dropped it down the chimney,” he recalled. “It rained, and now you have a solid block of concrete somewhere where it’s extremely difficult to get in to break it up. That’s just wrong.”

Also, don’t forget to inspect the minutes of the condominium board or homeowners’ association, if there is one. It may be in deep financial trouble if other foreclosures have occurred. Ms. Tolbert says that a good title insurer may be able to help with contacts if you have no luck finding the manager or treasurer on your own.

THE TITLE INSURANCE Speaking of which, title insurance is a must, particularly now. In the unlikely event that a former owner somehow wins back rights to the foreclosed home you end up buying and then tries to kick you out, you will need to make a title insurance claim.

And if you plan to put a lot of money into fixing up the home, you’ll want to ask about a rider on the insurance policy that can cover you for more than what you paid to buy the property.

THE WAITING GAME Still worried about the prospect of former owners showing up someday and asking for their home back? Cyd Weeks, a real estate agent with Palmcoasting.com in Palm Coast, Fla., suggests waiting a few months before trying to buy a foreclosed home. Now that all eyes are on the foreclosure process, he said, homes coming on the market early next year will probably have been foreclosed upon with much more care and precision.

Indeed, Ms. Weeks’s tip suggests a larger point. Given the foreclosure moratorium that some banks have put in place and the lengthy investigations and lawsuits that are sure to follow, there is no rush to buy as long as you don’t have to move or if renting is an option.

Take your time. Assemble a panel of experts and apprentice yourself to them. And watch the listings carefully. For better or for worse, foreclosed properties are going to be available for a very, very long time.

    Avoid Foreclosure Market Until the Dust Settles, NYT, 15.10.2010, http://www.nytimes.com/2010/10/16/your-money/mortgages/16money.html

Inflation Was Tame in September

October 15, 2010
The New York Times
By CHRISTINE HAUSER

The economy continued to show little sign of inflation as consumer prices eased marginally in September, a government report said on Friday.

The Labor Department said that the Consumer Price Index, a benchmark measure of inflation, increased 0.1 percent in September, compared with a 0.3 percent rise in August and the same increase in July, on a seasonally adjusted basis. Excluding volatile energy and food prices, the core index was flat in September, the same as in August. It had risen 0.1 percent in July and 0.2 percent in June.

Year-over-year core inflation was up 0.8 percent. It had been running at 0.9 percent for five consecutive months, its lowest level in more than 50 years.

The figures were the latest in a series of economic indicators this week suggesting that growth would continue to be sluggish for the rest of the year, given the slowdown in jobs and output.

This week the government said the trade deficit widened to $46.3 billion in August, with the deficit with China reaching a record. And weekly claims for unemployment insurance reached 462,000 as of the week of Oct. 9, while the Producer Price Index registered a slight rise.

The consumer price results were slightly below analysts’ forecasts, which had called for a 0.2 percent rise in September and a 0.1 percent uptick in the core index.

The data was released weeks ahead of a meeting on Nov. 2-3 of Federal Reserve policy makers, who many economists and analysts expect will announce a new round of quantitative easing.

At their meeting on Aug. 10, policy makers decided to use proceeds from the Fed’s mortgage bonds to buy long-term Treasury securities.

    Inflation Was Tame in September, NYT, 15.10.2010, http://www.nytimes.com/2010/10/16/business/economy/16econ.html

Bernanke Signals Intent to Further Spur Economy

October 15, 2010
The New York Times
By SEWELL CHAN

BOSTON — The Federal Reserve chairman, Ben S. Bernanke, sent a clear signal on Friday that the central bank was poised to take additional steps to try to fight persistently low inflation and high unemployment.

“Given the committee’s objectives, there would appear — all else being equal — to be a case for further action,” he said in a detailed speech at a gathering of top economists here.

Mr. Bernanke noted that “unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” But he suggested that the Fed was prepared to manage the risks associated with the most powerful tool remaining in the Fed’s arsenal of weapons to stimulate the economy: vast new purchases of government debt to lower long-term interest rates.

As Mr. Bernanke sent an unmistakable signal to the markets that the Fed was prepared to wander into uncharted territory, he tried to anticipate and address potential criticism.

“One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public,” he said.

Mr. Bernanke addressed a criticism made about the potential for new asset purchases, that they would “reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time.” Such a reduction in confidence, “even if unjustified,” could lead to an undesirable increase in inflation expectations, he said.

For now, inflation appears remote. As Mr. Bernanke spoke, the government released the September figures for the consumer price index, showing a rise of only 0.1 percent from the previous month. The core inflation rate, excluding energy and food, was flat.

Mr. Bernanke’s comments in Boston strongly suggested that the Federal Open Market Committee, which sets monetary policy, is likely to take new steps at its next meeting on Nov. 2-3.

The Fed’s balance sheet has nearly tripled, to about $2.3 trillion, since the financial crisis of 2008. Most of the increase can be attributed to the Fed’s purchases of $1.7 trillion in mortgage-related securities and Treasury securities in 2009-10. The Fed has tested a number of technical tools to drain the large pool of bank reserves that the Fed created in order to purchase those securities.

“With these tools in hand, I am confident that the F.O.M.C. will be able to tighten monetary conditions when warranted, even if the balance sheet remains considerably larger than normal at that time,” Mr. Bernanke said.

Mr. Bernanke also weighed one other tool the Fed could take: communicating that it intends to keep short-term interest rates at nearly zero for even longer than the markets now expect. (The Fed has been saying since March 2009 that the benchmark federal funds rate, at which banks lend to each other overnight, will remain “exceptionally low” for “an extended period.”) Changing the statement could help lower longer-term rates.

“A potential drawback of using the F.O.M.C.’s statement this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the committee’s policy intentions with sufficient precision and conditionality,” Mr. Bernanke said, hinting that that strategy was not his favored approach.

Mr. Bernanke used his speech to plant himself firmly on the side of those who view the high unemployment rate — 9.6 percent — as an outcome of the sharp contraction in economic demand that accompanied the financial crisis, rather than structural factors like a mismatch between workers’ skills and the skills required by employers.

Disappointing some Wall Street analysts, Mr. Bernanke did not reveal details of the magnitude and pace of any new debt purchases — a strategy known as quantitative easing.

Instead, and in line with his background as a professor who taught at Stanford and Princeton until he joined the government in 2002, Mr. Bernanke outlined the intellectual case for new action.

He acknowledged, with greater candor than Fed officials have normally used, the tension between the two parts of the Fed’s “dual mandate: promoting price stability and maximum employment.

“Whereas monetary policy makers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy,” Mr. Bernanke said.

Therefore, Mr. Bernanke seemed to frame his argument for new actions more in terms of preventing inflation from getting too low than in terms of improving the job market quickly.

“In light of the recent decline in inflation, the degree of slack in the economy, and the relative stability of inflation expectations, it is reasonable to forecast that underlying inflation — setting aside the inevitable short-run volatility — will be less than the mandate-consistent inflation rate,” Mr. Bernanke said. That rate is commonly believed to be nearly 2 percent, though the Fed does not have an official inflation target.

Mr. Bernanke’s speech followed signals from within the Fed that for all its previous steps to get the economy back on track, new action was needed.

Minutes of the Fed’s most recent policy making meeting, released this week, showed the members divided between those with the view that the Fed should act “unless the pace of economic recovery strengthened,” and others who thought action was merited “only if the outlook worsened and the odds of deflation increased materially.”

The minutes of the meeting of the Federal Open Market Committee, held Sept. 21, indicated that several officials “consider it appropriate to take action soon,” given persistently high unemployment and uncomfortably low inflation.

But other officials “saw merit in accumulating further information before reaching a decision,” according to the minutes.

    Bernanke Signals Intent to Further Spur Economy, NYT, 15.10.2010, http://www.nytimes.com/2010/10/16/business/economy/16fed.html

No Social Security Increase Next Year

October 14, 2010
Filed at 9:06 a.m. ET on October 15, 2010
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — More than 58 million retirees and disabled Americans will get no increase in Social Security benefits next year, the second year in a row without a raise.

The Social Security Administration said Friday inflation has been too low since the last increase in 2009 to warrant an increase for 2011. The announcement marks only the second year without an increase since automatic adjustments for inflation were adopted in 1975. The first year was this year.

The cost-of-living adjustments, or COLAs, are automatically set each year by an inflation measure that was adopted by Congress back in the 1970s.

To make up for the lack of a COLA, the House will vote in November — after congressional elections — on a bill to provide $250 payments to Social Security recipients, House Speaker Nancy Pelosi said. But even if Pelosi can get the House to pass the proposal, it faces opposition in the Senate.

The absence of inflation will be of small comfort to many older Americans whose savings and home values still haven't recovered from the recession. Many haven't had a raise since January 2009, and they won't be getting one until at least January 2012. And the timing couldn't be worse for Democrats as they approach an election in which they are in danger of losing their House majority and possibly their Senate majority as well.

"We're a little bit upset because our bills are going up and our Social Security isn't," said Betty Dizik of Tamarac, Fla., a retired tax preparer and social worker.

Dizik, 83, said her only source of income is a $1,200 monthly payment from Social Security.

"I'm like a lot of other people in my predicament who live on Social Security," Dizik said. "It's hard. We cannot make ends meet."

Claire Edelman of Monroe Township, N.J., said she was so hard up that at the age of 83 she applied for a temporary job as a census taker for the 2010 Census. She didn't get the job, so she gets by on a small pension from her job with the state and her monthly Social Security payment of $1,060.

"I just hope there is some way to reconsider that decision (on the COLA) because it is going to affect so many people," Edelman said. "I can't understand why the Congress hasn't seen that there's been an increase in everything."

A little more than 58.7 million retirees and disabled Americans receive Social Security or Supplemental Security Income. Social Security was the primary source of income for 64 percent of retirees who got benefits in 2008.

The average Social Security benefit: $1,072 a month.

Social Security is supported by a 6.2 percent payroll tax — paid by both workers and employers — on wages up to $106,800. Because there is no COLA, that amount will remain unchanged for 2011.

The last increase in benefits came in 2009, when payments went up by 5.8 percent, the largest increase in 27 years. The big increase was caused by a sharp but short-lived spike in energy prices in 2008.

Gasoline prices topped $4 a gallon in the summer of 2008, jolting the inflation rate and resulting in the high COLA for 2009. When the price of gasoline subsequently fell below $2 a gallon, so did the overall inflation rate. Seniors, however, kept the high COLA for 2009.

"They received a nearly 6 percent COLA for inflation that no longer really existed," said Andrew Biggs, a former deputy commissioner at the Social Security Administration and now a resident scholar at the American Enterprise Institute.

"Seniors aren't being treated unfairly, here," Biggs said. "It looks bad, but they're actually not being treated unfairly."

By law, the next increase won't come until consumer prices rise above the level measured in 2008. The trustees who oversee Social Security project that will happen next year, resulting in an estimated 1.2 percent COLA for 2012.

Advocates for older Americans are pushing for some kind of payment to make up for the lack of a COLA.

"I know everybody's been hurting. I see it everyday. But they are really hurting," said Barbara Kennelly, a former Democratic member of Congress from Connecticut who is now president and CEO of the National Committee to Preserve Social Security and Medicare.

"It's one more thing to be disappointed in," she said.

    No Social Security Increase Next Year, NYT, 14.10.2010, http://www.nytimes.com/aponline/2010/10/14/us/politics/AP-US-Social-Security-No-COLA.html

How Wall Street Hid Its Mortgage Mess

October 14, 2010
7:30 pm
The New York Times
By WILLIAM D. COHAN

William D. Cohan on Wall Street and Main Street.

The conventional wisdom has it that the Financial Crisis Inquiry Commission — the bipartisan group of wise men and women charged with uncovering what caused our recent economic meltdown and telling us what should be done to prevent a recurrence — is woefully out-of-touch and out-of-date. A Times article last month suggested that “an exodus of senior employees” from the commission and “internal disagreements” among those remaining could hamper efforts to produce a meaningful and useful report, which is due to be published in December.

But the conventional wisdom is often wrong, and this time will be no exception. I predict that not only will the commission’s report — and accompanying documents — reveal numerous causes of the crisis that others have overlooked, but also that it will have a significant impact on the regulations that still must be written by the Securities and Exchange Commission and the Treasury as part of the implementation on the Dodd-Frank financial reform law. In fact, the inquiry commission may have already played an essential role in beginning to bring fraudsters to justice.

A much-derided federal panel has produced clear evidence that investment banks kept secret from their clients the shaky nature of many mortgage-backed securities.
Consider what was revealed at one of the commission’s regional hearings, held in Sacramento on Sept. 23. Part of the hearing focused on the role that Clayton Holdings, a firm that reviews loan files on behalf of investment banks, played in the mortgage securitization process by which one home mortgage after another got packaged up into mortgage-backed securities by Wall Street and sold to investors all over the world. The banks hired Clayton to do some forensics — to examine the mortgages that went into the securities and determine if they complied with some basic level of credit underwriting guidelines and “client risk tolerances,” as well as with state and local laws. If a loan met the underwriting “guidelines,” Clayton would rate the loan “Event 1”; other ratings meant that the loan did not meet the guidelines, with varying degrees of flaws.

According to Vicki Beal, a senior vice president at Clayton who testified at the Sacramento hearing, one of the main services Wall Street paid Clayton for was a detailed examination of the loans that deviate “from seller underwriting guidelines and client tolerances.”

This is where things got interesting. Clayton provided the inquiry commission with documents that summarized its findings for the six quarters between January 2006 and June 2007, when mortgage-underwriting standards were arguably at their worst and the housing bubble was inflating rapidly. Of the 911,039 mortgages Clayton examined for its Wall Street clients — a sample of about 10 percent of the total mortgages that the banks intended to package into securities — only 54 percent were found to meet the underwriting guidelines. Standards deteriorated over time, with only 47 percent of the mortgages Clayton examined meeting the guidelines by the second quarter of 2007.

So, did Wall Street throw all those mortgages back into the pond as being too risky for securities they were going to sell to clients? Of course not — many were packaged right into their product. There were degrees of nefariousness: Some Wall Street firms were better about including higher-quality mortgages in their mortgage-backed securities than others. For instance, at Goldman Sachs, 77 percent of the nearly 112,000 mortgages reviewed met the guidelines, while at Citigroup only 58 percent did. At Lehman Brothers, which later filed for bankruptcy, 74 percent of the mortgages sampled and then packaged up as securities met underwriting guidelines.

In fact, the banks probably weren’t disappointed at all by the shaky status of many of these loans: in part because they could use the information that some of the mortgages were rotten to get a discount from the mortgage originators on the price paid for the entire portfolio. The people who should have been concerned were the investors who bought the securities from the Wall Street firms. But the amazing revelation of the Sacramento hearing was that the investment banks did not pass this very valuable information on their customers.

“Investors were not given sufficient information to make the decisions that they needed to make to see if they were going to buy these securities,” testified Kurt Eggert, a professor at Chapman University School of Law in Orange, Calif. “They should have been given loan-level detail for every pool for which securities were issued. Current loan-level detail, not what was true weeks ago or a month ago. Instead, they got vague, boilerplate language about ‘underwriting,’ and that there were ‘substantial exceptions,’ whatever that means. They should have gotten the due diligence reports that we just heard described. Those reports existed. The exceptions were described and defined. Why weren’t investors given that information which was in the hands of the people that were selling the securities? Why weren’t they given the underwriting reports by the originators who knew what exceptions were given and why?”

These are very good questions. And while we await the Financial Crisis Inquiry Commission’s answers, the good news is that the news media have begun to pick up on the outrageous behavior its hearing revealed. The Times’ Gretchen Morgenson reported on that Clayton Holdings had in fact offered to make its data available to the three ratings agencies that rated mortgage-backed securities, but that each rejected Clayton’s offer. It seems they feared that if they revealed the flaws in the underwriting of the mortgages, they would lose other business from the investment banks that put the mortgage-backed securities together.

On Monday, Eliot Spitzer, the former New York governor turned talk-show host, called the inquiry commission’s revelations “fraud, plain and simple,” and said there is “a basis without any question for the most rigorous examination” of why Wall Street failed to disclose this valuable information to investors. His guest on CNN’s “Parker Spitzer”show that night was Joshua Rosner, a managing director at Graham Fisher & Co., an independent research firm. Mr. Rosner agreed with Spitzer’s assessment and said, “This is what happens when the children are in charge.” On Wednesday, Felix Salmon, a business columnist at Reuters, wrote that “if I was one of the investors in one of these pools, I’d be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can’t imagine they’ll like what they find.”

So far, not a soul on Wall Street has been found to be criminally liable for the practices that led to the financial crisis. But thanks, in part, to the Financial Crisis Inquiry Commission, we are getting closer than ever to the day when the culprits will pay for what they did.

    How Wall Street Hid Its Mortgage Mess, NYT, 14.10.2010, http://opinionator.blogs.nytimes.com/2010/10/14/how-wall-street-hid-its-mortgage-mess/

The Mortgage Morass

October 14, 2010
The New York Times
By PAUL KRUGMAN

American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had.

We didn’t.

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

What can be done?

True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?

The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them.

That won’t be easy, but there are good ideas out there. For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass.

One thing is for sure: What we’re doing now isn’t working. And pretending that things are O.K. won’t convince anyone.

    The Mortgage Morass, NYT, 14.10.2010, http://www.nytimes.com/2010/10/15/opinion/15krugman.html

From a Maine House, a National Foreclosure Freeze

October 14, 2010
The New York Times
By DAVID STREITFELD

DENMARK, Me. — The house that set off the national furor over faulty foreclosures is blue-gray and weathered. The porch is piled with furniture and knickknacks awaiting the next yard sale. In the driveway is a busted pickup truck. No one who lives there is going anywhere anytime soon.

Nicolle Bradbury bought this house seven years ago for $75,000, a major step up from the trailer she had been living in with her family. But she lost her job and the $474 monthly mortgage payment became difficult, then impossible.

It should have been a routine foreclosure, with Mrs. Bradbury joining the anonymous millions quietly dispossessed since the recession began. But she was savvy enough to contact a nonprofit group, Pine Tree Legal Assistance, where for once in her 38 years, she caught a break.

Her file was pulled, more or less at random, by Thomas A. Cox, a retired lawyer who volunteers at Pine Tree. He happened to know something about foreclosures because when he worked for a bank he did them all the time. Twenty years later, he had switched sides and, he says, was trying to make amends.

Suddenly, there is a frenzy over foreclosures. Every attorney general in the country is participating in an investigation into the flawed paperwork and questionable methods behind many of them. A Senate hearing is scheduled, and federal inquiries have begun. The housing market, which runs on foreclosure sales, is in turmoil. Bank stocks fell on Thursday as analysts tried to gauge the impact on lenders’ bottom lines.

All of this is largely because Mr. Cox realized almost immediately that Mrs. Bradbury’s foreclosure file did not look right. The documents from the lender, GMAC Mortgage, were approved by an employee whose title was “limited signing officer,” an indication to the lawyer that his knowledge of the case was effectively nonexistent.

Mr. Cox eventually won the right to depose the employee, who casually acknowledged that he had prepared 400 foreclosures a day for GMAC and that contrary to his sworn statements, they had not been reviewed by him or anyone else.

GMAC, the country’s fourth-largest mortgage lender, called this omission a technicality but was forced last month to halt foreclosures in the 23 states, including Maine, where they must be approved by a court. Bank of America, JPMorgan Chase and other lenders that used robo-signers — the term caught on instantly — have enacted their own freezes.

The tragedy of foreclosure is that some homeowners may be able to stay where they are if their lenders are more interested in modification than eviction. Without a job, Mrs. Bradbury is not one of them. Her family, including her 14-year-old daughter and 16-year-old son, lives on welfare and food stamps.

“A lot of people say we just want a free ride,” Mrs. Bradbury said. “That’s not it. I’ve worked since I was 14. I’m not lazy. I’m just trying to keep us together. If we lost the house, my family would have to break up.”

It has been two years since she last paid the mortgage, which surprises even her lawyers.

“Had GMAC followed the legal requirements, she would have lost her home a long time ago,” acknowledged Geoffrey S. Lewis, another lawyer handling her case.

GMAC, which began as the financing arm of General Motors, has received $17 billion from taxpayers in an effort to keep it from failing and is now majority-owned by the federal government. A spokeswoman for the lender declined to comment on Mrs. Bradbury’s case because it was still being litigated.

John J. Aromando of the firm of Pierce Atwood in Portland, Me., the lawyer for GMAC and Fannie Mae, the mortgage holding company that owns Mrs. Bradbury’s loan, did not return calls for comment on Thursday.

Fannie Mae and GMAC, which serviced the loan for Fannie, have now most likely spent more to dislodge Mrs. Bradbury than her house is worth. Yet for all their efforts, they are not only losing this case, but also potentially laying the groundwork for foreclosure challenges nationwide.

“This ammunition will be front and center in thousands of foreclosure cases,” said Don Saunders of the National Legal Aid and Defender Association.

Just a few miles from the New Hampshire border, this slice of Maine does not have much in the way of industry or, for that matter, people. Mrs. Bradbury grew up around here, married and had her children here, and married for a second time here. Her parents still live nearby.

In 2003, her brother-in-law at the time offered to sell her a house on property adjacent to his. It was across from a noisy construction supply site. But it was ringed by maple, evergreen and willow trees, and who does not want to be a homeowner, especially when GMAC Mortgage will give you a loan for the entire purchase price and then another loan to improve the property?

“I was very happy,” she remembered. “It was a new beginning.”

But Mrs. Bradbury lost her job as an employment counselor in 2006 and did part-time work after that. Her husband, Scott, was in poor health and had other problems. He could not work as a roofer. She fell behind and got a modification from GMAC. It increased her monthly payments and provided no relief.

Finally, in late 2008, she stopped paying altogether, and GMAC asked a court to approve her eviction without a trial. By the summer of 2009, this removal was well under way when Mr. Cox picked up her file.

Mr. Cox, 66, worked in the late 1980s and early 1990s for Maine National Bank, a subsidiary of the Bank of New England, which went under. His job was to call in small-business loans. The borrowers had often pledged their houses as collateral, which meant foreclosure.

“It was extraordinarily unpleasant, but it paid well,” he said. “I had a family to support.”

The work exacted its cost: his marriage ended and a serious depression began. He gave up law and found solace in building houses. By April 2008, he said, he was sufficiently recovered and started volunteering at Pine Tree Legal.

By the time Mr. Cox saw Mrs. Bradbury’s case, it was just about over. Last January, Judge Keith A. Powers of the Ninth District Court of Maine approved the foreclosure, leaving the case alive only to establish exactly how much Mrs. Bradbury owed.

Mr. Cox vowed to a colleague that he would expose GMAC’s process and its limited signing officer, Jeffrey Stephan. A lawyer in another foreclosure case had already deposed Mr. Stephan, but Mr. Cox wanted to take the questioning much further. In June, he got his chance. A few weeks later, he spelled out in a court filing what he had learned from the robo-signer:

“When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn’t. When he says that he has custody and control of the loan documents, he doesn’t. When he says that he is attaching ‘a true and accurate’ copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn’t.”

GMAC’s reaction to the deposition was to hire two new law firms, including Mr. Aromando’s firm, among the most prominent in the state. They argued that what Mrs. Bradbury and her lawyers were doing was simply a “dodge”: she had not paid her mortgage and should be evicted.

They also said that Mr. Cox, despite working pro bono, had taken the deposition “to prejudice and influence the public” against GMAC for his own commercial benefit. They asked that the transcript be deleted from any blog that had posted it and that it be put under court seal.

In a ruling late last month, Judge Powers said that GMAC, despite its expensive legal talent and the fact that it got “a second bite of the apple” by filing amended foreclosure papers, still could not get this eviction right.

Even the amended documents did not bother to include the actual street address of the property it was trying to seize — reason enough, the judge wrote, to reject the request for immediate foreclosure without a trial.

But Judge Powers went further than that, saying that GMAC had been admonished in a Florida court for using robo-signers four years ago but had persisted. “It is well past the time for such practices to end,” he wrote, adding that GMAC had acted “in bad faith” by submitting Mr. Stephan’s material:

“Filing such a document without significant regard for its accuracy, which the court in ordinary circumstances may never be able to investigate or otherwise verify, is a serious and troubling matter.”

It was not a complete loss for GMAC — Judge Powers declined to find the lender in contempt — but nearly so. GMAC was ordered, as a penalty, to pay Mr. Cox personally what he would have been paid for his work on the deposition and related matters had he been charging Mrs. Bradbury. That, he says, is $27,000.

The court’s ruling on GMAC’s “bad faith” is already being taken up by foreclosure defense lawyers around the country. Mr. Cox “did a remarkable job of proving the lenders not only rubber-stamped these loans on the front end, but they rubber-stamped them on the back end,” said Mr. Saunders of the legal aid group.

GMAC, which this week expanded its foreclosure freeze to the entire country, is not giving up on Mrs. Bradbury. It will try for the third time to evict her when the case goes to trial this winter.

If Mrs. Bradbury is not quite victorious, she is still in her house, and for her that is the only thing that counts. If she can get her pickup fixed, she will go back to looking for a job.

“I am not leaving,” she said this week, standing out on her front lawn, the autumn splendor spread all around her. “We have nowhere to go.”

This article has been revised to reflect the following correction:

Correction: October 14, 2010


An earlier version of a photo caption with this article misspelled the given name of Nicolle Bradbury.

    From a Maine House, a National Foreclosure Freeze, NYT, 14.10.2010, http://www.nytimes.com/2010/10/15/business/15maine.html

The Foreclosure Crises

October 14, 2010
The New York Times

Attorneys general in all 50 states have pledged a coordinated investigation into chaotic foreclosure practices by some of the nation’s largest banks. The Department of Justice is also looking into what happened, while some lawmakers are now calling for a nationwide moratorium on all foreclosures until the legal questions are settled. The Obama administration is insisting such a broad delay would hurt the economy.

There is plenty to worry about. But amid all this roiling, neither Congress nor the administration has found a way to address an even more fundamental problem: What government and banks need to do to finally stanch the flood of foreclosures wreaking havoc on the lives of millions of Americans and threatening the recovery.

According to the latest figures, 4.2 million loans are now in or near foreclosure. An estimated 3.5 million homes will be lost by the end of 2012, on top of 6.2 million already lost. Yet the administration’s main antiforeclosure effort has modified fewer than 500,000 loans in about 18 months.

Judges and investigators need to be unflinching in their inquiries into the paperwork debacle and must hold the banks fully accountable. What we’ve already learned is chilling — and suggests that bankers have learned little since the 2008 implosion and taxpayer bailout.

Major banks — including Bank of America, JPMorgan Chase and Ally Bank, which is owned by GMAC — have suspended foreclosures after admitting they had submitted tens of thousands of affidavits to the courts, attesting to facts about the defaulted loans that had not been verified by the bank employees signing the documents.

The Times’s Eric Dash and Nelson D. Schwartz reported in Thursday’s paper that in their rush to process foreclosures, banks hired inexperienced workers (“Burger King kids” as one former banker derided them) who barely knew what a mortgage was.

The problems may go far deeper. The banks’ procedures for keeping track of mortgages may also be seriously flawed. If there are problems in establishing a chain of title, it could — again — call into question the value of mortgage-backed securities. That would mean litigation, which would harm bank profits, and in a worst case, risk another economywide disruption.

As important, and dismaying, as all this is, it must not obscure the underlying problem: potentially millions of foreclosures that could and should be avoided.

A mandated, national moratorium may be unavoidable if banks resume a rush to foreclosure before all the legal issues are resolved. So far, there is no sign of that. A moratorium won’t address the fundamental problem that banks have not competently and aggressively pursued ways to keep more financially viable Americans in their homes.

The White House may well be right that a moratorium would further rattle investors. But the economy is not going to rebound until the housing mess is resolved. What is needed, urgently, are laws and policies to give homeowners a better shot at reworking their loans so they can keep making payments and avoid foreclosure.

Throughout this crisis, the Obama administration has been far more worried about protecting the banks than protecting homeowners. The big weaknesses in the administration’s main antiforeclosure policy is that participation by lenders is voluntary and homeowners have little leverage to get better terms — especially reductions in loan principal when the mortgage balance is greater than the value of the home.

One way to change that would be for Congress to reform the bankruptcy law so troubled borrowers could turn to the courts for a loan modification if banks were uncooperative. Homeowners also need a simple process to challenge a bank if it uses incorrect information to deny a modification and justify a foreclosure, or if it refuses to divulge the facts and figures it used.

The administration also needs to alter refinancing guidelines so that many borrowers who are current in their payments are eligible to refinance to lower rates, even if their houses have declined in value. It needs to provide more legal aid to homeowners, using money authorized by Congress.

This latest foreclosure crisis should settle one issue once and for all. The banks that got us into this mess can’t be trusted to get us out of it. The administration and Congress need to act.

    The Foreclosure Crises, NYT, 14.10.2010, http://www.nytimes.com/2010/10/15/opinion/15fri1.html

Across the U.S., Long Recovery Looks Like Recession

October 12, 2010
The New York Times
By MICHAEL POWELL and MOTOKO RICH

This is not what a recovery is supposed to look like.

In Atlanta, the Bank of America tower, the tallest in the Southeast, is nearly a fifth vacant, and bank officials just wrestled a rent cut from the developer. In Cherry Hill, N.J., 10 percent of the houses on the market are so-called short sales, in which sellers ask for less than they owe lenders. And in Arizona, in sun-blasted desert subdivisions, owners speak of hours cut, jobs lost and meals at soup kitchens.

Less than a month before November elections, the United States is mired in a grim New Normal that could last for years. That has policy makers, particularly the Federal Reserve, considering a range of ever more extreme measures, as noted in the minutes of its last meeting, released Tuesday. Call it recession or recovery, for tens of millions of Americans, there’s little difference.

Born of a record financial collapse, this recession has been more severe than any since the Great Depression and has left an enormous oversupply of houses and office buildings and crippling debt. The decision last week by leading mortgage lenders to freeze foreclosures, and calls for a national moratorium, could cast a long shadow of uncertainty over banks and the housing market. Put simply, the national economy has fallen so far that it could take years to climb back.

The math yields somber conclusions, with implications not just for this autumn’s elections but also — barring a policy surprise or economic upturn — for 2012 as well:

¶At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession. And that doesn’t even account for five million or six million jobs needed in that time to keep pace with an expanding population. Even top Obama officials concede the unemployment rate could climb higher still.

¶Median house prices have dropped 20 percent since 2005. Given an inflation rate of about 2 percent — a common forecast — it would take 13 years for housing prices to climb back to their peak, according to Allen L. Sinai, chief global economist at the consulting firm Decision Economics.

¶Commercial vacancies are soaring, and it could take a decade to absorb the excess in many of the largest cities. The vacancy rate, as of the end of June, stands at 21.4 percent in Phoenix, 19.7 percent in Las Vegas, 18.3 in Dallas/Fort Worth and 17.3 percent in Atlanta, in each case higher than last year, according to the data firm CoStar Group.

Demand is inert. Consumer confidence has tumbled as many are afraid or unable to spend. Families are still paying off — or walking away from — debt. Mark Zandi, chief economist of Moody’s Analytics, estimates it will be the end of 2011 before the amount of income that households pay in interest recedes to levels seen before the run-up. Credit card delinquencies are rising.

“No wonder Americans are pessimistic and unhappy,” said Mr. Sinai. “The only way we are going to get in gear is to face up to the reality that we are entering a period of austerity.”

This dreary accounting should not suggest a nation without strengths. Unemployment rates have come down from their peaks in swaths of the United States, from Vermont to Minnesota to Wisconsin. Port traffic has increased, and employers have created an average of 68,111 jobs a month this year.

After plummeting in 2009, the stock market has spiraled up, buoying retirement accounts and perhaps the spirits of middle-class Americans. As a measure of economic health, though, that gain is overstated. Robert Reich, the former labor secretary, notes that the most profitable companies in the domestic stock indexes generate about 40 percent of their revenue from abroad.

Few doubt the American economy remains capable of electrifying growth, but few expect that any time soon. “We still have a lot of strengths, from a culture of entrepreneurship and venture capitalism, to flexible labor markets and attracting immigrants,” said Barry Eichengreen, an economist at the University of California, Berkeley. “But we’re going to be living with the overhang of our financial and debt problems for a long, long time to come.”

New shocks could push the nation into another recession or deflation. “We are in a situation where our vulnerability to any new problem is great,” said Carmen M. Reinhart, a professor of economics at the University of Maryland.

So troubles ripple outward, as lost jobs, unsold houses and empty offices weigh down the economy and upend lives. Struggles in Arizona, New Jersey and Georgia echo broadly.

 

Florence, Ariz.

In 2005, Arizona ranked, as usual, second nationally in job growth behind Nevada, its economy predicated on growth. The snowbirds came and construction boomed and land stretched endless and cheap. Then it stopped.

This year, Arizona ranks 42nd in job growth. It has lost 287,000 jobs since the recession began, and the fall has been calamitous.

Renee Wheaton, 38, sits in an old golf cart on the corner of Tangerine and Barley Roads in her subdivision in the desert, an hour south of Phoenix. Her next-door neighbor, an engineer, just lost his job. The man across the street is unemployed.

Her family is not doing so well either. Her husband’s hours have been cut by 15 percent, leaving her family of five behind on water and credit card bills — more or less on everything except the house and car payment. She teaches art, but that’s not much in demand.

“I say to myself ‘This can’t be happening to us: We saved, we worked hard and we’re under tremendous stress,’ ” Ms. Wheaton says. “My husband is a very hard-working man but for the first time, he’s having real trouble.”

Arizona’s poverty rate has jumped to 19.6 percent, the second-highest in the nation after Mississippi. The Association of Arizona Food Banks says demand has nearly doubled in the last 18 months.

Elliott D. Pollack, one of Arizona’s foremost economic forecasters, said: “You had an implosion of every sector needed to survive. That’s not going to get better fast.”

To wander exurban Pinal County, which is where Florence is located, is to find that the unemployment rate tells just half the story. Everywhere, subdivisions sit in the desert, some half-built and some dreamy wisps, like the emerald green putting green sitting amid acres of scrub and cacti. Signs offer discounts, distress sales and rent with the first and second month free.

Discounts do not help if your income is cut in half. Construction workers speak of stringing together 20-hour weeks with odd jobs, and a 45-year-old woman who was a real estate agent talks of her job making minimum wage bathing elderly patients. Many live close to the poverty line, without the conveniences they once took for granted. Pinal’s unemployment rate, like that of Arizona, stands at 9.7 percent, but state officials say that the real rate rises closer to 20 percent when part-timers and those who have stopped looking for work are added in.

At an elementary school near Ms. Wheaton’s home, an expansion of the school’s water supply was under way until thieves sneaked in at night and tore the copper pipes out of the ground to sell for scrap.

Five miles southwest, in Coolidge, a desert town within view of the distant Superstition Mountains, demand has tripled at Tom Hunt’s food pantry. Some days he runs out.

Henry Alejandrez, 60, is a roofer who migrated from Texas looking for work. “It’s gotten real bad,” he says. “I’m a citizen, and you’re lucky if you get minimum wage.”

Mary Sepeda, his sister, nods. She used to drive two hours to clean newly constructed homes before they were sold. That job evaporated with the housing market. (Arizona issued 62,500 housing permits several years ago; it gave out 8,400 last year.)

“It’s getting crazy,” she says, holding up a white plastic bag of pantry food. “How does this end?”

You put that question to Mr. Pollack, the forecaster. “We won’t recover until we absorb 80,000 empty houses and office buildings and people can borrow again,” he says.

When will that be?

“I’m forecasting recovery by 2013 to 2015,” he says.

 

Cherry Hill, N.J.

The housing market in this bedroom community just across the border from Philadelphia never leapt to the frenzied heights of Miami Beach or Las Vegas. But even if foreclosure notices are not tacked to every other door, a malaise has settled over the market. Home prices have fallen by 16 percent since 2006, and houses now take twice as long to sell as they did five years ago.

That’s enough to inflict pain on homeowners who need to sell because of a job loss or drop in income. Some are being forced to get rid of their houses in short sales, asking less than they owe on a mortgage. As of last week, 10 percent of all listings in this well-tended suburb were being offered as short sales.

Chrysanthemums bloomed in boxes on the porch of one of those homes as a real estate broker unlocked the front door. In the kitchen, children’s chores were listed neatly on an erasable white board. Dinner simmered in a Crock-Pot on the counter.

There were few signs of the financial distress that prompted the owners to put their four-bedroom colonial on the market for less than they paid five years ago.

The colonial’s owners, James and Patricia Furrow, bought near the top of the market in 2005 for $289,900. Mr. Furrow, 48, retired in July after 26 years as a corrections officer and supplements his pension with work as a handyman. But his income is spotty, and his wife, who works in a school cafeteria, does not earn enough to cover the mortgage on the house where they live with their three children.

They have already missed a payment; they want to sell the house in hopes their lender will forgive the shortfall between their loan balance and the lower sale price. They are asking $279,900.

“When we did buy, the market was still moving pretty good,” said Mr. Furrow. “Then it got to the point where people said it is not going to last. And of course it didn’t last.”

Some of the homes being offered at distressed prices are dragging down prices for less troubled homeowners who hope to sell. And with foreclosures now in disarray, the market could be further weakened. “Even someone who is trying to sell a normal, well-maintained house is at the mercy of these low prices,” said Walter Bud Crane, an agent with Re/Max of Cherry Hill.

So the houses sit, awaiting offers that rarely materialize. According to Mr. Crane, the average number of days that homes sit on the market has nearly doubled, to 62 this year from 32 in 2005. Buyers are chary, not sure if their jobs are secure. Open houses draw sparse crowds.

In Camden County, where Cherry Hill sits, unemployment is near 10 percent. Several large employers have closed or conducted huge layoffs, and others have pruned hours. With Gov. Chris Christie reining in spending, government workers are jittery.

Real estate agents say it has rarely been a better time to buy: interest rates are at record lows, house prices have fallen and the selection is large.

Tara Stewart-Becker, a 28-year-old financial services manager, said she and her husband would love to buy a sprawling fixer-upper just three blocks from the narrow colonial they purchased four years ago in Riverton, which backs onto the Delaware River.

But a bad kitchen flood and a loan to pay for repairs has left Ms. Becker and her husband, Eric, owing more on their mortgage than the house is currently worth. Even though the couple make far more money than they did when they bought their house and could afford a larger loan and renovations, they cannot sell.

“I would gladly take a new mortgage and stimulate the economy for the rest of my life,” Ms. Becker said.

“Unfortunately, there isn’t anything that a government or a bank can do,” she added. “You just have to settle for less and wait.”

 

Atlanta

Long fast-growing, no-holds-barred Atlanta has burned to the ground before, figuratively and in reality, and each time it was a phoenix rising. But this recession has cut deeper than any since the Great Depression and left Atlanta’s commercial and high-end condo real estate in an economic coma.

Over all, assuming a robust growth rate, industry leaders say it could take 12 years for Atlanta to absorb excess commercial space.

“That one — see it?” Alan Wexler points to a gleaming blue tower as he drives. “A Chicago bank took it over six months ago. Sold at a 40 percent discount.”

“And over there” — he juts his chin at a boarded-up hotel topped by a Chick-fil-A fast-food restaurant crown. “That was going to be a condo. They just shut it down and walked away.”

Mr. Wexler, a wiry and peripatetic real estate data analyst, describes it all on a drive down Peachtree Road, Atlanta’s posh commercial spine.

He starts in the Buckhead neighborhood, which has more than two million square feet of vacant commercial space. A billboard outside one discounted condo tower promises “New Pricing from the $290s!” There are towers half-empty and towers in receivership. Office buildings that once sold for $85 million now retail for $35 million.

Approaching downtown, Mr. Wexler hits the brakes and points to an older, white marble building. “See that one? It’s the Fed Reserve. That’s where they sit, look, sweat and wonder: How did we get into this mess?”

That’s a question much on the minds and lips of residents.

The commercial vacancy rate in Buckhead is near 20 percent, and the Atlanta region has added jobs only at the low end.

Mike Alexander, research division chief for the Atlanta Regional Commission, posed the question: “When do we start to add premium jobs again?”

Lawrence L. Gellerstedt III, chief executive of Cousins Properties, sits in an office high atop an elegant Philip Johnson tower, with a grand view of the Atlanta commercial corridor running north. He does not see improvement on the horizon.

“We’re all wondering what gets the economy producing jobs and growth again,” he says. “Atlanta always was the fair-haired child of real estate growth and now, it’s ‘O.K., poster boy, you’re getting yours.’ ”

Small banks are a particular disaster, 43 having gone under in Georgia since 2008. (Federal regulators closed 129 nationally this year, up from 25 last year.) Real estate was the beginning, the middle and the end of the troubles. In one deal, dozens of Atlanta banks invested in Merrill Ranch, a 4,508-acre tract of desert south of Phoenix.

The deal imploded and took a lot of banks with it.

“No one was demanding documents or reading the fine print, and mortgage banks were fat and happy,” recalls John Little, a developer. “Well, that train couldn’t keep running.”

He has a ringside seat on this debacle, as he sits in the office of a handsome condo complex he built in west Atlanta. He faced price discounts so deep that he decided to rent it instead.

Nationwide banks have no interest in lending to local developers, and the regional banks are desperate for cash and calling in their loans.

Mr. Little got lucky; he bought out his loan and kept his property. “Most of my generation of builders has gone under,” he said. “It’s still spiraling out of control.”

    Across the U.S., Long Recovery Looks Like Recession, NYT, 12.10.2010, http://www.nytimes.com/2010/10/13/business/economy/13econ.html

Ohio Attorney General Fights Against Wall Street

October 11, 2010
The New York Times
By MICHAEL POWELL

COLUMBUS, Ohio — Back East, at the corner of Broad and Wall Streets, the view is swell. The Dow is soaring, and bankers look pleased.

But here on East Broad Street, the mood is gloomier. At least 90,000 residential and commercial foreclosure notices will be filed in Ohio this year. Pension funds for teachers, secretaries and janitors have suffered grave losses. And multitudes of the unemployed in Ohio now speak of turning to prayer.

Ohio’s attorney general, Richard Cordray, might be seen as their pinstriped avenger.

“There’s a belief here that Wall Street is a fixed casino and it’s back in business, and we’re left holding the bag,” said Mr. Cordray, whose office overlooks East Broad. “It’s important for us to show we’ll go after a company that does wrong.”

Mr. Cordray in two years in office has demonstrated a willingness to sue early and often, filing lawsuits against global financial houses, rating agencies, subprime lenders and foreclosure scammers. He has wrested about $2 billion so far, a string of gilded pelts: a $475 million Merrill Lynch settlement, $400 million from Marsh & McLennan and $725 million from the American International Group.

Last week, he filed suit against GMAC Mortgage, accusing the loan servicer of filing fraudulent affidavits in hundreds of Ohio foreclosures.

His office has returned money to investors, pension funds, schools and cities. And he has directed millions to agencies fighting foreclosure.

“We see what Washington doesn’t: the houses lying vacant, the eyesore stripped for copper piping with mattresses out back,” Mr. Cordray says. “We bailed out irresponsible banks, but we forgot about everyone else.”

It speaks to this political age that such words are more rarely heard from federal regulators, who walk quietly and carry big bailout checks. Instead state attorneys general, in this case, a sandy-haired 51-year-old Democrat who sits about 400 miles from Washington, are giving full throat to popular outrage.

If Eliot Spitzer, the former New York attorney general, was the prototype of this breed, a handful of current ones, like Mr. Cordray, Martha Coakley of Massachusetts, Lisa Madigan of Illinois, Tom Miller of Iowa and Roy Cooper of North Carolina, lay claim to his mantle. Like recessionary scouts, they spot trouble, like a rapacious foreclosure-rescue operator, a predatory credit card company or a financial firm draining a pension fund.

Ms. Coakley secured millions of dollars in mortgage modifications from Countrywide Financial and reached a $102 million settlement with Morgan Stanley over its role in financing the subprime loans that fed the housing crash in Massachusetts.

“We were the first to go after predatory loans — we’re not waiting for federal agencies to act,” Ms. Coakley said.

Some express skepticism, suggesting that such lawsuits are emotionally pleasing but economically destructive. Former Senator Michael DeWine, a Republican who is running against Mr. Cordray, a Democrat, in the November election, has implied that Mr. Cordray wields an antibusiness cudgel. Better to rely on federal regulators, others argue, to constrain global corporations.

That strikes James E. Tierney, director of the National State Attorneys General Program at Columbia, as a bit beside the point.

“Is state action as effective as a federal regulator going after these companies? Absolutely not,” says Mr. Tierney, a former state attorney general for Maine. “But when regulators are too worried about giving offense, there’s no reason an enterprising attorney general can’t go in there,”

Born in Grove City, Ohio, Mr. Cordray was educated at Michigan State, Oxford and the University of Chicago Law School. A Supreme Court clerk, he also argued cases before the court. In 1987, he enjoyed a run as a five-time winner on the television show “Jeopardy!”

Somewhere along the way, he hankered for more. His father ran a program for mentally disabled people; his mother, a social worker, founded an organization of foster grandparents; and he wanted to enter the public sphere. Mr. Cordray began running for office.

His yearning often went unrequited; voters, he noted with a hike of the eyebrows, elected him state representative but rejected his run for Congress and an early attempt at state attorney general.

He shrugs.

“I really got my head pounded in over the years in politics,” Mr. Cordray says. “My wife thought I was nuts.”

Eventually, he downsized his ambitions, and ran successfully for Franklin County treasurer and later for state treasurer. And in 2008, he won a special election for attorney general.

Mr. Cordray is no William Jennings Bryan inveighing against the evils of monopoly capital. He can be eloquent about corporate misbehavior, in an eyes-downcast and soft-spoken fashion. (His language reads hotter on the page than it sounds in person.)

He is, however, tapping a populist tradition in Ohio. This is where politicians mounted challenges to the Standard Oil monopoly of John Rockefeller and where Senator John Sherman led a late 19th-century campaign to pass the Sherman Antitrust Act, which was the first law to require the federal government to investigate companies suspected of running cartels and monopolies.

Mr. Cordray carefully describes his allegiance to capitalism, although he says the financial crisis should explode forever the efficient-markets theory, popular with economists, that the best market is a self-correcting one. (Adam Smith’s “Wealth of Nations” shares space on his office bookshelf with books by the urbane Keynesian John Kenneth Galbraith.)

“The notion that banks will just get things right over time is perhaps true,” Mr. Cordray says. “But over what time period, and at what terrible cost to the individual American?”

Certainly, he has not minced words in pursuing a steady stream of cases against corporations.

He accused Marsh & McLennan of conspiring to eliminate competition in the insurance business by generating fictitious quotes. He denounced three credit rating firms, Fitch Ratings, Moody’s Investor Services and Standard & Poor’s, for giving inflated ratings to packages of troubled mortgages put together by the big investment houses. He says that Ohio pension funds lost close to half a billion dollars by investing in those triple-A rated securities.

And last October, he accused Bank of America officials of concealing critical facts in the acquisition of Merrill Lynch, even as that firm careened toward insolvency. Top bankers, he said, had not come remotely clean about the extent of the losses at Merrill and its bonuses.

The lawsuit against Bank of America was the first of its kind, although Mr. Cordray’s actions drew rather less press than a lawsuit filed months later by Attorney General Andrew M. Cuomo of New York. Mr. Cuomo, whose skill with the tactical leak, news release and the lawsuit is considerable, tends not to work closely with his fellow state attorneys general, say two officials from states other than Ohio.

Attorneys general are perhaps more successful at extracting large sums of money than in changing corporate behavior. A Goldman Sachs or Marsh & McLennan, to this view, tends to see such settlements as a cost of doing business.

“The settlements are large, but the changes in behavior don’t seem to be that large,” said Daniel C. Richman, a former federal prosecutor and professor at Columbia Law School. “These targets have massive amounts of money to pay off and continue on their merry way.”

Raise this criticism to Mr. Cordray and he nods in agreement.

“In an ideal world, if the S.E.C. had done its job, that would be much better,” he said. “Our settlements make up for the losses fractionally.”

As it happens, Mr. Cordray now faces a more existential threat. Legal challenges to corporate misbehavior are not proven electoral gold. This year, Ms. Coakley, a Democrat, fell to Republican Scott Brown in a race to fill the Senate seat of Edward M. Kennedy.

And polls show Mr. Cordray running behind in his race with Mr. DeWine. He’s no natural glad-hander — he apologizes when he realizes he has automatically extended his hand at a luncheon. More paradoxical, he finds himself at risk of being identified with “them,” which is to say the establishment that Ohio residents view as having failed them.

Again, he shrugs. He is not inclined to blame voters for his troubles.

“Politicians are kind of like adolescents, always looking in the mirror and assuming that’s what people see,” he says. “But there’s a great anxiety out there, a great unease about our future. Most people are hurting, and they don’t have the time to pay attention to us.”

    Ohio Attorney General Fights Against Wall Street, NYT, 11.10.2010, http://www.nytimes.com/2010/10/12/business/12avenge.html

A Foreclosure Tightrope for Democrats

October 11, 2010
The New York Times
By BINYAMIN APPELBAUM

WASHINGTON — The swelling outcry over fast-and-loose foreclosures has thrust the Obama administration back into the uncomfortable position of sheltering the banking industry from the demands of an angry public.

While senior Congressional Democrats join the calls for a national moratorium on foreclosures, the White House once again is arguing against punishing the industry, just as it did in 2009 amid the outcry over the unbreakable habit of paying large bonuses.

“Irresponsible banks need to be held accountable, but if we have not found a problem with a bank’s process we do not believe that we should impose a moratorium where that can hurt the market and hurt individual buyers,” said Shaun Donovan, secretary of Housing and Urban Development.

The administration’s basic logic has not changed since it took office in the depths of the financial crisis: Hitting the financial industry, officials argue in private and in public, hurts the broader economy. A moratorium on foreclosures may provide short-term political satisfaction in an overheated election climate, but the administration fears it will only delay the inevitable and necessary process of forcing many Americans out of homes they cannot afford.

The intramural argument among Democrats also reflects the political divisions between an administration with two years to improve the economy, and members of Congress facing an angry electorate in less than a month.

The White House can focus on the eventual economic benefits of foreclosures. But Senator Harry Reid, the Nevada Democrat battling to salvage re-election in the state with the nation’s highest foreclosure rate, cannot. The result is that Mr. Reid favors a moratorium, and the White House finds itself in an uncomfortable moment of agreement with his Republican opponents.

The latest foreclosure firestorm flared in mid-September when GMAC, a major mortgage lender, announced that it was suspending home seizures in 23 states in light of revelations that the company had not been taking basic steps to double-check and demonstrate its right to seize particular homes.

Bank of America leapfrogged that position last week, announcing that it would stop pursuing foreclosures in all 50 states while reviewing its procedures.

That prompted calls from a wide range of politicians for a national moratorium on all foreclosures, including from Mr. Reid, who released a letter to other lenders urging the rest of the industry to follow Bank of America’s example.

The industry has argued in response that problems should be addressed without halting all foreclosures, because a moratorium would damage the economy. “It must be recognized that the mortgage market, investors and the health of the economy are all interrelated,” Tim Ryan, president of the Securities Industry and Financial Markets Association, said Monday.

The White House shares those concerns, and it has tried to defuse the issue by arguing that problems can be addressed without imposing a moratorium.

“There are, in fact, valid foreclosures that probably should go forward,” David Axelrod, a senior White House adviser, said Sunday on CBS.

Administration officials argue in part that the problems that have emerged in recent weeks do not change the fact that lenders are seeking to foreclose on people who borrowed and then failed to repay. Most of the identified problems are best described as technicalities, not miscarriages of justice.

Advocates for homeowners, however, say that the pattern of sloppiness allows and encourages more serious abuses. They point to a growing number of documented cases in which lenders mistakenly seized homes.

Bank of America apologized last month for foreclosing on a home in Fort Lauderdale, Fla. The homeowner didn’t even have a mortgage. The bank had failed to notice that the previous owner had repaid the mortgage loan.

Last year the company’s contractors entered the home of a Pittsburgh woman, changed the locks, cut off the utilities and seized her pet parrot. The bank later acknowledged that the woman had not missed any mortgage payments.

Other companies including Citigroup and JPMorgan Chase also have apologized for mistaken attempts to seize homes they didn’t own.

Dozens of people have sued lenders charging that their homes were foreclosed even after the lender agreed to a loan modification or repayment plan.

“We need to end the voluntary reliance on the industry to do the right thing with respect to homeowners,” said John Taylor, chief executive of the National Community Reinvestment Coalition.

Mr. Taylor noted that foreclosures also damaged the economy.

The administration’s defense of a process that is throwing many Americans out of their homes echoes its tightrope walk in the spring of 2009, when public anger over Wall Street pay was at a boiling point. The president excoriated the industry in public interviews, and met with executives to caution against large paydays and to press for increased lending. But the administration resisted legislation to force changes in either area.

President Obama told executives at the time that his administration was the bulwark between their industry and the public’s anger.

Now the administration is again seeking to demonstrate its concern over industry practices without taking steps that it fears will damage the economy.

Mr. Obama last week decided not to sign a bill requiring many states to lower their standards for verifying the legitimacy of notarized documents. Mr. Axelrod said that the legislation, which drew fire from state officials after sailing through Congress, would have “made it easier to make mistakes” in foreclosures.

Mr. Donovan said that the problems identified so far were serious and widespread, and that it was necessary for companies including GMAC and Bank of America to suspend foreclosures while they addressed those problems.

He said that his agency and other parts of the government, including banking regulators, were scrutinizing other mortgage companies for evidence of problems.

“We are doing everything we can through a range of enforcement powers to make sure that we find where there are problems,” he said. “We’re going to act very swiftly and very strongly to protect homeowners.”

But Mr. Donovan said it did not make sense to act against companies absent evidence of problems. He said such a step would hurt not just the companies, but also people waiting to buy the foreclosed homes.

    A Foreclosure Tightrope for Democrats, NYT, 11.10.2010, http://www.nytimes.com/2010/10/12/business/economy/12foreclose.html

Junk Bonds Are Back on Top

October 7, 2010
The New York Times
By NELSON D. SCHWARTZ

Jim Casey remembers the fast times when Michael R. Milken ruled Wall Street as the billionaire king of junk bonds.

But now even those heady days of the 1980s, when Mr. Milken played kingmaker and rainmaker in the great takeover wars of that era, seem a little tame.

The market for high-yield securities, as junk bonds are more politely known in the business, is booming as never before. And Mr. Casey, one of today’s junk-bond kings, is in the midst of a run unlike anything Mr. Milken saw from his X-shaped trading desk in Beverly Hills.

Like many blue-chip corporations, companies with less-than-sterling credit are rushing to sell bonds and take advantage of low interest rates. In the first nine months of this year, a record-breaking $275 billion of junk bonds have been issued worldwide, up from $163 billion during the period last year, according to the financial data provider Dealogic, a research company.

“Other than 1988 at Drexel, this is the best time I’ve ever seen, and it’s getting better,” said Mr. Casey, who worked at Drexel Burnham Lambert with Mr. Milken and now runs the junk-bond business at JPMorgan Chase. “In high-yield, it’s undeniable that these are the best years that anyone has seen in their career.”

Of course the Milken era of the Predators’ Ball ended with the collapse of the mighty Drexel and the market it virtually invented. Mr. Milken today is a philanthropist and businessman, after spending two years in jail.

While no one foresees a junk-bond bust on the Drexel scale, the explosive growth of the market for risky corporate bonds has some people worrying. Interest rates have fallen so far — the yield on two-year United States Treasury securities sank to a record low of 0.36 percent on Thursday — that investors are turning to riskier and riskier securities for relatively high yields. The typical junk bond pays an annual rate of 7.5 percent.

Wall Street is happy to oblige. As one veteran high-yield banker put it: “You need to put in the dish what the dog wants to eat.”

A similar serving of low rates and high risk has intoxicated Wall Street before. After the dot-com bubble of the 1990s and the housing and credit bubble of the 2000s, analysts worry that investors and bond underwriters are getting careless again. That is particularly true given the weak economy, which is straining many marginal companies, including some that are selling junk bonds.

“We’re starting to see the market get ahead of itself,” said Diane Vazza, head of global fixed-income research at Standard & Poor’s.

Borrowers are increasingly able to raise money on easy terms that recall the frothy days before the financial crisis of 2008, Ms. Vazza said. In the 1980s, junk bonds were often used to finance corporate takeovers. Today most companies are selling them to refinance existing debt at lower rates. Others are selling junk bonds to pay dividends to private equity firms that acquired the companies before the financial collapse.

“These deals are getting done more easily than they should, given that the economy is not on solid ground,” Ms. Vazza said.

Junk-bond veterans like Mr. Casey insist Wall Street is being careful this time.

“I don’t think there’s any question that the risk profile of the companies has gone up, but things are not out of hand,” he said. Defaults on junk bonds are the lowest ever, he added, and about 75 percent of the deals are aimed at refinancing, rather than taking on additional debt.

Risky or not, the new kings of junk are walking a little taller. “It’s improved the status of leveraged finance,” said David Flannery, a lean, intense 40-year-old who heads up high-yield lending at Bank of America.

That is a shift from the traditional hierarchy on Wall Street, which favored the Ivy League crowd in investment banking and equities, not the scrappy types who populated the junk-bond desks.

“You need an edge — you deal with very smart, very aggressive players,” said Richard Zogheb, a seasoned high-yield player and now co-head of debt and equity capital markets at Citigroup. “If you don’t push back and you don’t display confidence, you get run over.”

Mr. Casey studied accounting as an undergraduate at Bentley College outside Boston, but he did not want to follow that route. “I found accounting to be incredibly boring, and I wanted to work in an area that was much more vibrant,” he said.

Vibrant is certainly one way of describing Drexel when Mr. Casey joined in the summer of 1987. “It was a great place; we had 70 to 80 percent market share,” he recalled. “At Drexel, you didn’t pitch business. The phone rang and you picked it up.”

While junk may be hot again, it is a very different business today. Drexel’s near monopoly is long gone, and as befits a junkyard, it is the scene of a fierce struggle for market share. Unlike investment banking or advising on mergers and acquisitions, where white-shoe firms like Goldman Sachs or Morgan Stanley have first call on business with more traditional clients, a few hundredths of a percentage point in underwriting fees can make all the difference in securing a deal.

“This is a rough and tumble business,” Mr. Casey said. “The smaller the margin, the tougher the fight. If you get more margin, you can be more genteel about it.”

Often that means Mr. Zogheb, Mr. Casey and Mr. Flannery are facing off. “We know one another, and we compete aggressively,” Mr. Flannery said. “Our clients are sophisticated, and they know how to feed that competition.”

Besides having the ability to obtain capital cheaply, Bank of America and JPMorgan are also benefiting from the after-effects of the financial crisis.

JPMorgan is just about the only big financial institution that emerged with its reputation and finances intact, a drawing card with clients. Bank of America is benefiting from its acquisition of Merrill Lynch, a deal that turned two middle-tier players into one junk powerhouse. Citigroup, once a bulge-bracket player, has fallen to No. 4, with Credit Suisse taking third place so far this year, according to Dealogic.

“After the strong headwinds of the last few years, we have great momentum in our debt underwriting businesses in 2010,” said Mr. Zogheb of Citigroup. “We will not sacrifice revenues or take undue risk in order to achieve a No. 1 league table position.”

As in any street fight, there is plenty of trash talk: Bank of America, the whispers go, is cutting fees to gain business. JPMorgan, the gossip goes, is bullying clients and threatening to pull back on other loans if they go elsewhere for junk-bond offerings. And Citigroup is supposedly reeling from deep staff cuts that came after the bank’s broader problems in 2008 and 2009.

All three banks insist the scuttlebutt is baseless.

Whatever the case, Mr. Flannery’s team at Bank of America surprised the competition earlier this year when it unseated JPMorgan, which had been the top global underwriter of high-yield debt since 2005.

So far Bank of America has managed to hold on — barely. In the first nine months of the year, Bank of America led $29.61 billion worth of high-yield offerings globally, compared with $28.95 billion for JPMorgan.

It might not seem like much of a difference, but neither bank is giving ground.

“We’re a clear No. 1 any way you slice it in high yield,” said Mr. Flannery at Bank of America.

With only a few months left in 2010, Mr. Casey promises JPMorgan will be able to close the gap. “We expect to be on top for the year,” he said.

    Junk Bonds Are Back on Top, NYT, 7.10.2010, http://www.nytimes.com/2010/10/08/business/08bond.html

The End of the Tunnel

October 7, 2010
The New York Times
By PAUL KRUGMAN

The Erie Canal. Hoover Dam. The Interstate Highway System. Visionary public projects are part of the American tradition, and have been a major driver of our economic development.

And right now, by any rational calculation, would be an especially good time to improve the nation’s infrastructure. We have the need: our roads, our rail lines, our water and sewer systems are antiquated and increasingly inadequate. We have the resources: a million-and-a-half construction workers are sitting idle, and putting them to work would help the economy as a whole recover from its slump. And the price is right: with interest rates on federal debt at near-record lows, there has never been a better time to borrow for long-term investment.

But American politics these days is anything but rational. Republicans bitterly opposed even the modest infrastructure spending contained in the Obama stimulus plan. And, on Thursday, Chris Christie, the governor of New Jersey, canceled America’s most important current public works project, the long-planned and much-needed second rail tunnel under the Hudson River.

It was a destructive and incredibly foolish decision on multiple levels. But it shouldn’t have been all that surprising. We are no longer the nation that used to amaze the world with its visionary projects. We have become, instead, a nation whose politicians seem to compete over who can show the least vision, the least concern about the future and the greatest willingness to pander to short-term, narrow-minded selfishness.

So, about that tunnel: with almost 1,200 people per square mile, New Jersey is the most densely populated state in America, more densely populated than any major European nation. Add in the fact that many residents work in New York, and you have a state that can’t function without adequate public transportation. There just isn’t enough space for everyone to drive to work.

But right now there’s just one century-old rail tunnel linking New Jersey and New York — and it’s running close to capacity. The need for another tunnel couldn’t be more obvious.

So last year the project began. Of the $8.7 billion in planned funding, less than a third was to come from the State of New Jersey; the rest would come, in roughly equal amounts, from the independent Port Authority of New York and New Jersey and from the federal government. Even if costs were to rise substantially, as they often do on big projects, it was a very good deal for the state.

But Mr. Christie killed it anyway.

News reports suggest that his immediate goal was to shift funds to local road projects and existing rail repairs. There were, however, much better ways to raise those funds, such as an increase in the state’s relatively low gasoline taxes — and bear in mind that whatever motorists gain from low gas taxes will be at least partly undone by pain from the canceled project in the form of growing congestion and traffic delays. But, no, in modern America, no tax increase can ever be justified, for any reason.

So this was a terrible, shortsighted move from New Jersey’s point of view. But that’s not the whole cost. Canceling the tunnel was also a blow to national hopes of recovery, part of a pattern of penny-pinching that has played a large role in our continuing economic stagnation.

When people ask why the Obama stimulus didn’t accomplish more, one good response is to ask, what stimulus? Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance, federal spending has risen only modestly — and this rise has been largely offset by cutbacks at the state and local level. Many of these cuts were forced by Congress, which has refused to approve adequate aid to the states. But as Mr. Christie is demonstrating, local politicians are also doing their part.

And the ideology that has led Mr. Christie to undermine his state’s future is, of course, the same ideology that has led almost all Republicans and some Democrats to stand in the way of any meaningful action to revive the nation’s economy. Worse yet, next month’s election seems likely to reward Republicans for their obstructionism.

So here’s how you should think about the decision to kill the tunnel: It’s a terrible thing in itself, but, beyond that, it’s a perfect symbol of how America has lost its way. By refusing to pay for essential investment, politicians are both perpetuating unemployment and sacrificing long-run growth. And why not? After all, this seems to be a winning electoral strategy. All vision of a better future seems to have been lost, replaced with a refusal to look beyond the narrowest, most shortsighted notion of self-interest.

I wish I could say something optimistic at this point. But at least for now, I don’t see any light at the end of this tunnel.

    The End of the Tunnel, NYT, 7.10.2010,http://www.nytimes.com/2010/10/08/opinion/08krugman.html

Fiscal Woes Deepening for Cities, Report Says

October 6, 2010
The New York Times
By MICHAEL COOPER

The nation’s cities are in their worst fiscal shape in at least a quarter of a century and have probably not yet hit the bottom of their slide, according to a report released on Wednesday.

The report, by the National League of Cities, found that many cities, which are in their fourth straight year of declining revenues, are only now beginning to see lower property values translate into lower property tax collections, which are the backbone of many city budgets.

It can take several years for city assessors to catch up to real estate market conditions, and this year, for the first time since the housing bubble burst, cities are projecting a 1.8 percent decrease in property tax collections.

With sales tax collections still down, and unemployment and stagnant salaries taking a toll on cities that rely on income-tax revenues, cities are seeing their revenues drop even faster than many of them have been able to cut spending. They also face the additional burden of paying rising health care and pension costs for their employees.

“The effects of a depressed real estate market, low levels of consumer confidence, and high levels of unemployment will likely play out in cities through 2010, 2011 and beyond,” the report said.

Cities around the country have made steep cuts to stay afloat, from layoffs of firefighters and police officers to turning off street lights. The report, which surveyed finance officers in 338 cities, found that two-thirds of them were canceling or delaying construction and maintenance projects, a third were laying off workers and a quarter were cutting public safety.

Christopher W. Hoene, one of the authors of the report, said in an interview that the length of the downturn had dealt cities an unusual blow: in most recessions, he said, sales tax collections start to improve by the time property tax collections drop to reflect lower home values.

“This time around, the recession has been deep enough that we have the two major sources of revenue down at the same time,” Mr. Hoene said.

And cities have few places to turn for help, leaving tax increases and service cuts as their main options.

“Right now there isn’t really anywhere to turn,” Mr. Hoene said, noting that many states are now cutting aid to cities, not increasing it. “The state budgets are in a position where they are more likely to hurt than to help.”

    Fiscal Woes Deepening for Cities, Report Says, NYT, 6.10.2010, http://www.nytimes.com/2010/10/07/us/07cities.html

Cheap Debt for Corporations Fails to Spur Economy

October 3, 2010
The New York Times
By GRAHAM BOWLEY

As many households and small businesses are being turned away by bank loan officers, large corporations are borrowing vast sums of money for next to nothing — simply because they can.

Companies like Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash until the economy improves.

The development presents something of a chicken-and-egg situation: Corporations keep saving, waiting for the economy to perk up — but the economy is unlikely to perk up if corporations keep saving.

This situation underscores the limits of Washington policy makers’ power to stimulate the economy. The Federal Reserve has held official interest rates near zero for almost two years, which allows corporations to sell bonds with only slightly higher returns — even below 1 percent. But most companies are not doing what the easy monetary policy was intended to get them to do: invest and create jobs.

The Fed’s low rates have in fact hurt many Americans, especially retirees whose incomes from savings have fallen substantially. Big companies like Johnson & Johnson, PepsiCo and I.B.M. seem to have been among the major beneficiaries.

“They are benefiting themselves by borrowing and keeping this cash, but it is not benefiting the economy yet,” said Dana Saporta, an economist at Credit Suisse in New York.

American corporations have been saving more money since the financial collapse of 2008. But a recent rush of blue-chip bond offerings — including a $4.75 billion deal last month by Microsoft, one of the richest companies in the world — has put even more money in their coffers.

Corporations now sit atop a combined $1.6 trillion of cash, a figure equal to slightly more than 6 percent of their total assets. In the first quarter of this year it was 6.2 percent of assets, the highest level since 1964, when it was 6.4 percent.

When will they start spending that money — in particular, by hiring?

That is part of what has become the great question of this long, jobless recovery: When will corporate America start to feel confident enough to put its cash to work, building factories and putting some of the nation’s 14.9 million unemployed to work?

Businesses are holding on to their protective cash cushions, worried perhaps that the economy could slip back into recession or at least grow too lethargically to make an investment worthwhile.

The nation’s corporations will be strong, well capitalized and ready to act aggressively when executives finally decide it is time to expand their businesses.

After running up sharply every quarter since mid-2008, the ratio of cash holdings to assets by corporations fell slightly for the first time in the second quarter of this year.

Although investment in factories and plants still languishes, companies have spent some money on investment in new equipment and software. That spending grew at an annualized rate of more than 20 percent in the first two quarters of this year.

But economists say that such investment is still below its peak before the financial crisis.

In addition, many of the new machines and computers may be replacing older machines companies put off retiring in the recession. Businesses are playing catch-up, and little expansion is occurring.

“They may actually be using this new investment to be more efficient and cut jobs,” said Michael Gapen, an economist at Barclays Capital. “The mix of signals right now is still telling corporations to sit tight and wait.”

Mr. Gapen said those signals included the direction of the housing market, the outcome of midterm election, the effects on the economy as the fiscal stimulus wears off and any changes in tax policy.

They are deciding, “Why don’t we just wait until the first quarter of next year?” he said.

The cheap money may be having yet another effect unintended by policy makers eager to cut the nation’s 9.6 percent unemployment rate. Several of the corporations borrowing billions on bond markets are using the money to put their own financial house in order rather than to create jobs.

Microsoft said it was using some of its money to buy back shares, other companies are locking in longer-term borrowing, and some of the new borrowing is financing an increase in mergers and acquisitions.

All of this may enrich the corporations’ shareholders and cut company costs in the long run, but it does not necessarily lead to more jobs and it does not represent the big investments in growth that could fuel a sharp economic recovery for everyone.

“They are still holding on to more cash in the same way that Noah built the ark,” said David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto. “It is very telling.”

In the case of Microsoft’s bond offering, one factor might have been avoiding a big tax bill, said Richard J. Lane, who analyzes Microsoft for Moody’s. If Microsoft had needed cash, it could have pulled some from its operations abroad, but “borrowing new money on the debt markets is now cheaper than bringing its own money back from overseas,” Mr. Lane said.

Microsoft’s offering was only its second; its first was last year. The second offering included three-year debt at an interest rate of 0.875, among the lowest on record for that type of borrowing.

According to the financial data provider Dealogic, United States companies have borrowed $488 billion on the American high-yield and investment grade bond markets so far this year, 7 percent more than businesses borrowed during all of 2009, and on track to at least match the $589 billion borrowed in the boom year in 2007, which was the highest on record.

Smaller companies continue to have trouble borrowing, and most of the new financing is limited to bigger corporations.

Their borrowing spree is in contrast to America’s households, which continue to cut their debt and consumption. Perhaps unsure of the recovery, like the corporations hoarding cash, Americans are saving far more than they have in years, and some economists fear that consumers’ frugality will further hobble growth.

One of the biggest corporations to borrow recently, the DuPont Company, said it was using the cheaper money to lock in borrowing over a longer period.

“The current low interest rate environment provides DuPont a great opportunity to refinance our long-term debt at lower rates,” it said in a statement.

Conditions have become so good that some companies are borrowing money they will not have to repay until the next century. In August, the railroad Norfolk Southern Corporation borrowed $250 million in 100-year bonds at an annual rate of 5.95 percent.

Robin Chapman, a spokesman, said, “Opportunistic borrowing is a good way to characterize this.” He said that the company was seeing a “slow and steady pickup” in rail traffic but that any hiring the company was doing was to replace workers lost through attrition.

Other companies are borrowing to finance acquisitions. PepsiCo borrowed recently to help pay for the takeover of two bottling plants. Hertz borrowed $300 million for its bid to buy a rival car rental company, Dollar Thrifty.

Economists say it is rational for companies to seize the opportunity to borrow at low interest rates and to buy back shares. But Guy LeBas, a fixed income strategist at Janney Montgomery Scott in Chicago, said, “It is not particularly beneficial for economic conditions.”

    Cheap Debt for Corporations Fails to Spur Economy, NYT, 3.11.2010, http://www.nytimes.com/2010/10/04/business/04borrow.html

Eye on China, House Votes for Greater Tariff Powers

September 29, 2010
The New York Times
By DAVID E. SANGER and SEWELL CHAN

WASHINGTON — The House of Representatives sent an unusually confrontational signal to the Chinese leadership on Wednesday, voting overwhelmingly to give the Obama administration expanded authority to impose tariffs on virtually all Chinese imports to the United States.

The move, which could affect more than $300 billion in goods this year, was made in retaliation for the country’s refusal to revalue its currency.

The bill passed 348 to 79 and included the support of 99 Republicans, a highly unusual bipartisan vote at a time when large numbers of House Republicans have rarely joined Democrats on an economic issue. House Speaker Nancy Pelosi, who has long pressed China trade issues, personally gaveled the vote closed. Nonetheless, prospects for Senate approval are unclear.

The action was intended to hand President Obama new leverage in what has become a major flashpoint between the world’s two largest economies. While tariffs have been placed on specific products, like steel and tires, because of evidence of unfair export subsidies, the threat of putting sizable tariffs on a country’s entire line of exports to the United States is highly unusual — and, some argue, of dubious legality under international trade law.

It reflects both election-year politics over a loss of American jobs and great frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.

The Obama administration never took an emphatic position on the legislation and some officials say that, if passed, signed into law and challenged at the World Trade Organization, it might well be struck down. But this is a case where the symbolism may be more important than the legal niceties, and for that reason, the White House has been of two minds about the bill.

Mr. Obama has tried to use the rising public anger over China’s trade advantage to argue to Chinese leaders that the United States would no longer tolerate deliberate currency manipulation, a point Mr. Obama made repeatedly in a meeting last week with Wen Jiabao, China’s prime minister. He did so again on Wednesday in Des Moines, where one businessman asked the president about the issue.

“The reason that I’m pushing China about their currency is because their currency is undervalued,” he said, adding: “People generally think that they are managing their currency in ways that make our goods more expensive to sell and their goods cheaper to sell here. And that contributes — that’s not the main reason for our trade imbalance — but it’s a contributing factor to our trade imbalance.”

But in conversations with Congress, the Treasury secretary, Timothy F. Geithner, and other officials have warned of the danger of touching off a trade war, in which China blocks American goods in retaliation, that could hurt both economies.

The risks go beyond trade. Mr. Obama is pressing China for help on cutting exports to Iran, managing a dangerous leadership transition in North Korea and some kind of accord on curbing carbon outputs that contribute to global warming. He is also coming up with what one senior administration official called on Tuesday “new rules of the road” over disputed maritime territory.

But in Beijing, and on Capitol Hill, all that pales in comparison to the currency dispute, which is often portrayed in the Chinese news media as an effort to curb China’s growth, and thus its power.

Eswar S. Prasad, a professor of trade policy at Cornell, called the legislation “a shot across the bow that indicates a clear escalation from overheated rhetoric about Chinese currency policy to more substantive action.”

While it is unlikely there will be a trade war, he said, “there is now a real risk that a cycle of tit-for-tat trade sanctions could spin out of control and cause some real, if not lasting, damage.”

Under the bill, Mr. Obama would not have personal control to turn sanctions on or off. The legislation would make it easier for the Commerce Department to place duties on imports from countries that have “fundamentally undervalued” currencies — defined as “protracted, large-scale intervention” in foreign exchange markets; an undervaluation of at least 5 percent; persistent global current account surpluses; and “excessive” foreign asset reserves.

Traditionally, only direct subsidies to an industry, rather than the indirect help that comes from an undervalued currency, have been considered a reason for retaliatory tariffs. Because so many countries have managed their currency rates for so long, it is unclear that the W.T.O. would uphold any American efforts to make the manipulation of a currency a justification for action.

While the bill did not mention China by name, the criteria were clearly written with China, the largest creditor of the United States, in mind.

In response, the official Xinhua news agency quoted China’s commerce ministry spokesman, Yao Jian, as saying: “Starting a countervailing investigation in the name of exchange rates does not conform with relevant W.T.O. rules.”

So far the administration has been reluctant to pursue retaliation against China. The Treasury Department has repeatedly declined to formally declare China a currency manipulator. And last month, the Commerce Department decided not to investigate allegations that China’s currency practices amounted to an improper export subsidy.

“The United States does not gain leverage in these negotiations by doing things China doesn’t find credible,” said Marc L. Busch, a political scientist at Georgetown. “The Chinese are aware that this is just not going to fly.”

But the Obama administration may have few other options and few allies. Europeans are largely uninterested in the problem: the euro has weakened because of the sovereign debt crisis, limiting European incentives to get involved. Japan is intensely interested, and this month intervened in the currency markets for the first time since 2004, moving to devalue the yen unilaterally.

But in the House, the politics of the moment seemed more important than the long-run economic strategy of managing economic relations with China.

Representative Sander M. Levin, Democrat of Michigan and chairman of the House Ways and Means Committee, said that “China’s persistent manipulation of its currency” had resulted in a “tilted field of competition” and the loss of as many as 1.5 million American jobs.

“This manipulation is one of the causes of outsourcing of our jobs — manufacturing and other good jobs,” he said. “Talk hasn’t worked.”

The top Republican on the committee, Representative Dave Camp of Michigan, said that the Obama administration had been insufficiently engaged in securing international pressure on the Chinese; that the bill would not promote Mr. Obama’s goal of doubling American exports over five years; and that other issues — like China’s tolerance for violations of intellectual property rights — were as significant as the currency undervaluation. Even so, Mr. Camp said, “I will vote for this bill because it signals to China that Congress’s patience is running out.”

    Eye on China, House Votes for Greater Tariff Powers, NYT, 29.9.2010, http://www.nytimes.com/2010/09/30/business/30currency.html

JPMorgan Suspending Foreclosures

September 29, 2010
The New York Times
By DAVID STREITFELD

In a sign that the entire foreclosure process is coming under pressure, a second major mortgage lender said that it was suspending court cases against defaulting homeowners so it could review its legal procedures.

The lender, JPMorgan Chase, said on Wednesday that it was halting 56,000 foreclosures because some of its employees might have improperly prepared the necessary documents. All of the suspensions are in the 23 states where foreclosures must be approved by a court, including New York, New Jersey, Connecticut, Florida and Illinois.

The bank, which lends through its Chase Mortgage unit, has begun to “systematically re-examine” its filings to verify that they meet legal standards, a spokesman, Tom Kelly, said.

Last week, GMAC Mortgage said it was suspending an undisclosed number of foreclosures to give it time to take a closer look at its own procedures. GMAC simultaneously began withdrawing affidavits in pending court cases, throwing their future into doubt.

Chase and GMAC, in their zeal to process hundreds of thousands of foreclosures as quickly as possible and get those properties on the market, employed people who could sign documents so quickly they popularized a new term for them: “robo-signer.”

In depositions taken by lawyers for embattled homeowners, the robo-signers said they or their team had signed 10,000 or more foreclosure affidavits a month.

Now that haste has come back to haunt them. The affidavits in foreclosures attest that the preparer personally reviewed the files, which those workers acknowledge they had no time to do.

GMAC and Chase say that their lapses were technical and will soon be remedied with new filings. But defense lawyers are seizing on these revelations and say they will now work to have their cases thrown out.

Beyond the relative handful of foreclosure cases being contested are many more in which the homeowner did not have legal counsel. Potentially, hundreds of thousands of cases could be in doubt.

GMAC’s initial disclosures prompted challenges or investigations from attorneys general in Iowa, Illinois, Colorado, California and North Carolina. The Treasury Department, which became the majority owner of GMAC after providing $17 billion in bailout money, has directed the lender to correct its procedures.

The pressure on the lender, which began as the auto financing arm of General Motors, is continuing to increase. Senator Al Franken, Democrat of Minnesota, asked Wednesday for the Treasury, the Justice Department and other regulators to collaborate on “a thorough investigation into the alleged misconduct.”

Defense lawyers have consistently complained that the lenders’ law firms were sending through cases that were at best sloppy. The Florida attorney general’s office says it is investigating four so-called foreclosure mills.

“The GMAC announcement was the mushroom cloud,” said one Florida defense lawyer, Matthew Weidner. “The fallout will burn through the entire mortgage servicing industry.”

Judges who oversee a lot of foreclosure cases increasingly agree that there is a serious problem.

“I don’t want to say that every one of these cases is wrong and a fraud on the court, but it is a big concern for us,” J. Thomas McGrady, chief judge of the Sixth Judicial Circuit in Florida, said in an interview last week after GMAC’s announcement.

Judge McGrady predicted that the foreclosure process in Florida, which the Legislature has been trying to speed up, would have to slow down.

“Everyone is going to have to look at these cases more closely,” said Judge McGrady, whose circuit includes St. Petersburg.

The foreclosure process in many states is already torpid. This benefits delinquent homeowners, who can live in their properties free for years, as well as lenders who do not have to write down the value of the original loan. But it also threatens to prolong the housing crisis for many years.

Chase said that unlike GMAC, it had not withdrawn any affidavits in pending cases. It also said that if foreclosures were completed, it was allowing its agents to proceed with the sale of the properties. GMAC has stopped its sales.

Chase followed the lead of GMAC in playing down the impact of the situation. “Affidavits were prepared by appropriate personnel with knowledge of the relevant facts based on their review of the company’s books and records,” the spokesman, Mr. Kelly, said.

But many questions are unresolved. One is whether completed foreclosures will be vulnerable to what GMAC is calling “corrective action.” If those former homeowners press their claims, they could conceivably dislodge the new buyers.

Such cases are probably not imminent. The more immediate consequences for the lenders using robo-signers will be determined by the homeowners who are fighting their cases in court.

Lilliana DeCoursy, a real estate agent in Safety Harbor, Fla., has a rental property in foreclosure with GMAC. Now that the lender has withdrawn the affidavit in her case, Ms. DeCoursy said she was determined to press every advantage.

“I think they should have to answer for this,” she said.


William Neuman contributed reporting.

    JPMorgan Suspending Foreclosures, NYT, 29.9.2010, http://www.nytimes.com/2010/09/30/business/30mortgage.html

Still Few Women in Management, Report Says

September 27, 2010
The New York Times
By CATHERINE RAMPELL

Women made little progress in climbing into management positions in this country even in the boom years before the financial crisis, according to a report to be released on Tuesday by the Government Accountability Office.

As of 2007, the latest year for which comprehensive data on managers was available, women accounted for about 40 percent of managers in the United States work force. In 2000, women held 39 percent of management positions. Outside of management, women held 49 percent of the jobs in both years.

Across the work force, the gap between what men and women earn has shrunk over the last few decades. Full-time women workers closed the gap to 80.2 cents for every dollar earned by men in 2009, up from just 62.3 cents in 1979. Much of this persistent wage gap, however, can be explained by what kinds of jobs the sexes are drawn to, whether by choice or opportunity.

The new report, commissioned by the Joint Economic Council of Congress, tries to make a better comparison by looking at men versus women in a specific industry and in similar jobs, and also controlling for differences like education levels and age. On average, female managers had less education, were younger and were more likely to be working part time than their male counterparts.

In all but three of the 13 industries covered by the report, women had a smaller share of management positions than they did of that industry’s overall work force. The sectors where women were more heavily represented in management than outside of it were construction, public administration and transportation and utilities.

Across the industries, the gender gap in managers’ pay narrowed slightly over the last decade, even after adjusting for demographic differences. Female full-time managers earned 81 cents for every dollar earned by male full-time managers in 2007, compared with 79 cents in 2000.

This varied by industry, with the pay gap being the narrowest in public administration, where female managers earned 87 cents for every dollar paid to male managers. It was widest in construction and in financial services, where women earned 78 percent of what men were paid after adjustments.

Across the work force, the pay gap was also slightly wider for managers who had children.

Managers who were mothers earned 79 cents of every dollar paid to managers who were fathers, after adjusting for things like age and education. This gap has stayed the same since at least 2000.

The greater toll that parenthood appears to take on women’s paychecks may help explain why, generally speaking, female managers are less likely to have children than their male counterparts.

In 2007, 63 percent of female managers were childless, compared with just 57 percent of male managers. Of those managers who did have children, men on average had more children than their women counterparts.

Female managers were also less likely to be married than male managers, at rates of 59 percent versus 74 percent, respectively.

It is difficult to determine why a wage gap exists between female and male managers, and to what extent these differences might be because of discrimination or other factors, like hours clocked. The new G.A.O. report, for example, does not try to control for hours worked, beyond broad categories like full-time or part-time status.

The report was prepared at the request of Representative Carolyn B. Maloney, Democrat of New York and the chairwoman of the Joint Economic Committee, for a hearing on Tuesday on the gender gap in management jobs. The findings were based on an analysis of data from the American Community Survey of the Census Bureau.

“When working women have kids, they know it will change their lives, but they are stunned at how much it changes their paycheck,” Ms. Maloney said of the report. “In this economy, it is adding insult to injury, especially as families are increasingly relying on the wages of working moms.”

During the recession that began in December 2007 and ended in the summer of 2009 — generally after the data contained in this new report — men generally bore the brunt of job losses because of the types of industries. It is still unclear how management positions might have shifted or whether women were affected differently by that.

    Still Few Women in Management, Report Says, NYT, 27.9.2010, http://www.nytimes.com/2010/09/28/business/28gender.html

We Haven’t Hit Bottom Yet

September 24, 2010
The New York Times
By BOB HERBERT

Wallingford, Conn.

Marcus Vogt is 20 years old and homeless. Or, as he puts it, “I’m going through a couch-surfing phase.”

Mr. Vogt is a Wal-Mart employee but he was injured in a car accident and was unable to work for a couple of months. With no income and no health insurance, he quickly found himself unable to pay the rent. Even meals were hard to come by.

(His situation is quite a statement about real life in the United States in the 21st century. On the same day that I spoke with Mr. Vogt, Forbes magazine came out with its list of the 400 most outrageously rich Americans.)

I met Mr. Vogt at Master’s Manna, a food pantry and soup kitchen here that also offers a variety of other services to individuals and families that have fallen on hard times. He told me that his cellphone service has been cut off and he has more than $3,000 in medical bills outstanding. But he was cheerful and happy to report that he’s back at work, although it will take at least a few more paychecks before he’ll have enough money to rent a room.

Other folks who make their way to Master’s Manna are not so upbeat. The Great Recession has long since ended, according to the data zealots in their windowless rooms. But it is still very real to the millions of men and women who wake up each morning to the grim reality of empty pockets and empty cupboards.

Wallingford is nobody’s definition of a depressed community. It’s a middle-class town on the Quinnipiac River. But the number of people seeking help at Master’s Manna is rising, not falling. And when I asked Cheryl Bedore, who runs the program, if she was seeing more clients from the middle class, she said: “Oh, absolutely. We have people who were donors in the past coming to our doors now in search of help.”

The political upheaval going on in the United States right now is being driven by the economic upheaval. It’s sometimes hard to see this clearly amid the craziness and ugliness stirred up by the professional exploiters. But the essential issue is still the economy — the rising tide of poor people and the decline of the middle class. The true extent of the pain has not been widely chronicled.

“The minute you open the doors, it’s like a wave of desperation that’s hitting you,” said Ms. Bedore. “People are depressed, despondent. They’re on the edge, especially those who have never had to ask for help before.”

In recent weeks, a few homeless people with cars have been showing up at Master’s Manna. Ms. Bedore has gotten permission from the local police department for them to park behind her building and sleep in their cars overnight. “We’ve been recognized as a safe haven,” she said.

In two of the cars, she said, were families with children.

It’s not just joblessness that’s driving people to the brink, although that’s a big factor. It’s underemployment, as well. “For many of our families,” said Ms. Bedore, “the 40-hour workweek is over, a thing of the past. They may still have a job, but they’re trying to survive on reduced hours — with no benefits. Some are on forced furloughs.

“Once you start losing the income and you’ve run through your savings, then your car is up for repossession, or you’re looking at foreclosure or eviction. We’re a food pantry, but hunger is only the tip of the iceberg. Life becomes a constant juggling act when the money starts running out. Are you going to pay for your medication? Or are you going to put gas in the car so you can go to work?

“Kids are going back to school now, so they need clothes and school supplies. Where is the money for that to come from? The people we’re seeing never expected things to turn out like this — not at this stage of their lives. Not in the United States. The middle class is quickly slipping into a lower class.”

Similar stories — and worse — are unfolding throughout the country. There are more people in poverty now — 43.6 million — than at any time since the government began keeping accurate records. Nearly 15 million Americans are out of work and home foreclosures are expected to surpass one million this year. The Times had a chilling front-page article this week about the increasing fear among jobless workers over 50 that they will never be employed again.

The politicians seem unable to grasp the immensity of the problem, which is why the policy solutions are so woefully inadequate. During my conversations with Ms. Bedore, she dismissed the very thought that the recession might be over. “Whoever said that was sadly mistaken,” she said. “We haven’t even bottomed-out yet.”


Charles M. Blow is off today.

    We Haven’t Hit Bottom Yet, NYT, 24.9.2008, http://www.nytimes.com/2010/09/25/opinion/25herbert.html

With Warning, Obama Presses China on Currency

September 23, 2010
The New York Times
By DAVID E. SANGER

UNITED NATIONS — President Obama increased pressure on China to immediately revalue its currency on Thursday, devoting most of a two-hour meeting with China’s prime minister to the issue and sending the message, according to one of his top aides, that if “the Chinese don’t take actions, we have other means of protecting U.S. interests.”

But Prime Minister Wen Jiabao barely budged beyond his familiar talking points about gradual “reform” of China’s currency policy, leaving it unclear whether Mr. Obama’s message would change Beijing’s economic or political calculus.

The unusual focus on this single issue at such a high level was clearly an effort by the White House to make the case that Mr. Obama was putting American jobs and competitiveness at the top of the agenda in a relationship that has endured strains in recent weeks on everything from territorial disputes to sanctions against Iran and North Korea.

Democrats in Congress are threatening to pass legislation before the midterm elections that would slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent.

Mr. Obama’s aides said he was embracing the threat of tariffs and new trade actions against China at the World Trade Organization to gain some leverage over the Chinese, but was also trying to head off any action that would lead to a destructive trade war.

Jeffrey Bader, the senior director for Asia at the National Security Council, told reporters that the two men engaged in “a lengthy discussion about the impact and the politics of the issue.” One Chinese official speculated Thursday that Mr. Obama’s insistence on spending so much time on the issue was motivated by pre-election politics, suggesting that the pressure might abate after early November.

While the United States has been pressing China for years to lift the strict controls on its currency, which keep Chinese exports competitive and more factory workers employed, American voters and lawmakers have only recently seized on exchange rates as a potent political issue. Mr. Obama pressed much harder on Thursday than during a visit to Beijing last year, perhaps because a Chinese commitment several months ago to allow the value of the currency to rise has resulted in a change of less than 2 percent.

The meeting with Mr. Wen came as the United States appeared to lean toward its longtime ally, Japan, in an increasingly heated standoff between China and Japan over who has claim on territory near the South China Sea.

In Washington, Defense Secretary Robert M. Gates said that China and Japan should sort out the issue themselves, but that “We would fulfill our alliance responsibilities,” a term that clearly referred to the American military alliance with Japan.

But the United States also tried not to inflame the dispute. It barely came up at the meeting between Mr. Obama and Mr. Wen, Mr. Bader said, adding that despite the talk of America’s obligation to back its military ally, “we have no expectation in any known universe that this would escalate to that kind of a level.”

Mr. Obama’s meeting with Mr. Wen, in a spare conference room usually used by members of the Security Council, came minutes after the president told the United Nations General Assembly that his efforts to engage friends and adversaries were beginning to bear fruit.

He called on Arab states to support fragile Middle East peace talks and warned Iran that it would face sustained international pressure if it did not negotiate seriously over its nuclear program.

Iranian officials have hinted they are prepared to resume talks, without setting a date.

“The door remains open to diplomacy should Iran choose to walk through it,” said Mr. Obama, who plans to address the Iranian people directly on Friday in an interview with BBC’s Persian service. “But the Iranian government must demonstrate a clear and credible commitment, and confirm to the world the peaceful intent of its nuclear program.”

If Iran fails to meet its obligations under international nonproliferation treaties, he added, it “must be held accountable.”

In June, the United Nations Security Council imposed its fourth round of sanctions against Iran, which were followed by harsher measures by the United States and European and Asian nations. On Wednesday, Russia made clear that it would not be fulfilling a contract to sell Iran an advanced missile system.

Mr. Obama also called on Israel to extend its partial freeze on building new Jewish settlements in the West Bank, construction that is one of the most contentious issues between Israelis and Palestinians.

The moratorium is set to expire this weekend, and hard-won talks could be stymied if the Israelis fail to extend it and the Palestinians decide to walk away from the table.

“Our position on this issue is well known,” Mr. Obama said. “We believe that the moratorium should be extended. We also believe that talks should press on until completed.”

Clashes on Wednesday between Israeli security forces and Palestinians in the Old City of Jerusalem underscored the fragile state of affairs in the region and the potential for violent outbursts if the negotiations fall apart.

Mr. Obama acknowledged the possibility of “terror, or turbulence, or posturing or petty politics” to disrupt the negotiations, but exhorted world leaders to stand behind the peace process.

“When we come back here next year, we can have an agreement that will lead to a new member of the United Nations, an independent state of Palestine, living in peace with Israel,” he said.

Tonally, Mr. Obama’s speech to the General Assembly was dramatically different from the one he delivered last year, in his maiden appearance as a new president promising change not only at home, but in America’s dealings with the rest of the world. If the 2009 speech was about the promise of a new approach, and often interrupted by applause, this speech was far more about pressing countries to take up what he called their “responsibilities.”

“Last year he sought to signal that U.S. foreign policy was under new management and intended to work better with others, just what his audience wanted to hear,” James M. Lindsay, the director of studies at the Council on Foreign Relations, wrote shortly after the speech was over. “This year he made clear he wants to get things done, and that will require others to do things they would prefer not to do.” He added, “He shouldn’t be surprised to discover that others are slow to follow.”

Mr. Obama, at turns sweeping and philosophical, told the delegates and world leaders that it was “our destiny” to endure a time of recession, war and conflict, and spoke out broadly in support of open governments and human rights.

    With Warning, Obama Presses China on Currency, NYT, 23.9.2010, http://www.nytimes.com/2010/09/24/world/24prexy.html

Facebook Hopes Credits Make Dollars

September 22, 2010
The New York imes
By MIGUEL HELFT

PALO ALTO, Calif. — For all its success, Google is often criticized for being a one-trick pony. After 12 years, the Internet search company is still struggling to find a significant new revenue source to supplement its lucrative text advertising business.

Facebook, which more than any other company aspires to usurp Google’s dominant place on the Internet, hopes to avoid that problem. Already on the path to becoming an advertising powerhouse, the social networking company is laying the groundwork for its second act: a virtual currency system that some day could turn into a multibillion-dollar business.

Facebook began testing its virtual currency, called Credits, more than a year ago with some popular games on Facebook. This month, Credits passed a milestone when it became the exclusive payment method for most of the games created by Zynga, the No. 1 developer of Facebook applications.

Zynga is expected to have $500 million in revenue this year, according to the Inside Network, which tracks Facebook applications, as millions of users pay real money to buy virtual goods on games like FarmVille and Mafia Wars. Through Credits, Facebook will take a 30 percent cut.

By the end of the year, Facebook expects that Credits will be used to buy the vast majority of virtual goods sold on Facebook. The fast-growing market is expected to reach $835 million on Facebook this year, according to the Inside Network. To bolster that market, Facebook began selling Credits gift cards at Target stores across the country this month.

For now, Facebook says it simply wants Credits to help foster the growth of virtual goods transactions. But Mark Zuckerberg, the chief executive, said recently that the company may choose to do “a lot more” with Credits in the future. Over time, the company plans to turn Credits into a system for micropayments that could be open to any application on Facebook, be it a game or perhaps a media company, people with direct knowledge of Facebook’s plans said. They spoke anonymously because the plans have not been announced publicly.

In addition to games, which account for the vast majority of money spent on Facebook, more than a million other applications run on the site. In the future, many of those may choose to charge for access to certain features or to things like music, videos or news articles.

Some analysts and industry insiders say that expanding Credits makes sense and could eventually put Facebook in competition with PayPal, Google, Amazon and others for a slice of the growing pie of online transactions.

“If they can get 50 million registered credit cards, why wouldn’t they use them to pay for your newspaper subscription?” said Alex Rampell, the chief executive of TrialPay, an advertising company that offers free Facebook Credits to people who buy certain products.

Others say the potential for using Credits could extend beyond the Facebook site, through Facebook Connect, a service that allows users to log in to sites across the Web using their Facebook identities.

“There is a huge opportunity for Facebook to use Facebook Connect to offer seamless checkout on other sites,” said Ron Hirson, a senior vice president at Boku, a start-up company that enables online payments using a cellphone. “They are focusing on games and apps now, but it would make sense for them to go into other” product categories.

For now, Facebook prefers to play down talk of its broader ambitions for Credits. Dan Rose, Facebook’s vice president for partnerships and platform marketing, talks about the usefulness of Credits while playing Facebook games. Users will have a single currency they can spend on any game, sparing them the trouble of entering the credit card or PayPal credentials multiple times, he says. Currently users can buy Credits with 15 currencies, including the United States dollars, the euro, the British pound, the Venezuelan bolivar and the Danish krone

It works much like Apple’s App Store, which allows users to enter their credit cards or PayPal accounts once and buy applications from any developer. Apple also takes a 30 percent cut of sales on iTunes and its app store.

Mr. Rose said that while some developers might initially see a decline in revenue because of Facebook’s commission, the plan is for Credits to more than offset that loss over time, because Credits will make it easier to spend more in a game.

“We need to be able to grow the total level of money spent,” Mr. Rose said. Facebook is also helping lubricate the system by giving its developers credits that they can give away to users.

Some developers say they already have made gains. “We are seeing the number of paying users increase and the revenue per user increase, and FB deserves a lot of the credit for it,” said Mark Hull, vice president for marketing at CrowdStar, whose Happy Aquarium game is among the most popular on Facebook.

Mr. Rose said that if Facebook succeeded, Credits “could grow it to a size where over time it will become a material revenue generator.” For now, he said, Facebook plans to reinvest revenue from Credits into improving its software for developers.

But Facebook’s ambitions are unmistakable. Credits is backed by a sizable engineering and product team that is full of PayPal veterans.

“It is a lot like PayPal in the early days,” said Deb Liu, a former director of corporate strategy at PayPal who is now product marketing manager for Credits. “We are moving fast and changing the industry.”

For now, Credits is not a rival to PayPal or other payment systems. In February, Facebook signed an agreement with PayPal, a unit of eBay, making PayPal one of the preferred ways to finance Credits accounts. Facebook users can buy Credits using their credit cards and some mobile payments services.

Since Zynga was one of PayPal’s largest customers, Facebook is now a significant customer as well. “Facebook has been a great partner,” Osama Bedier, PayPal’s vice president for platform, said.

But as Credits expands beyond Facebook games, it could collide with a number of others competing for a piece of the growing commerce in digital goods. They include Apple, the leading seller of music and apps; Google, whose Checkout system is used in e-commerce and on the company’s app store for mobile phones; and even Amazon, which is seeking to expand its payment system across the Web.

Analysts said Facebook’s ambitions might well run into the same obstacles that have thwarted Google and Amazon as they have sought to expand across the Web.

“Facebook is a very innovative company, but we have had two large innovative companies, Google and Amazon, that have spent a fair amount of effort on payments,” said Mark Mahaney, an analyst at Citigroup. Those companies have yet to gain much traction, he said. “I have to think that the odds against Facebook are steep.”

    Facebook Hopes Credits Make Dollars, NYT, 22.9.2010, http://www.nytimes.com/2010/09/23/technology/23facebook.html

Fair Pay Isn’t Always Equal Pay

September, 21, 2010
The New York Times
By CHRISTINA HOFF SOMMERS

Washington

AMONG the top items left on the Senate’s to-do list before the November elections is a “paycheck fairness” bill, which would make it easier for women to file class-action, punitive-damages suits against employers they accuse of sex-based pay discrimination.

The bill’s passage is hardly certain, but it has received strong support from women’s rights groups, professional organizations and even President Obama, who has called it “a common-sense bill.”

But the bill isn’t as commonsensical as it might seem. It overlooks mountains of research showing that discrimination plays little role in pay disparities between men and women, and it threatens to impose onerous requirements on employers to correct gaps over which they have little control.

The bill is based on the premise that the 1963 Equal Pay Act, which bans sex discrimination in the workplace, has failed; for proof, proponents point out that for every dollar men earn, women earn just 77 cents.

But that wage gap isn’t necessarily the result of discrimination. On the contrary, there are lots of other reasons men might earn more than women, including differences in education, experience and job tenure.

When these factors are taken into account the gap narrows considerably — in some studies, to the point of vanishing. A recent survey found that young, childless, single urban women earn 8 percent more than their male counterparts, mostly because more of them earn college degrees.

Moreover, a 2009 analysis of wage-gap studies commissioned by the Labor Department evaluated more than 50 peer-reviewed papers and concluded that the aggregate wage gap “may be almost entirely the result of the individual choices being made by both male and female workers.”

In addition to differences in education and training, the review found that women are more likely than men to leave the workforce to take care of children or older parents. They also tend to value family-friendly workplace policies more than men, and will often accept lower salaries in exchange for more benefits. In fact, there were so many differences in pay-related choices that the researchers were unable to specify a residual effect due to discrimination.

Some of the bill’s supporters admit that the pay gap is largely explained by women’s choices, but they argue that those choices are skewed by sexist stereotypes and social pressures. Those are interesting and important points, worthy of continued public debate.

The problem is that while the debate proceeds, the bill assumes the answer: it would hold employers liable for the “lingering effects of past discrimination” — “pay disparities” that have been “spread and perpetuated through commerce.” Under the bill, it’s not enough for an employer to guard against intentional discrimination; it also has to police potentially discriminatory assumptions behind market-driven wage disparities that have nothing to do with sexism.

Universities, for example, typically pay professors in their business schools more than they pay those in the school of social work, citing market forces as the justification. But according to the gender theory that informs this bill, sexist attitudes led society to place a higher value on male-centered fields like business than on female-centered fields like social work.

The bill’s language regarding these “lingering effects” is vague, but that’s the problem: it could prove a legal nightmare for even the best-intentioned employers. The theory will be elaborated in feminist expert testimony when cases go to trial, and it’s not hard to imagine a media firestorm developing from it. Faced with multimillion-dollar lawsuits and the attendant publicity, many innocent employers would choose to settle.

The Paycheck Fairness bill would set women against men, empower trial lawyers and activists, perpetuate falsehoods about the status of women in the workplace and create havoc in a precarious job market. It is 1970s-style gender-war feminism for a society that should be celebrating its success in substantially, if not yet completely, overcoming sex-based workplace discrimination.


Christina Hoff Sommers is a resident scholar at the American Enterprise Institute and the editor, most recently, of “The Science on Women and Science.”

    Fair Pay Isn’t Always Equal Pay, 21.9.2010, http://www.nytimes.com/2010/09/22/opinion/22Sommers.html

Stores Scramble to Accommodate Budget Shoppers

September 21, 2010
The New York imes
By STEPHANIE CLIFFORD

The country’s continued economic doldrums have stores scrambling for the once-ignored low-end customer, as people make fewer costly shopping trips to stock their pantries, and increasingly, can only afford inexpensive items in small quantities like those sold at dollar stores.

Dollar stores have shown the biggest gain in shopper visits over the last year out of all the retailers that sell basic consumer goods, according to market research data. Manufacturers are racing to package more affordable versions of products common at those stores, and other budget retailers, feeling the loss of customers, are trying to duplicate their success.

Wal-Mart, the world’s largest retailer, is adding thousands of items to its shelves, including inexpensive ones, and is asking dollar-store suppliers to create small, under-a-dollar packages for its stores, too. In areas with high unemployment, Wal-Mart is grouping together its less than $1 items in a clear challenge to the dollar stores.

The impetus for the downmarket trend is the continued tightening of household budgets, retailers and analysts said.

Some customers at Wal-Mart and the major dollar chains — Dollar General, Family Dollar and Dollar Tree — have such modest budgets that the retailers report upticks in spending at the beginning of the month, when government benefit checks and many paychecks come through. Late in the month, sales drop as even multiroll packs of paper towels are ditched for a single roll.

“People are literally running out of cash on hand as the month goes on and they’re looking for smaller package sizes,” said Craig Johnson, president of the retail consulting and research firm Customer Growth Partners. “They may have $10, $20, $30 to spend getting toward the end of the month, and they have to be able to still feed the family and get diapers and so forth.”

At about a quarter of Wal-Mart’s stores, the company is beginning to offer items for under $1, like a four-pack of toilet paper, boxes containing just a few garbage bags and single rolls of paper towels.

But the dollar stores have best been able to capitalize on the downmarket trend because of strategies they embraced during the recession, when the stores kept things cheap and expanded their merchandise, analysts said.

Realizing that their shoppers often could not afford regular-size detergent, for example, the stores worked with manufacturers to create smaller packages that cost less.

“Just because of their cash flow, they’re buying the smaller packs,” said Sam Paul, chief executive of Nextep, which makes trash bags.

To keep up with the demand for smaller quantities Wal-Mart began stocking the company’s five-pack of outdoor garbage bags a couple of months ago and Nextep recently opened a factory that specializes in small packaging.

In the last year, dollar stores “have not only shown growth among their heaviest shoppers, but also that they are stealing heavy shoppers” from stores like Wal-Mart, said Susan Viamari, editor of Times and Trends, a publication from the market research and consulting firm SymphonyIRI Group, in an e-mail. SymphonyIRI tracks what consumers are buying.

According to the company, the number of visits to dollar stores increased 2.6 percent from June 2009 to June 2010 compared with the same period a year earlier, the most recent figures available. Over the same period, visits to large stores like Wal-Mart declined 7 percent.

The dollar stores are pulling in shoppers like Mellissa Hayden. A pizza deliverer, she is the kind of price-sensitive shopper who knows that a bottle of ibuprofen from the Dollar General near her home in Rockford, Tenn., costs just $2.50 and has 100 pills, but at Wal-Mart, she will get fewer pills for about $5.

So lately, she has been heading to dollar stores instead of Wal-Mart. “You don’t have the big crowds and it’s cheaper,” she said.

Same-store sales, which measure revenue at stores open at least a year, at the three major dollar chains have increased for at least 10 consecutive quarters. At Wal-Mart, same-store sales in the United States have declined for the last five quarters.

During the recession, Wal-Mart pulled back on very inexpensive products, suppliers said, to make the stores look less cluttered and to appeal to shoppers who might be testing out that retailer instead of, say, Target. That decision has it now playing catch-up.

“They just abandoned that lowest price point,” said Mr. Paul of Nextep.

In the last couple of quarters, Wal-Mart tried aggressive discounts on items like milk, but the price cuts did not attract huge traffic, said Thomas M. Schoewe, Wal-Mart’s chief financial officer, in a conference call with reporters last month.

He said that dollar stores were part of the challenge.

“Many times it is convenient to walk into a dollar store and even though the price per unit, if you will, may be a little bit higher at the dollar store, if they can find that product and still live from paycheck to paycheck, that’s how they’re solving that problem,” Mr. Schoewe said.

The dollar stores have found creative ways to keep their prices low. When commodity costs rose for suppliers, for example, the dollar stores asked them to decrease the number of sandwich bags in a box or pushed them to come up with a cheaper version of the products.

To increase their attractiveness to the low-income customer, the dollar stores have also switched out merchandise like trinkets for necessities like food and detergent.

At Family Dollar, most customers have incomes under $40,000 and have “really curtailed discretionary spending out of necessity,” said Kiley Rawlins, a spokeswoman. But customers are shopping more frequently, she said, and buying a greater variety of items, a reflection of the items like cleaning products that the store now carries.

Some of the stores have even managed to reach some middle-income shoppers, by increasing products from well-known brands like Hanes, Quaker Oats and Nabisco.

“This is a break from historical trends, where dollar stores really catered almost entirely to lower income shoppers,” Ms. Viamari of SymphonyIRI said.

Many manufacturers have been hurrying to get dollar shoppers’ attention. Tracy VanBibber, senior vice president for sales at the Dial Corporation, a division of Henkel that makes products like Dial soap and Soft Scrub, said there were now enough low-end customers — known in the industry as value shoppers — to justify the investment.

“We’re really trying to get better at thinking of the value shopper earlier in our innovation pipeline,” Ms. VanBibber said. “The retailers that service value shoppers have enough scale that manufacturers can customize and it pays off now.”

    Stores Scramble to Accommodate Budget Shoppers, NYT, 21.9.2010, http://www.nytimes.com/2010/09/22/business/22dollar.html

Fed Mulls Trillion - Dollar Policy Question

September 21, 2010
Filed at 1:57 a.m. ET
The New York imes
By REUTERS

NEW YORK (Reuters) - How much of a boost to the U.S. recovery could another trillion dollars or two buy?

That's a tricky question for the Federal Reserve when it meets on Tuesday to debate what would warrant pumping more money into the financial system.

To battle the financial crisis, the Fed bought $1.7 trillion of longer-term Treasury and mortgage-related bonds, supplementing its pledge to keep interest rates near zero for a long time.

All told, it helped stabilize a collapsing financial system and to avert what could have been a second Great Depression.

Now, faced with a 9.6 percent jobless rate and below-target inflation, Fed policymakers are trying to gauge how much they could achieve if they resume massive quantitative easing.

Few analysts expect the Fed to launch a new round of bond buying this week, and uncertainty over the impact of fresh moves may be a factor keeping the central bank on the sidelines.

"I think part of the hesitancy of the committee to use quantitative easing a second time around relates to views of its effectiveness," said Vince Reinhart, a former Fed staffer.

At the Fed's August meeting it decided to reinvest maturing mortgage-debt in Treasuries to keep its balance sheet steady, a move many analysts saw as a precursor to more easing.

Proponents of a relaunch of large-scale bond-buying say it will help prevent inflation expectations from falling and spur growth by further reducing borrowing costs for consumers and businesses.

Skeptics say the economic recovery has just hit a weak patch. They argue that more easing could be ineffective in helping the economy, potentially damaging Fed credibility.

An incremental drop in long-term yields may not be enough to force banks to stop hoarding safe-haven Treasuries and make loans to businesses instead, some analysts warn.

Some policymakers worry that more easing could fuel market imbalances or sow the seeds of sky-high inflation ahead.

There is also the risk that the Fed spooks investors.

"My own view is that any radical balance sheet program would be seen by many as an act of desperation which would dampen business sentiment and depress non-financial borrowing even more," said Wrightson ICAP Chief Economist Lou Crandall.

HARD TO MEASURE SUCCESS

Fed bond purchases can have two effects. They can increase liquidity in strained markets and, by lowering yields, force investors to look for returns in riskier asset classes, helping to boost the supply of credit in the economy.

In addition, some officials believe bond buying helps solidify trust among investors that the Fed will keep policy easy for longer, further helping to lower borrowing costs.

The New York Federal Reserve Bank estimates that the $1.7 trillion of purchases lowered the yield on the 10-year Treasury note by between 30 and 100 basis points. For more, see: http://www.newyorkfed.org/research/staff_reports/sr441.pdf

The estimate is based in part on the sharp drop in yields that occurred when the Fed first announced its large-scale bond-buying program.

But this "announcement effect" approach does not show how yields acted over the course of the program and may not appropriately capture the impact, analysts say.

It is tough to gauge how much of a move in yields can be tied to the Fed's actions after the fact, and it is also extremely difficult to predict the impact of another move.

When it comes to the benchmark overnight federal funds rate, "you can come up with rough orders of magnitude of the impact, but with quantitative easing there is so much uncertainty, you can't calculate it with any type of precision," said Dino Kos, former head of the New York Fed's markets group and a managing director at Portales Partners LLC.

The success of the first round of purchases may have been amplified by the stressed nature of markets at the time, as well as the fact that the purchases were focused on the smaller, less-liquid agency mortgage-backed securities market.

"If you show up and purchase assets when markets are stressed, you are not pushing back against much conviction so you can move prices more easily," said Reinhart, the former Fed staffer.

To get a significant effect in the Treasury market -- where any new round of purchases would likely be centered -- could be harder, says Mark Gertler, a professor at New York University.

"Evidence suggests it would take a huge purchase of long-term government bonds, maybe the whole market, to really have any effect, and the effect would be quite uncertain."

Rather than announcing such an eye-popping amount upfront, the Fed could decide to buy Treasuries in smaller steps, calibrated to the economic outlook at each meeting.

Forecasting firm Macroeconomic Advisors estimates each $100 billion in asset buys could lower the yield on the 10-year Treasury note by 0.03 percentage point.

That is a marginal move that could go unnoticed, though if Fed buying helped nudge up the inflation rate it could get a bit more of a bang for its buck on real rates.

Even a small amount of easing is not to be sneezed at, says Michael Feroli, chief U.S. economist at JPMorgan Chase.

"If you have a headache and only one aspirin left, do you decide not to take it because you wish you had two aspirins?"

(Reporting by Kristina Cooke; Editing by Dan Grebler)

    Fed Mulls Trillion - Dollar Policy Question, NYT, 21.9.2010, http://www.nytimes.com/reuters/2010/09/21/business/business-us-usa-fed.html

Recession May Be Over, but Joblessness Remains

September 20, 2010
The New York Times
By CATHERINE RAMPELL

The United States economy has lost more jobs than it has added since the recovery began over a year ago.

Yes, you read that correctly.

The downturn officially ended, and the recovery officially began, in June 2009, according to an announcement Monday by the official arbiter of economic turning points. Since that point, total output — the amount of goods and services produced by the United States — has increased, as have many other measures of economic activity.

But nonfarm payrolls are still down 329,000 from their level at the recession’s official end 15 months ago, and the slow growth in recent months means that the unemployed still have a long slog ahead.

“We started from a deep hole,” said James Poterba, an economics professor at M.I.T. and a member of the National Bureau of Economic Research’s Business Cycle Dating Committee, which declared the recession’s end. “And clearly the bounce-back has not been immediate after hitting this trough.”

The declaration of the recession’s end confirms what many suspected: The 2007-9 recession was not only the longest post-World War II recession, but also the deepest, in terms of both job losses and at least one measure of output declines.

The announcement also implies that any contraction that might lie ahead would be a separate and distinct recession, and one that the Obama administration could not claim to have inherited. While economists generally say such a double-dip recession seems unlikely, new monthly estimates of gross domestic product, released by two committee members, show that output shrank in May and June, the most recent months for which data are available. Output and other factors would have to shrink for a longer period of time before another contraction might be declared.

Even without a full-blown double dip in the economy, the recovery thus far has been so anemic that the job picture seems likely to stagnate, and perhaps even get worse, in the near future.

Many forecasters estimate that output needs to grow over the long run by about 2.5 percent to keep the unemployment rate, now at 9.6 percent, constant. The economy grew at an annual rate of just 1.6 percent in the second quarter of this year, and private forecasts indicate growth will not be much better in the third quarter. (The Business Cycle Dating Committee itself does not engage in forecasting.)

“The amount of unemployment we’ve already got and the slowness of recovery lead to predictions that we could have 9-plus percent unemployment even through the next presidential election,” said Robert J. Gordon, an economics professor at Northwestern University and a committee member.

“What’s really unique about this recession is the amount of unemployment in combination with the slowness of the recovery,” he said. “That’s just not happened before. We had a sharp recession followed by a sharp recovery in the 1980s. And in ’91 and ’01 we had slow recoveries, but those recessions were shallow recessions, so the slowness didn’t matter much.”

All three of these most recent recoveries have been known as jobless recoveries, as employment growth has significantly lagged output growth. In this recovery, the job market bottomed six months after economic output bottomed. That is still not nearly as much of a lag as experienced after the 2001 recession, when it took the job market 19 months to turn around after output improved.

This new pattern of jobless recoveries has led to some complaints that employment should play a more prominent role in dating business cycles and to criticism that a jobless recovery is not truly a recovery at all. Business Cycle Dating Committee members have been reluctant to change their criteria too drastically, though, because they want to maintain consistency in the official chronology of contractions and expansions.

While all three recent recoveries have been weak for employment, the job market has to cover the most ground from the latest recession.

From December 2007 to June 2009, the American economy lost more than 5 percent of its nonfarm payroll jobs, the largest decline since World War II. And through December 2009, the month that employment hit bottom, the nation had lost more than 6 percent of its jobs.

The unemployment rate, which comes from a different survey, peaked last October at 10.1 percent. The postwar high was in 1982, at 10.8 percent. But the composition of the work force was very different in the 1980s — it was younger, and younger people tend to have higher unemployment rates — and so if adjusted for age, unemployment this time around actually looks much worse.

The broadest measure of unemployment, including people who are reluctantly working part time when they wish to be working full time and those who have given up looking for work altogether, also was at its highest level since World War II.

There is some debate, though, about whether this recession was the worst in terms of output.

Adjusted for inflation, output contracted more than in any other postwar period, according to Robert E. Hall, a Stanford economics professor and committee chairman.

But some economists say that a better measure would be the gap between where output is and where it could have been if growth had been uninterrupted.

“It’s definitely not as deep as 1981-82 when measured relative to the economy’s potential growth rate,” Mr. Gordon said.

Besides employment, nearly every indicator that the committee considers simultaneously reached a low point in June 2009, which made that month a relatively easy selection as the official turning point, Mr. Gordon said. The committee previously met in April but had decided that the data were inconclusive.

In its statement on Monday affirming the recession’s end, the bureau took care to note that the recession, by definition, meant only the period until the economy reached its low point — not a return to its previous vigor.

“In declaring the recession over, we’re not at all saying the unemployment rate, or anything else, has returned to normal,” said James H. Stock, an economics professor at Harvard and a member of the business cycle committee.

“We clearly still have a long ways to go.”

    Recession May Be Over, but Joblessness Remains, NYT, 20.9.2010, http://www.nytimes.com/2010/09/21/business/economy/21econ.html

The Angry Rich

September 19, 2010
The New York imes
By PAUL KRUGMAN

Anger is sweeping America. True, this white-hot rage is a minority phenomenon, not something that characterizes most of our fellow citizens. But the angry minority is angry indeed, consisting of people who feel that things to which they are entitled are being taken away. And they’re out for revenge.

No, I’m not talking about the Tea Partiers. I’m talking about the rich.

These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can’t find jobs; laid-off 50-somethings fear that they’ll never work again.

Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won’t find it among these suffering Americans. You’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes.

The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Thus when New York magazine published an article titled “The Wail Of the 1%,” it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds, but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses. When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland, the proposal in question would have closed a tax loophole that specifically benefits fund managers like him.

Now, however, as decision time looms for the fate of the Bush tax cuts — will top tax rates go back to Clinton-era levels? — the rage of the rich has broadened, and also in some ways changed its character.

For one thing, craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda, that “the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s.” When it comes to defending the interests of the rich, it seems, the normal rules of civilized (and rational) discourse no longer apply.

At the same time, self-pity among the privileged has become acceptable, even fashionable.

Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families. Even tax breaks for the rich were justified in terms of trickle-down economics, the claim that lower taxes at the top would make the economy stronger for everyone.

These days, however, tax-cutters are hardly even trying to make the trickle-down case. Yes, Republicans are pushing the line that raising taxes at the top would hurt small businesses, but their hearts don’t really seem in it. Instead, it has become common to hear vehement denials that people making $400,000 or $500,000 a year are rich. I mean, look at the expenses of people in that income class — the property taxes they have to pay on their expensive houses, the cost of sending their kids to elite private schools, and so on. Why, they can barely make ends meet.

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

You see, the rich are different from you and me: they have more influence. It’s partly a matter of campaign contributions, but it’s also a matter of social pressure, since politicians spend a lot of time hanging out with the wealthy. So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes, politicians feel their pain — feel it much more acutely, it’s clear, than they feel the pain of families who are losing their jobs, their houses, and their hopes.

And when the tax fight is over, one way or another, you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed. America must make hard choices, they’ll say; we all have to be willing to make sacrifices.

But when they say “we,” they mean “you.” Sacrifice is for the little people.

    The Angry Rich, NY, 19.9.2010, http://www.nytimes.com/2010/09/20/opinion/20krugman.html

For the Unemployed Over 50, Fears of Never Working Again

September 19, 2010
The New York Times
By MOTOKO RICH

VASHON ISLAND, Wash. — Patricia Reid is not in her 70s, an age when many Americans continue to work. She is not even in her 60s. She is just 57.

But four years after losing her job she cannot, in her darkest moments, escape a nagging thought: she may never work again.

College educated, with a degree in business administration, she is experienced, having worked for two decades as an internal auditor and analyst at Boeing before losing that job.

But that does not seem to matter, not for her and not for a growing number of people in their 50s and 60s who desperately want or need to work to pay for retirement and who are starting to worry that they may be discarded from the work force — forever.

Since the economic collapse, there are not enough jobs being created for the population as a whole, much less for those in the twilight of their careers.

Of the 14.9 million unemployed, more than 2.2 million are 55 or older. Nearly half of them have been unemployed six months or longer, according to the Labor Department. The unemployment rate in the group — 7.3 percent — is at a record, more than double what it was at the beginning of the latest recession.

After other recent downturns, older people who lost jobs fretted about how long it would take to return to the work force and worried that they might never recover their former incomes. But today, because it will take years to absorb the giant pool of unemployed at the economy’s recent pace, many of these older people may simply age out of the labor force before their luck changes.

For Ms. Reid, it has been four years of hunting — without a single job offer. She buzzes energetically as she describes the countless applications she has lobbed through the Internet, as well as the online courses she is taking to burnish her software skills.

Still, when she is pressed, her can-do spirit falters.

“There are these fears in the background, and they are suppressed,” said Ms. Reid, who is now selling some of her jewelry and clothes online and is late on some credit card payments. “I have had nightmares about becoming a bag lady,” she said. “It could happen to anyone. So many people are so close to it, and they don’t even realize it.”

Being unemployed at any age can be crushing. But older workers suspect their résumés often get shoved aside in favor of those from younger workers. Others discover that their job-seeking skills — as well as some technical skills sought by employers — are rusty after years of working for the same company.

Many had in fact anticipated working past conventional retirement ages to gird themselves financially for longer life spans, expensive health care and reduced pension guarantees.

The most recent recession has increased the need to extend working life. Home values, often a family’s most important asset, have been battered. Stock portfolios are only now starting to recover. According to a Gallup poll in April, more than a third of people not yet retired plan to work beyond age 65, compared with just 12 percent in 1995.

Older workers who lose their jobs could pose a policy problem if they lose their ability to be self-sufficient. “That’s what we should be worrying about,” said Carl E. Van Horn, professor of public policy and director of the John J. Heldrich Center for Workforce Development at Rutgers University, “what it means to this class of the new unemployables, people who have been cast adrift at a very vulnerable part of their career and their life.”

Forced early retirement imposes an intense financial strain, particularly for those at lower incomes. The recession and its aftermath have already pushed down some older workers. In figures released last week by the Census Bureau, the poverty rate among those 55 to 64 increased to 9.4 percent in 2009, from 8.6 percent in 2007.

But even middle-class people who might skate by on savings or a spouse’s income are jarred by an abrupt end to working life and to a secure retirement.

“That’s what I spent my whole life in pursuit of, was security,” Ms. Reid said. “Until the last few years, I felt very secure in my job.”

As an auditor, Ms. Reid loved figuring out the kinks in a manufacturing or parts delivery process. But after more than 20 years of commuting across Puget Sound to Boeing, Ms. Reid was exhausted when she was let go from her $80,000-a-year job.

Stunned and depressed, she sent out résumés, but figured she had a little time to recover. So she took vacations to Turkey and Thailand with her husband, who is a home repairman. She sought chiropractic treatments for a neck injury and helped nurse a priest dying of cancer.

Most of her days now are spent in front of a laptop, holed up in a lighthouse garret atop the house that her husband, Denny Mielock, built in the 1990s on a breathtaking piece of property overlooking the sound.

As she browses the job listings that clog her e-mail in-box, she refuses to give in to her fears. “If I let myself think like that all the time,” she said, “I could not even bear getting out of bed in the morning.”

With her husband’s home repair business pummeled by the housing downturn, the bills are mounting. Although the couple do not have a mortgage on their 3,000-square-foot house, they pay close to $7,000 a year in property taxes. The roof is leaking. Their utility bills can be $300 a month in the winter, even though they often keep the thermostat turned down to 50 degrees.

They could try to sell their home, but given the depressed housing market, they are reluctant.

“We are circling the drain here, and I am bailing like hell,” said Ms. Reid, emitting an incongruous cackle, as if laughter is the only response to her plight. “But the boat is still sinking.”

It is not just the finances that have destabilized her life.

Her husband worries that she isolates herself and that she does not socialize enough. “We’ve both been hard workers our whole lives,” said Mr. Mielock, 59. Ms. Reid sometimes rose just after 3 a.m. to make the hourlong commute to Boeing’s data center in Bellevue and attended night school to earn a master’s in management information systems.

“A job is more than a job, you know,” Mr. Mielock said. “It’s where you fit in society.”

Here in the greater Seattle area, a fifth of those claiming extended unemployment benefits are 55 and older.

To help seniors polish their job-seeking skills, WorkSource, a local consortium of government and nonprofit groups, recently began offering seminars. On a recent morning, 14 people gathered in a windowless conference room at a local community college to get tips on how to age-proof their résumés and deflect questions about being overqualified.

Motivational posters hung on one wall, bearing slogans like “Failure is the path of least persistence.”

Using PowerPoint slides, Liz Howland, the chipper but no-nonsense session leader, projected some common myths about older job-seekers on a screen: “Older workers are less capable of evaluating information, making decisions and problem-solving” or “Older workers are rigid and inflexible and have trouble adapting to change.”

Ms. Howland, 61, ticked off the reasons those statements were inaccurate. But a clear undercurrent of anxiety ran through the room. “Is it really true that if you have the energy and the passion that they will overlook the age factor?” asked a 61-year-old man who had been laid off from a furniture maker last October.

Gallows humor reigned. As Ms. Howland — who suggested that applicants remove any dates older than 15 years from their résumé — advised the group on how to finesse interview questions like “When did you have the job that helped you develop that skill?” one out-of-work journalist deadpanned: “How about ‘during the 20th century?’ ”

During a break, Anne Richard, who declined to give her age, confessed she was afraid she would not be able to work again after losing her contract as a house director at a University of Washington sorority in June. Although she had 20 years of experience as an office clerk in Chattanooga, Tenn., she feared her technology skills had fallen behind.

“I don’t feel like I can compete with kids who have been on computers all their lives,” said Ms. Richard, who was sleeping on the couch of a couple she had met at church and contemplating imminent homelessness.

Older people who lose their jobs take longer to find work. In August, the average time unemployed for those 55 and older was slightly more than 39 weeks, according to the Labor Department, the longest of any age group. That is much worse than in August 1983, also after a deep recession, when someone unemployed in that age group spent an average of 27.5 weeks finding work.

At this year’s pace of an average of 82,000 new jobs a month, it will take at least eight more years to create the 8 million positions lost during the recession. And that does not even allow for population growth.

Advocates for the elderly worry that younger people are more likely to fill the new jobs as well.

“I do think the longer someone is out of work, the more employers are going to question why it is that someone hasn’t been able to find work,” said Sara Rix, senior strategic policy adviser at AARP, the lobbying group for seniors. “Their skills have atrophied for one thing, and technology changes so rapidly that even if nothing happened to the skills that you have, they may become increasingly less relevant to the jobs that are becoming available.”

In four years of job hunting, Ms. Reid has discovered that she is no longer technologically proficient. In one of a handful of interviews she has secured, for an auditing position at the Port of Seattle, she learned that the job required skills in PeopleSoft, financial software she had never used. She assumes that deficiency cost her the job.

Ms. Reid is still five years away from being eligible for Social Security. But even then, she would be drawing early, which reduces monthly payments. Taking Social Security at 62 means a retiree would receive a 25 percent lower monthly payout than if she worked until 66.

Ms. Reid is in some ways luckier than others. Boeing paid her a six-month severance, and she has health care benefits that cover her and her husband for $40 a month.

And she admits some regrets: she had a $180,000 balance in her 401(k) account, and paid $80,000 in penalties and taxes when she cashed it out early. She did not rein in her expenses right away. And now, her $500-a-week unemployment benefits have been exhausted.

She has since cut back, forgoing Nordstrom shopping sprees and theater subscriptions, but also cutting out red meat at home and putting off home repairs.

In order to qualify for accounting posts, she is taking an online training course in QuickBooks, a popular accounting software used by small businesses. She recently signed up for a tax course at an H&R Block tax preparation office in Seattle.

And she is plugging ahead with her current plan: to send out 600 applications to accounting firms in the area, offering her services for the next tax season. Eventually, she wants to open her own business.

With odd jobs and her husband’s — albeit shriveled — earnings, she could stagger along. For now, she stitches together an income by gardening for neighbors, helping fellow church members with their computers, and participating in Internet surveys for as little as $5 apiece.

“You don’t necessarily have to go through the door,” Ms. Reid said. “You can go around it and go under it. I can be very creative. I think that I will eventually manage to pull this together.”

    For the Unemployed Over 50, Fears of Never Working Again, NYT, 19.9.2010, http://www.nytimes.com/2010/09/20/business/economy/20older.html

Wall Street’s Engines of Profit Are Slowing Down

September 19, 2010
The New York Times
By NELSON D. SCHWARTZ

Inside the great investment houses on Wall Street, business has taken a surprising turn — downward.

Even after taxpayer bailouts restored bankers’ profits and pay, the great Wall Street money machine is decelerating. Big financial institutions, including commercial banks, are still making a lot of money. But given unease in the financial markets and the economy, brokerages and investment banks are not making nearly as much as their executives, employees and investors had hoped.

After an unusually sharp slowdown in trading this summer, analysts are rethinking their profit forecasts for 2010.

The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.

While the numbers will not be known until after the third quarter ends and financial companies begin reporting earnings in October, the pace of trading this summer was slow even by normal summer standards. Trading in shares listed on the New York Stock Exchange was down by 11 percent in July from 2009 levels, and August volume was off nearly 30 percent.

“What’s happened in the third quarter is that after a very slow summer, people expected things to come back,” said Ms. Whitney. “But they haven’t, and the inactivity is really squeezing everyone.”

The downward slide on Wall Street parallels a similar shift in the broader economy, which has slowed considerably since showing signs of a nascent recovery this spring. And if banks come under pressure, all but the safest borrowers may struggle to get loans.

With less than two weeks to go in the third quarter, companies will be hard-pressed to fulfill earlier, more optimistic expectations.

“It’s like the marathon: if you’re five miles behind, you can’t make that up in the last 10 minutes of the race,” said David H. Ellison, president of FBR Fund Advisers, a money management firm that specializes in financial companies. Many banks are barely scraping by in traditional Wall Street business.

As a result, executives, portfolio managers and analysts say that even the mighty Goldman Sachs, which posted a profit every day for the first three months of the year, is unlikely to deliver the kind of profit growth that investors have come to expect.

Keith Horowitz, a bank analyst at Citigroup, said he expected Goldman Sachs to earn $7.8 billion in 2010, a 35 percent decline from the $12.1 billion it made last year.

The drop in trading translates into lower commissions for brokerage firms, as well as a weaker environment for underwriting initial public offerings and other stock issues, traditionally a highly lucrative niche.

Banks are also scaling back on making bets with their own money — known as proprietary trading — another huge profit source in recent years that will soon be forbidden under terms of the financial reform legislation passed by Congress this summer.

Indeed, analysts have finally started to bring their forecasts in line with the new reality. On Sept. 12, Mr. Horowitz reduced his estimates for third-quarter profits at Goldman and Morgan Stanley.

Mr. Horowitz had predicted Goldman would make $1.75 billion in the third quarter, or $3 a share; he now expects Goldman’s profit to total $1.34 billion, or $2.30 a share. For Morgan Stanley, his revision was even steeper, with earnings expectations revised downward to $140 million, or 10 cents a share, from $726 million, or 53 cents a share.

Mr. Horowitz’s estimates are considerably lower than the consensus among analysts who track the two companies. If the other analysts revise their estimates closer to his, they would put pressure on the shares.

One of the rare bright spots for Wall Street recently has been the issuance of junk bonds, as ultra-low interest rates encourage investors to seek out riskier debt that carries a higher yield. But that will not be enough to offset the weakness elsewhere, said one top Wall Street executive who insisted on anonymity because he was not authorized to speak publicly for his company, and because final numbers would not be tallied until the end of the month.

To make matters worse, he said, many Wall Street firms increased their work forces in the first half of the year, before the mood shifted and worries of a double-dip recession arose. If activity remains anemic, firms could soon begin cutting jobs again.

“I think the summer was horrible for everyone, and no one expected it to be as bad as it was,” he said. “It’s coming back a little bit in September but nowhere near enough to make up for what happened in July and August.”

The profit picture is brighter for diversified companies like JPMorgan Chase and Bank of America, which have larger commercial and retail banking operations in addition to their Wall Street units, but some analysts say earnings expectations for them could come down as well.

“Estimates still seem a little high, and the revenue story for all the banks is not a good one,” said Ed Najarian, who tracks the banking sector for ISI, a New York research firm.

With interest rates plunging, banks are making less off their interest-earning assets like government bonds and other ultra-safe securities. At the same time, demand for new loans remains weak.

One wild card will be the credit card portfolios at major banks like JPMorgan, Bank of America and Citigroup. As delinquencies ease, Mr. Najarian said, credit losses are likely to decline. That trend helped earnings at JPMorgan in the second quarter, and could be crucial again in the third quarter.

Ms. Whitney says the gloomy short-term predictions foreshadow a series of lean years in the broader financial services industry.

Indeed, she said the Street faced a “resizing” not seen since the cutbacks that followed the bursting of the dot-com bubble a decade ago.

“We expect compensation to be down dramatically this year,” she wrote in a recent report. She predicts the American banking industry will lay off 40,000 to 80,00 employees, or as many as 1 in 10 of its workers.

That may be extreme, but Ms. Whitney argues that the boom years are not coming back anytime soon. As both consumers and companies cut back on debt, and financial reform rules put the brakes on profitable niches like derivatives and proprietary trading, the engines of earnings growth for the last decade will continue to sputter.

    Wall Street’s Engines of Profit Are Slowing Down, NYT, 19.9.2010, http://www.nytimes.com/2010/09/20/business/20wall.html

Obama Is Said to Be Preparing to Seek Approval on Saudi Arms Sale

September 17, 2010
The New York Times
By THOM SHANKER and DAVID E. SANGER

WASHINGTON — President Obama is preparing to seek Congressional approval for a huge arms sale to Saudi Arabia, chiefly intended as a building block for Middle East regional defenses to box in Iran, according to administration and Pentagon officials.

The advanced jet fighters and helicopters for Saudi Arabia, long a leading customer for these weapons, could become the largest arms deal in American history, and one significant enough to shift the region’s balance of power over the course of a decade.

The key element of the sale would be scores of new F-15 combat aircraft, along with more than 175 attack and troop-transport helicopters and, if subsequent negotiations are successful, ships and antimissile defenses. The deal has been put together in quiet consultations with Israel, which has sought assurances that it will retain its technological edge over Saudi forces, even as Saudi Arabia improves its ability to face down a shared rival, the Iranians.

“We want Iran to understand that its nuclear program is not getting them leverage over their neighbors, that they are not getting an advantage,” a senior administration official said Friday, describing the Saudi sale as part of a broader regional strategy in which the United States has bolstered antimissle defenses in Arab states along the Persian Gulf. “We want the Iranians to know that every time they think they will gain, they will actually lose.”

Though the timing appears coincidental, Congress will likely be formally notified of the proposed sale in the coming days, during a visit to the United States by President Mahmoud Ahmadinejad of Iran. Mr. Ahmadinejad has used his annual visit to address the United Nations General Assembly as a moment to denounce the United States and proclaim that Iran’s nuclear program is entirely peaceful, though this month international weapons inspectors said they had been stonewalled on important questions about Iranian work on warhead designs.

When the arms sale plan is formally sent to Congress, that will start a 30-day clock for it to consider the issue. There is little question it will go forward — the administration is already talking about how many jobs it will create in Congressional districts around the country — but several members of Congress have already expressed reservations about whether it would erode Israel’s military edge.

Administration officials would not discuss the proposed sale on the record because the pre-notification negotiations with Congressional committees were still under way. The Wall Street Journal, which first reported the deal on Tuesday, projected that the value could top $60 billion. But officials involved in the planning said a firm estimate remained impossible because the sale would unfold in phases and would be likely to change along the way as weapons packages, battlefield-management systems and service contracts were decided.

Saudi Arabia has over the decades been the largest purchaser of American arms, with a package for advanced-radar aircraft and associated command systems in the early 1980s worth about $7.5 billion. That was followed in the early 1990s by a deal for jet fighters and support systems that cost nearly $10 billion, according to government records. Another gulf partner that serves as a front line against Iran, the United Arab Emirates, has also purchased significant amounts of American weapons, in particular air-defense systems.

In the past, Israel has often regarded those sales with suspicion. But in recent years, the standoff with Iran has changed the regional dynamics. Officials from Israel, Saudi Arabia and the United Arab Emirates describe their perceptions of the threat from Iran in very similar terms.

Since coming to office, Mr. Obama and his top officials have hinted at extending the American defense umbrella over much of the Persian Gulf, in hopes of preventing other states in the region, including the Saudi Arabia, from seeking nuclear arms of their own. The sale of conventional weapons, the theory goes, helps persuade Saudia Arabia and other Arab states that they could deter Iranian ambitions, even without their own nuclear capability.

There is an added benefit for the American military, in addition to helping regional partners bolster their defenses with weapons that cannot be matched by Iran. The purchase of these American combat systems and related military support, including American trainers, would allow the United States armed forces to operate seamlessly in that part of the world, according to Pentagon officials.

“We are helping these allied and partner nations create their own containment shield against Iran,” said an American military officer. “It is a way of deterring Iran, but helpful to us in so many other ways.”

A senior Defense Department official said the proposed sale would include 84 new F-15s and an agreement to modernize 70 of Saudi Arabia’s older F-15s to that same upgraded configuration. The official said Saudi Arabia was expected to retire its older aircraft as the new and upgraded warplanes arrived, so that over the next 5 or 10 years the Saudi Air Force would be far more capable, but not larger in number.

In addition, the weapons package would include 70 Apache attack helicopters, 72 Black Hawk troop-transport helicopters and 36 Little Bird helicopters. The Little Bird is a small, agile helicopter used by American Special Operations forces for surveillance, as well as for inserting or extracting small numbers of combat troops quickly and surreptitiously.

    Obama Is Said to Be Preparing to Seek Approval on Saudi Arms Sale, NYT, 17.9.2010, http://www.nytimes.com/2010/09/18/world/18arms.html

Mr. Geithner and China

September 17, 2010
The New York Times

It is clear that China is going to keep manipulating its currency — and crowding out every other exporter — until the world pushes back. So it was good to hear Treasury Secretary Timothy Geithner speaking out this week on Capitol Hill, warning that an undervalued Chinese currency “makes it more difficult for goods and services produced by American workers to compete.”

The problem is that if the United States is the only one pushing back then Beijing will find it all too easy to ignore — claiming that it is resisting the American bully.

The policy is not in China’s long-term interest — as Mr. Geithner made clear in his testimony. It yields little employment growth and represses household spending. But Beijing has been reluctant to give up a strategy that has underpinned years of stellar economic growth.

It is once again swamping the world with exports. And it is unlikely to change until more countries — in Europe and Asia but especially India, Brazil and other developing countries, which China sees as its political constituency — start complaining. They are also the countries most hurt by Beijing’s currency manipulation. Mr. Geithner told Congress that he would look at the Obama administration’s entire “mix of tools.” The decision this week by the United States trade representative to bring cases at the World Trade Organization against China’s punitive tariffs on American steel and its discrimination against American debit card companies is a start.

The administration will also have to be careful not to unleash something it can’t control. Protectionist impulses run frighteningly deep in Congress.

At the hearing, Senator Charles Schumer declared that “China’s currency manipulation is like a boot to the throat of our recovery. This administration refuses to try and take that boot off our neck.” Nearly 100 members of the House from both parties recently sent a letter to the leadership asking for a vote on legislation that would impose new tariffs on Chinese imports to make up for its artificially cheap currency.

That can be a dangerous game. Unilateral trade sanctions could quickly lead to retaliation and escalate into a bilateral trade war that would benefit nobody and damage everybody.

The administration’s softly-softly approach has made very little headway. China announced in June that it would release its currency peg to the dollar. Its currency, the renminbi, has appreciated less than 2 percent against the dollar since, and it has declined against the euro, the yen and other currencies.

It is good to hear Mr. Geithner speaking out. It was also good to hear Japan this week criticizing China’s currency manipulation. The Obama administration now needs to persuade more countries to speak up. That may be the only way to get China to abandon its victim act and its policy that is doing huge economic damage around the world.

    Mr. Geithner and China, NYT, 17.9.2010, http://www.nytimes.com/2010/09/18/opinion/18sat1.html

Two Different Worlds

September 17, 2010
The New York Times
By BOB HERBERT

I didn’t notice much when a terrific storm slammed into parts of New York City on Thursday evening. I was working at my computer in a quiet apartment on the Upper West Side of Manhattan. The skies darkened and it began to rain, and I could hear thunder. But that’s all. I made a cup of coffee and kept working.

While I remained oblivious, the storm took a frightening toll in the boroughs of Brooklyn, Queens and Staten Island. A woman who was trying to walk home with her 10-year-old daughter from Prospect Park in Brooklyn told me the next day that it had been the most harrowing experience of her life. “With the wind and the rain, it was like being trapped in a car wash,” she said. “And then a tree crashed down on a car right in front of us.”

They ran soaking wet up the steps of a brownstone and the owner, a stranger, let them come inside.

The winds reached tornadolike intensity. Trees were uprooted and blown into electrical power lines. Roofs were blown from buildings. One woman was killed, and several neighborhoods were devastated.

I eventually heard about it on the news.

The movers and shakers of our society seem similarly oblivious to the terrible destruction wrought by the economic storm that has roared through America. They’ve heard some thunder, perhaps, and seen some lightning, and maybe felt a bit of the wind. But there is nothing that society’s leaders are doing — no sense of urgency in their policies or attitudes — that suggests they understand the extent of the economic devastation that has come crashing down like a plague on the poor and much of the middle class.

The American economy is on its knees and the suffering has reached historic levels. Nearly 44 million people were living in poverty last year, which is more than 14 percent of the population. That is an increase of 4 million over the previous year, the highest percentage in 15 years, and the highest number in more than a half-century of record-keeping. Millions more are teetering on the edge, poised to fall into poverty.

More than a quarter of all blacks and a similar percentage of Hispanics are poor. More than 15 million children are poor.

The movers and shakers, including most of the mainstream media, have paid precious little attention to this wide-scale economic disaster.

Meanwhile, the middle class, hobbled for years with the stagnant incomes that accompany extreme employment insecurity, is now in retreat. Joblessness, home foreclosures, personal bankruptcy — pick your poison. Median family incomes were 5 percent lower in 2009 than they were a decade earlier. The Harvard economist Lawrence Katz told The Times, “This is the first time in memory that an entire decade has produced essentially no economic growth for the typical American household.”

I don’t know what it will take, maybe a full-blown depression, for policy makers to decide that they need to take extraordinary additional steps to cope with this drastic economic and employment emergency. Nothing currently on the table will turn things around in a meaningful way. We’re facing a jobs deficit of about 11 million, which is about how many new ones we’d have to create just to get our heads above water. It will take years — years — just to get employment back to where it was when the recession struck in December 2007.

If Republicans take over the policy levers, forget about it. The party of Palin, Limbaugh and Boehner — with its tax cuts for the rich and obsession with the deregulatory, free-market zealotry that brought us the Great Recession — will only accelerate the mass march into poverty.

The G.O.P. wants to further shred the safety net, wants to give corporations even greater clout over already debased workers, and wants to fatten the coffers of the already obscenely rich.

While working people are suffering the torments of joblessness, underemployment and dwindling compensation, corporate profits have rebounded and the financial sector is once again living the high life. This helps to keep the people at the top comfortably in denial about the extent of the carnage.

Millions of struggling voters have no idea which way to turn. They are suffering under the status quo, but those with any memory at all are afraid of a rerun of the catastrophic George W. Bush era. An Associated Press article, based on recent polling, summed the matter up: “Glum and distrusting, a majority of Americans today are very confident in — nobody.”

What is desperately needed is leadership that recognizes the depth and intensity of the economic crisis facing so many ordinary Americans. It’s time for the movers and shakers to lift the shroud of oblivion and reach out to those many millions of Americans trapped in a world of hurt.

    Two Different Worlds, NYT, 17.9.2010, http://www.nytimes.com/2010/09/18/opinion/18herbert.html

Recession Raises Poverty Rate to a 15-Year High

September 16, 2010
The New York Times
By ERIK ECKHOLM

The percentage of Americans struggling below the poverty line in 2009 was the highest it has been in 15 years, the Census Bureau reported Thursday, and interviews with poverty experts and aid groups said the increase appeared to be continuing this year.

With the country in its worst economic crisis since the Great Depression, four million additional Americans found themselves in poverty in 2009, with the total reaching 44 million, or one in seven residents. Millions more were surviving only because of expanded unemployment insurance and other assistance.

And the numbers could have climbed higher: One way embattled Americans have gotten by is sharing homes with siblings, parents or even nonrelatives, sometimes resulting in overused couches and frayed nerves but holding down the rise in the national poverty rate, according to the report.

The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

The report provides the most detailed picture yet of the impact of the recession and unemployment on incomes, especially at the bottom of the scale. It also indicated that the temporary increases in aid provided in last year’s stimulus bill eased the burdens on millions of families.

For a single adult in 2009, the poverty line was $10,830 in pretax cash income; for a family of four, $22,050.

Given the depth of the recession, some economists had expected an even larger jump in the poor.

“A lot of people would have been worse off if they didn’t have someone to move in with,” said Timothy M. Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin.

Dr. Smeeding said that in a typical case, a struggling family, like a mother and children who would be in poverty on their own, stays with more prosperous parents or other relatives.

The Census study found an 11.6 percent increase in the number of such multifamily households over the last two years. Included in that number was James Davis, 22, of Chicago, who lost his job as a package handler for Fed Ex in February 2009. As he ran out of money, he and his 2-year-old daughter moved in with his mother about a year ago, avoiding destitution while he searched for work.

“I couldn’t afford rent,” he said.

Danise Sanders, 31, and her three children have been sleeping in the living room of her mother and sister’s one-bedroom apartment in San Pablo, Calif., for the last month, with no end in sight. They doubled up after the bank foreclosed on her landlord, forcing her to move.

“It’s getting harder,” said Ms. Sanders, who makes a low income as a mail clerk. “We’re all pitching in for rent and bills.”

There are strong signs that the high poverty numbers have continued into 2010 and are probably still rising, some experts said, as the recovery sputters and unemployment remains near 10 percent.

“Historically, it takes time for poverty to recover after unemployment starts to go down,” said LaDonna Pavetti, a welfare expert at the Center on Budget and Policy Priorities, a liberal-leaning research group in Washington.

Dr. Smeeding said it seemed almost certain that poverty would further rise this year. He noted that the increase in unemployment and poverty had been concentrated among young adults without college educations and their children, and that these people remained at the end of the line in their search for work.

One indirect sign of continuing hardship is the rise in food stamp recipients, who now include nearly one in seven adults and an even greater share of the nation’s children. While other factors as well as declining incomes have driven the rise, by mid-2010 the number of recipients had reached 41.3 million, compared with 39 million at the beginning of the year.

Food banks, too, report swelling demand.

“We’re seeing more younger people coming in that not only don’t have any food, but nowhere to stay,” said Marla Goodwin, director of Jeremiah’s Food Pantry in East St. Louis, Ill. The pantry was open one day a month when it opened in 2008 but expanded this year to five days a month.

And Texas food banks said they distributed 14 percent more food in the second quarter of 2010 than in the same period last year.

The Census report showed increases in poverty for whites, blacks and Hispanic Americans, with historic disparities continuing. The poverty rate for non-Hispanic whites was 9.4 percent, for blacks 25.8 percent and for Hispanics 25.3 percent. The rate for Asians was unchanged at 12.5 percent.

The median income of all households stayed roughly the same from 2008 to 2009. It had fallen sharply the year before, as the recession gained steam and remains well below the levels of the late 1990s — a sign of the stagnating prospects for the middle class.

The decline in incomes in 2008 had been greater than expected, and when the two recession years are considered together, the decline since 2007 was 4.2 percent, said Lawrence Katz, an economist at Harvard. Gains achieved earlier in the decade were wiped out, and median family incomes in 2009 were 5 percent lower than in 1999.

“This is the first time in memory that an entire decade has produced essentially no economic growth for the typical American household,” Mr. Katz said.

The number of United States residents without health insurance climbed to 51 million in 2009, from 46 million in 2008, the Census said. Their ranks are expected to shrink in coming years as the health care overhaul adopted by Congress in March begins to take effect.

Government benefits like food stamps and tax credits, which can provide hundreds or even thousands of dollars in extra income, are not included in calculating whether a family’s income falls above or below the poverty line.

But rises in the cost of housing, medical care or energy and the large regional differences in the cost of living are not taken into account either.

If food-stamp benefits and low-income tax credits were included as income, close to 8 million of those labeled as poor in the report would instead be just above the poverty line, the Census report estimated. At the same time, a person who starts a job and receives the earned income tax credit could have new work-related expenses like transportation and child care. Unemployment benefits, which are considered cash income and included in the calculations, helped keep 3 million families above the line last year, the report said, with temporary extensions and higher payments helping all the more.

The poverty line is a flawed measure, experts agree, but it remains the best consistent long-term gauge of need available, and its ups and downs reflect genuine trends.

The federal government will issue an alternate calculation next year that will include important noncash and after-tax income and also account for regional differences in the cost of living.

But it will continue to calculate the rate in the old way as well, in part because eligibility for many programs, from Medicaid to free school lunches, is linked to the longstanding poverty line.


Reporting was contributed by Rebecca Cathcart in Los Angeles, Emma Graves Fitzsimmons in Chicago, Malcolm Gay in St. Louis, Robert Gebeloff in New York and Malia Wollan in San Francisco.

    Recession Raises Poverty Rate to a 15-Year High, NYT, 16.9.2010, http://www.nytimes.com/2010/09/17/us/17poverty.html

Bad Economy Drives Down American Arms Sales

September 12, 2010
The New York Times
By THOM SHANKER

WASHINGTON — The global economic recession significantly pushed down purchases of weapons last year to the lowest level since 2005, a new government study has found.

The report to Congress concluded that the value of worldwide arms deals in 2009 was $57.5 billion, a drop of 8.5 percent from 2008.

While the United States maintained its role as the world’s leading supplier of weapons, officials nonetheless saw the value of its arms trade sharply decline in 2009. This was in contrast to 2008, when the United States increased the value of its weapons sales despite a drop in business for competitors in the global arms bazaar.

For 2009, the United States signed arms deals worth $22.6 billion — a dominating 39 percent of the worldwide market. Even so, that sales figure was down from $38.1 billion in 2008, which had been a surprising increase over the $25.7 billion in 2007 that defied sluggish economic trends.

The decrease in American weapons sales in 2009 was caused by a pause in major orders from clients in the Middle East and Asia, which had pumped up the value of contracts the year before. At the same time, there were fewer support and services contracts signed with American defense firms last year, the study said.

Russia was a distant second in worldwide weapons sales in 2009, concluding $10.4 billion in arms deals, followed by France, with $7.4 billion in contracts. Other leading arms traders included Germany, Italy, China and Britain.

The annual report was produced by the nonpartisan Congressional Research Service, a division of the Library of Congress. The analysis, regarded as the most detailed collection of unclassified global arms sales data available to the public, was delivered to members of the House and Senate over the weekend in advance of their return to work on Monday after the summer recess.

The decline in new weapons sales worldwide in 2009 was caused by government decisions “to defer the purchase of major systems” in a period of “severe international recession,” wrote Richard F. Grimmett, a specialist in international security at the Congressional Research Service and the author of the study.

The recession did not halt military modernization and improvements, as nations sought to make their armed forces more lethal despite tight budgets.

“Some nations chose to focus on completing the integration into their militaries of major weapons systems they had already purchased,” Mr. Grimmett wrote. Other nations, according to the study, focused available military money on smaller contracts for “training and support services, as well as selective upgrades of existing weapons systems.”

Mr. Grimmett said that while the global recession slowed overall weapons sales, “The international arms market is still very competitive,” with major weapons-producing nations battling over traditional clients and seeking new buyers in emerging markets.

To that end, the study focuses in particular on the category of weapons sales to the developing world, which totaled $45.1 billion of the overall arms trade in 2009, a drop from $48.8 billion in 2008.

In 2009, Brazil was the top weapons buyer in the developing world, concluding $7.2 billion in purchase contracts, followed by Venezuela with $6.4 billion in purchases and Saudi Arabia with $4.3 billion. Other major arms buyers last year were Taiwan, the United Arab Emirates, Iraq, Egypt, Vietnam, India and Kuwait.

Over much of the past decade, Saudi Arabia, China, India and the United Arab Emirates have been among the largest weapons purchasers in this category.

The United States led not only in global arms sales, but also in the category of weapons contracts to the developing world, signing deals worth $17.4 billion in arms to these nations in 2009. Russia was second, followed by France.

“Relationships between arms suppliers and recipients continue to evolve in the 21st century in response to changing political, military and economic circumstances,” Mr. Grimmett concluded. “Where before the principal motivation for arms sales by foreign suppliers might have been to support a foreign policy objective, today that motivation may be based as much on economic considerations.”

The study uses figures in 2009 dollars, with amounts for previous years adjusted for inflation to give a constant financial measurement.

    Bad Economy Drives Down American Arms Sales, NYT, 12.9.2010, http://www.nytimes.com/2010/09/13/world/13weapons.html

Trading Away the Stimulus

September 9, 2010
The New York Times
By ALAN TONELSON and KEVIN L. KEARNS

Washington

THE trade figures from the Commerce Department this week aren’t pretty: despite anemic economic growth, so far this year America’s trade deficit has hit $289 billion, compared with $204 billion for the same period in 2009.

For many people, the trade deficit seems unrelated to the nation’s continued economic crisis. But it is actually a central reason why American growth has lagged and President Obama’s stimulus hasn’t led to a robust recovery: since February 2009, the government has injected $512 billion into the American economy, but during roughly the same period, the trade deficit leaked about $602 billion out of it and into foreign markets.

Consequently, a successful recovery strategy will require aggressive measures to reduce the trade deficit — including new and expanded tariffs to encourage the sale of domestic goods over imports and a serious reindustrialization policy to create the manufacturing strength to exploit these new opportunities.

Advocates of traditional stimulus measures, like increased government spending or tax cuts, rely on recovery models rooted in, respectively, the 1930s and 1980s. Back then government stimulus and tax cuts made sense, because Americans spent almost all the new money on domestically produced goods and services.

For the last few decades, though, our growing trade deficit has undermined the relationship between spending and growth. Today Americans purchase so many foreign-produced goods and services that even large stimulus programs produce virtually no new net growth or employment at home.

Of course, trade deficits have subtracted from American economic prosperity for decades. But until recently, that damage was masked by artificial sources of growth, like the last decade’s credit and housing bubbles. With these phony economic engines gone, the trade deficit’s impact has become painfully clear.

President Obama’s pledge to double exports in five years at least shows the White House is aware of the problem. But without greater reductions in imports, even a doubling of exports would fail to generate substantial net growth or job increases.

It’s also true, as some claim, that the rising personal saving rate could reduce the trade deficit. Indeed, the deficit dropped from July to August in part because American consumers saved more and thus bought fewer foreign goods and services. But increased saving cuts both ways — consumers buy fewer domestic goods and services, too. Higher savings might bring down our trade deficit, but growth would still stagnate.

Fortunately, the government can take other, more effective steps to reduce the trade deficit. For starters, Congress and the president should allow American victims of currency manipulation — primarily industrial companies whose prices are kept artificially high when trade partners keep their currencies under-valued — to obtain compensatory tariffs against currency-subsidized imports.

Second, “Buy American” requirements for federal procurement should be expanded to cover all spending at every level of government.

Also essential is a border tax to counter foreign export rebates. In countries with value-added taxes, those levies are returned to producers when they export their goods — which allows them to lower their products’ prices in our market. In response, we can ensure fair competition in our home market by applying a tax equal to the rebate upon a product’s entry to the American market.

Finally, America needs more sweeping and proactive tariffs on foreign goods and services that compete directly with existing and start-up domestic producers. Opponents insist that significant tariffs would increase international trade tensions. Experience, however, suggests otherwise.

In 1971, President Richard Nixon set unilateral tariffs against Japan, Germany and other countries that refused to let their currencies rise in value. Far from setting off a trade war, the tariffs persuaded other countries to help rebalance the world economy cooperatively. There’s no reason the same thing couldn’t happen today.

These steps would revolutionize American trade policy. They would require suspending some international trade obligations Washington has spent years fighting for. But in such perilous economic times, trade-policy conventions can hardly remain sacrosanct. Otherwise, imports will continue to sabotage the recovery.


Alan Tonelson, a fellow at the United States Business and Industry Council, is the author of “The Race to the Bottom.” Kevin L. Kearns is the president of the council, which is an association of small manufacturers.

    Trading Away the Stimulus, NYT, 9.9.2010, http://www.nytimes.com/2010/09/10/opinion/10Tonelson.html

The Genteel Nation

September 9, 2010
The New York Times
By DAVID BROOKS

Most people who lived in the year 1800 were scarcely richer than people who lived in the year 100,000 B.C. Their diets were no better. They were no taller, and they did not live longer.

Then, sometime around 1800, economic growth took off — in Britain first, then elsewhere. How did this growth start? In his book “The Enlightened Economy,” Joel Mokyr of Northwestern University argues that the crucial change happened in people’s minds. Because of a series of cultural shifts, technicians started taking scientific knowledge and putting it to practical use. For example, entrepreneurs applied geological research to the businesses of mining and transportation.

Britain soon dominated the world. But then it declined. Again, the crucial change was in people’s minds. As the historian Correlli Barnett chronicled, the great-great-grandchildren of the empire builders withdrew from commerce, tried to rise above practical knowledge and had more genteel attitudes about how to live.

This history is relevant today because 65 percent of Americans believe their nation is now in decline, according to this week’s NBC/Wall Street Journal poll. And it is true: Today’s economic problems are structural, not cyclical. We are in the middle of yet another jobless recovery. Wages have been lagging for decades. Our labor market woes are deep and intractable.

The first lesson from the economic historians is that we should try to understand our situation by looking for shifts in ideas and values, not just material changes. Furthermore, most fundamental economic pivot points are poorly understood by people at the time.

If you look at America from this perspective, you do see something akin to the “British disease.” After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place.

The shift is evident at all levels of society. First, the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.

It would be embarrassing or at least countercultural for an Ivy League grad to go to Akron and work for a small manufacturing company. By contrast, in 2007, 58 percent of male Harvard graduates and 43 percent of female graduates went into finance and consulting.

The shift away from commercial values has been expressed well by Michelle Obama in a series of speeches. “Don’t go into corporate America,” she told a group of women in Ohio. “You know, become teachers. Work for the community. Be social workers. Be a nurse. ... Make that choice, as we did, to move out of the money-making industry into the helping industry.” As talented people adopt those priorities, America may become more humane, but it will be less prosperous.

Then there’s the middle class. The emergence of a service economy created a large population of junior and midlevel office workers. These white-collar workers absorbed their lifestyle standards from the Huxtable family of “The Cosby Show,” not the Kramden family of “The Honeymooners.” As these information workers tried to build lifestyles that fit their station, consumption and debt levels soared. The trade deficit exploded. The economy adjusted to meet their demand — underinvesting in manufacturing and tradable goods and overinvesting in retail and housing.

These office workers did not want their children regressing back to the working class, so you saw an explosion of communications majors and a shortage of high-skill technical workers. One of the perversities of this recession is that as the unemployment rate has risen, the job vacancy rate has risen, too. Manufacturing firms can’t find skilled machinists. Narayana Kocherlakota of the Minneapolis Federal Reserve Bank calculates that if we had a normal match between the skills workers possess and the skills employers require, then the unemployment rate would be 6.5 percent, not 9.6 percent.

There are several factors contributing to this mismatch (people are finding it hard to sell their homes and move to new opportunities), but one problem is that we have too many mortgage brokers and not enough mechanics.

Finally, there’s the lower class. The problem here is social breakdown. Something like a quarter to a third of American children are living with one or no parents, in chaotic neighborhoods with failing schools. A gigantic slice of America’s human capital is vastly underused, and it has been that way for a generation.

Personally, I’m not convinced we’re in decline. There are strengths to counter these weaknesses. But the value shifts are real. Up and down society, people are moving away from commercial, productive activities and toward pleasant, enlightened but less productive ones.

We can get distracted by short-term stimulus debates, but those are irrelevant by now. The real issues are whether the United States is content with gentility shift and whether there is anything that can be done about it in any case.

    The Genteel Nation, 9.9.2010, http://www.nytimes.com/2010/09/10/opinion/10brooks.html

John W. Kluge, Founder of Metromedia, Dies at 95

September 8, 2010
The New York Times
By MARILYN BERGER

John W. Kluge, who parlayed a small fortune from a Fritos franchise into a multibillion-dollar communications empire that made him one of the richest men in America, died on Tuesday night at a family home in Charlottesville, Va. He was 95.

The John W. Kluge Foundation confirmed his death.

Mr. Kluge was the creator of Metromedia, the nation’s first major independent broadcasting entity, a conglomerate that grew to include seven television stations, 14 radio stations, outdoor advertising, the Harlem Globetrotters, the Ice Capades, radio paging and mobile telephones.

An immigrant from Germany, Mr. Kluge (pronounced KLOOG-ee) came to the United States in 1922 and took his first job at the age of 10 as a payroll clerk for his stepfather in Detroit. He made his first million by the time he was 37.

He made his first billion — it was actually almost two billion — in 1984, when he took Metromedia private in a $1.1 billion leveraged buyout and then liquidated the company, more than tripling his take.

He sold the television stations, including WNEW in New York, for more than $2 billion to Rupert Murdoch, who was expanding his communications empire.

Mr. Kluge’s sale of 11 radio stations brought close to $290 million. The outdoor advertising business went for $710 million. The Harlem Globetrotters and the Ice Capades, which together cost the company $6 million, brought $30 million.

Critics complained that he had reaped the bonanza after having paid Metromedia’s stockholders too little when he took the company private. But Mr. Kluge maintained that the value of the company shot up afterward, when the Federal Communications Commission increased the number of television stations a company could own from seven to 12 and ruled that only two cellular telephone systems could operate in a given city.

“That changed the price of poker,” he said.

In 1986, Forbes magazine listed Mr. Kluge as the second-richest man in America (after Sam Walton, the founder of Wal-Mart Stores). By this year, after a bankruptcy of the Bennigan’s and Steak and Ale restaurant chains in 2008, Mr. Kluge had dropped to 109th on the Forbes list with a fortune of $6.5 billion.

Mr. Kluge savored the chance to move into new areas of high technology. He had no patience for those he called “self-important corporation types cut out of the same cookie cutter” who tended to stick to what was safe. He often took Wall Street by surprise, but as the financial analyst Allen J. Gottesman said in 1986: “Whatever he does works out real well. You always assume there was a good reason, and you usually find out later that it was a good move.”

Not everything he touched turned to gold. In 1965 he bought Diplomat magazine in Washington and tried to change it from a society sheet into a serious publication of world affairs. “I lost a million dollars before I ever knew I lost it,” he said.

Three years later he negotiated a proposed $300 million merger of Metromedia with Transamerica only to join in calling off the deal “by mutual consent” in a two-paragraph statement months later, saying a merger would “adversely effect” the growth plans of both companies.

But he never lost his zest for developing new businesses or his taste for complex financial deals.

“I love the work because it taxes your mind,” he said in an interview for this obituary, one of the few he ever gave, after he turned 72. “Years ago, I could have taken a few million dollars and joined the country club and gotten into this pattern of complaining about the world and about the tax law.”

He was critical of corporation executives who put themselves in the limelight. There were no public relations officers on his payroll. He liked to do business behind an unmarked door.

“I think a great deal of publicity becomes an obstacle,” he said. “I’d love to be in the woodwork all my life. I enjoy it when I know who the other people are and they don’t know who I am.”

But it was inevitable that people would come to know who he was, first in the business world as the man with the Midas touch and then as a generous contributor to schools and hospitals.

In his later years his name appeared in the society columns as the host for charity parties that he and his third wife, Patricia, gave on their yacht, the Virginian, or as a guest at dinner dances. (He had taught dancing at an Arthur Murray studio when he was in college.) He grew flowers and collected paintings, African sculpture and Indian, Chinese, Greek and Egyptian objets d’art.

But nothing gave him more pleasure than putting a deal together. And the creation of Metromedia, considered a triumph of financial structuring, may have been his greatest pleasure of all.

The most satisfying day in his life, he said, was the day Barney Balaban of Paramount told him, “Young man, you bring me $4 million and you’ll be able to have the Paramount stock in the Metropolitan Broadcasting Company.”

With that $4 million, Mr. Kluge got into the television business as chief executive of Metropolitan, which consisted of two stations — WNEW and, in Washington, WTTG — and two radio stations. He renamed the company Metromedia in 1961 because he intended to expand it beyond broadcasting.

Mr. Kluge held to a simple maxim: make money and minimize taxes. He made it his business to study the tax code. In 1981, for example, he received tax benefits when he bought buses and subway cars from New York’s Metropolitan Transportation Authority and leased them back to the authority for a tax savings of $50 million over five years.

He also found a way to enhance the company’s revenue by marrying the profits of broadcasting to the depreciation that came with billboard advertising.

“I sold the banks the idea that the Ford Motor Company that advertises on radio and television would also advertise on billboards,” he recalled. “From a financial orientation, if you took the pretax profits of radio and television and the depreciation of outdoor advertising, you increase the cash flow. I impressed the bank so much that I borrowed $14 million and got our money back in 27 months.”

John Werner Kluge was born Sept. 21, 1914, in Chemnitz, Germany. His father died in World War I. After his mother remarried, John was brought to America by his German-American stepfather to live in Detroit. The stepfather, Oswald Leitert, put him to work as a boy in the family contracting business.

Mr. Kluge said he left home when he was 14 to live in the house of a schoolteacher. “I was driven to have an education.”

He worked hard, and successfully, to lose his foreign accent and to get the grades he needed in high school to win a scholarship to college. He first attended Detroit City College, which was later renamed Wayne State University, and transferred to Columbia University when he was offered a full scholarship and living expenses.

At college he distributed Communist literature. “I was never an official member of the Communist Party, but I was quite liberal,” he said many years later. But what got him in trouble was his card playing. At one point the dean called him in to warn that he was in danger of losing his scholarship.

“I told him, ‘Dean, you will never catch me gambling again,’ ” he later recalled, “and it was then that I realized the dean of Columbia University didn’t understand the English language. I had told him he’d never catch me gambling again.”

Mr. Kluge later channeled his fondness for gambling into high-stakes finance. “I don’t really get comfortable when I haven’t got something at risk,” he said. Even as a billionaire twice over, he borrowed money to leverage his next ventures.

Mr. Kluge graduated from Columbia in 1937 and went to work for a small paper company in Detroit. Within three years he went from shipping clerk to vice president and part owner.

After serving in Army intelligence in World War II, he turned to broadcasting and, with a partner, created the radio station WGAY in Silver Spring, Md., in 1946. “It cost us $90,000,” he recalled. “I went up and down the street on Georgia Avenue in Silver Spring to get investors.”

In the 1950s he acquired radio stations in St. Louis, Dallas, Fort Worth, Buffalo, Tulsa, Nashville, Pittsburgh and Orlando, Fla. Meanwhile, he invested in real estate and expanded the New England Fritos corporation, which he had founded in 1947 to distribute Fritos and Cheetos in the Northeast, adding Fleischmann’s yeast, Blue Bonnet margarine and Wrigley’s chewing gum to his distribution network.

In 1951 he formed a food brokerage company, expanding it in 1956 in a partnership with David Finkelstein, and augmented his fortune selling the products of companies like General Foods and Coca-Cola to supermarket chains.

Mr. Kluge served on the boards of numerous companies, including Occidental Petroleum, Orion Pictures, Conair and the Waldorf-Astoria Corporation, as well as many charitable groups, including United Cerebral Palsy.

His philanthropy was prodigious. About a half-billion dollars went to Columbia alone, mainly for scholarships for needy and minority students. One gift, of $400 million, was to be given to the university by his estate when he died.

Mr. Kluge also contributed to the restoration of Ellis Island and in 2000 gave $73 million to the Library of Congress, which established the Kluge Prize for the Study of Humanities.

Mr. Kluge and his third wife, the former Patricia Rose Gay, lived in a Georgian-style house on a 6,000-acre farm near Charlottesville called Albemarle House. He had another home in New Rochelle, N.Y., on Long Island Sound, and an apartment in Manhattan, where he kept much of his modern art collection, including works by Giacometti, Kenneth Noland, Frank Stella and Fernando Botero. He traveled to his houses in his plane and helicopter.

Mr. Kluge became acquainted with the woman who would become his third wife at parties when she was in her mid-20s and he was about 60. “At one party,” he said, “she cooked the dinner and then she did a belly dance on the table and I said to myself, ‘Where have I been all my life?’ ”

A small scandal erupted in 1985 when Mrs. Kluge was chairwoman of a charity ball in Palm Beach, Fla., attended by Charles and Diana, the prince and princess of Wales. The British press disclosed that a nude photograph of Mrs. Kluge had been published a decade before in a British magazine called Knave, which was owned by her first husband. To avoid embarrassment, the Kluges were traveling abroad on the night of the ball.

Their marriage ended in divorce in 1991, and Mrs. Kluge received a big settlement as well as the Virginia estate. He married again, to Maria Tussi Kuttner, who survives him.

Mr. Kluge is also survived by his son, John W. Kluge II; a daughter, Samantha Kluge, from his second marriage, to Yolanda Galardo Zucco; a stepson, Joseph Brad Kluge, whom he adopted; and a grandson. His first wife was Theodora Thomson Townsend.

A convert to Roman Catholicism when he married his third wife, Mr. Kluge said he often went to church. He had planned to be buried in a crypt in a chapel he built on the grounds of Albemarle, but later changed his mind after the house was awarded to his third wife in the divorce.

Mr. Kluge acknowledged that he had been ruled by his ambitions and traced them to the struggles of his boyhood. He recalled a conversation he had with friends in college about their aspirations. “One fellow said he wanted to be a lawyer, another a doctor,” he said. “I said one thing — that the only reason I wanted money was that I was always afraid of being a charity case and of being a ward someplace. That’s what really drove me all my life.”

    John W. Kluge, Founder of Metromedia, Dies at 95, NYT, 8.9.2010, http://www.nytimes.com/2010/09/09/business/media/09kluge.html

Debating the Economy

September 8, 2010
The New York Times

Americans are deeply worried about the economy and their jobs — and about whether their elected representatives in Washington have a real plan for digging out of this mess. They are right to be worried. But this week, at least, voters were given a clear choice about the direction the country can take in November and beyond.

President Obama — who took too long to engage this debate — gave two sensible and, finally, passionate speeches. He said that to create jobs and stabilize the economy, the federal government will have to help businesses invest more, and it will have to spend some more, for a while longer. And he said that the country will never be able to wrestle down the deficit if Congress gives in to Republican demands to extend $700 billion in unjustified and unaffordable tax breaks for the wealthy.

The speeches were a pointed rebuttal to Representative John Boehner, the House Republican leader, who has spearheaded his party’s implacable opposition. In a speech in Ohio last month, billed as the definitive Republican position on the economy, he declared that “the prospect of higher taxes, stricter rules and more regulations” was choking recovery.

The president was exactly right when he said that Mr. Boehner’s proposals were nothing more than a return to the past decade of economic mismanagement; the same policies that helped turn budget surpluses into crippling deficits nearly destroyed the financial system and cast millions of Americans into long-term joblessness.

“Do we return to the same failed policies that ran our economy into the ditch,” he asked on Wednesday.

The immediate battle is over President George W. Bush’s tax cuts, which are set to expire at the end of this year. Mr. Obama wants to make the tax cuts permanent for families that make less than $250,000 a year and let the tax cuts expire for those who make more — about 2 percent of taxpayers. Mr. Boehner says he wants to extend all of the tax cuts for two years — although there is little doubt that the goal of Republicans is to extend all of them permanently.

It makes good sense to extend the middle-class tax cuts temporarily because the weak economy needs the boost, but it makes no sense to extend them for the rich. Middle-class Americans spend tax breaks, while wealthy taxpayers generally save them. In the longer term, more revenue will be needed to keep rebuilding the economy and meet health care and other obligations.

We’re not surprised that Mr. Obama avoided that hard truth. But Mr. Boehner and his party’s position is an utter denial of reality. In the real world, it was lower taxes for the rich, lax rules and deregulation that hurt middle-class Americans and dragged the economy to this dangerous pass.

Mr. Boehner’s much professed concern for small businesses is misdirection. The tax cuts that Mr. Obama would let expire would affect very few owners of small businesses — how many do you know who make more than $250,000 a year? — by any common-sense definition of that term.

Mr. Boehner said he was fed up with “Washington politicians talking about wanting to create jobs as a ploy to get themselves re-elected while doing everything possible to prevent jobs from being created.” Amazingly enough, he was not talking to Republicans.

Mr. Obama did more than just rebut Mr. Boehner. He also offered some sound ideas — some that also had Republican support, at least until Mr. Obama raised them. He proposed on Wednesday to allow businesses to write off all the investments they make in 2011, rather than over several years, to close loopholes that reward businesses that send jobs overseas and to permanently extend a research and development tax credit.

Mr. Obama again called on Congress to pass legislation that would make more credit available to small businesses — legislation that Senate Republicans, for all their claims of concern for small businesses, have delayed passing.

If there is any good news from Mr. Boehner and other Republicans it is that they suddenly want to seem eager to shed their reputation as the Party of No. This week, they suggested that they might be open to some of Mr. Obama’s ideas, which include a $50 billion initial investment to create jobs improving roads, rail lines and airports — as long as those projects were not paid for by taxing billionaires, oil companies and other wealthy corporations. That, of course, is just how Mr. Obama intends to pay for them — and just how he should.

Mr. Obama’s speeches were a robust effort by the president to rally Democrats for the election. It has been a long time coming. And we wish that Democratic leaders in Congress could show the same clear thinking and the same willingness to go head to head with the Republicans. Some commentators are likely to say that Mr. Obama should not have given a national stage to Mr. Boehner, a relative unknown despite his immense power in Congress and his ambition to be the next speaker of the House. But that is just what he needed to do.

For far too long, Mr. Boehner and others have been dominating the political debate with insincere sound bites, Jedi mind games and plain bad economics. How can they claim to care about the deficit and insist on more tax cuts?

The answer, unfortunately, is that they can, and they have, because Mr. Obama has sat on the sidelines and most Congressional Democrats have run for the hills. We are glad to see Mr. Obama fully in the fight.

    Debating the Economy, NYT, 8.9.2010, http://www.nytimes.com/2010/09/09/opinion/09thurs1.html

Obama Offers a Transit Plan to Create Jobs

September 6, 2010
The New York Times
By SHERYL GAY STOLBERG and MARY WILLIAMS WALSH

MILWAUKEE — President Obama, looking to stimulate a sluggish economy and create jobs, called Monday for Congress to approve major upgrades to the nation’s roads, rail lines and runways — part of a six-year plan that would cost tens of billions of dollars and create a government-run bank to finance innovative transportation projects.

With Democrats facing an increasingly bleak midterm election season, Mr. Obama used a speech at a union gathering on Labor Day, the traditional start of the campaign season, to outline his plan. It calls for a quick infusion of $50 billion in government spending that White House officials said could spur job growth as early as next year — if Congress approves.

That is a big if. Though transportation bills usually win bipartisan support, hasty passage of Mr. Obama’s plan seems unlikely, given that Congress has only a few weeks of work left before lawmakers return to their districts to campaign and that Republicans are showing little interest in giving Democrats any pre-election victories.

Central to the plan is the president’s call for an “infrastructure bank,” which would be run by the government but would pool tax dollars with private investment, the White House says. Mr. Obama embraced the idea as a senator; with unemployment still high despite an array of government efforts, the concept has lately been gaining traction in policy circles and on Capitol Hill.

Indeed, some leading proponents of such a bank — including Gov. Arnold Schwarzenegger, Republican of California; Gov. Ed Rendell, Democrat of Pennsylvania; and Michael R. Bloomberg, the independent mayor of New York — would like to see it finance a broader range of projects, including water and clean-energy projects. They say such a bank would spur innovation by allowing a panel of experts to approve projects on merit, rather than having lawmakers simply steer transportation money back home.

“It will change the way Washington spends your tax dollars,” Mr. Obama said here, “reforming the haphazard and patchwork way we fund and maintain our infrastructure to focus less on wasteful earmarks and outdated formulas, and more on competition and innovation that gives us the best bang for the buck.”

But the notion of a government-run bank — indeed, a government-run anything — is bound to prove contentious during an election year in which voters are furious over bank bailouts and over what many perceive as Mr. Obama pursuing a big government agenda. Even before the announcement Monday, Republicans were expressing caution.

“It’s important to keep in mind that increased spending — no matter the method of delivery — is not free,” said Representative Pat Tiberi, an Ohio Republican who is on a Ways and Means subcommittee that held hearings on the bank this year. He warned that “federally guaranteed borrowing and lending could place taxpayers on the hook should the proposed bank fail.”

The announcement comes after weeks of scrambling by a White House desperate to give a jolt to the lackluster recovery, and is part of a broader package of proposals that Mr. Obama intends to introduce on Wednesday during a speech in Cleveland. The transportation initiative would revise and extend legislation that has lapsed.

Specifically, the president wants to rebuild 150,000 miles of road, lay and maintain 4,000 miles of rail track, restore 150 miles of runways and advance a next-generation air-traffic control system.

The White House did not offer a price tag for the full measure or say how many jobs it would create. If Congress simply reauthorized the expired transportation bill and accounted for inflation, the new measure would cost about $350 billion over the next six years. But Mr. Obama wants to “frontload” the new bill with an additional $50 billion in initial investment to generate jobs, and vowed it would be “fully paid for.” The White House is proposing to offset the $50 billion by eliminating tax breaks and subsidies for the oil and gas industry.

After months of campaigning on the theme that the president’s $787 billion stimulus package was wasteful, Republicans sought Monday to tag the new plan with the stimulus label. The Republican National Committee called it “stimulus déjà vu,” and Representative Eric Cantor of Virginia, the House Republican whip, characterized it as “yet another government stimulus effort.”

But Governors Rendell and Schwarzenegger, and Mayor Bloomberg, who in 2008 founded a bipartisan coalition to promote transportation upgrades, praised Mr. Obama. And in policy circles, the plan, especially the call for the infrastructure bank, is generating serious debate.

“This is a very ripe policy question now,” said Robert Puentes, a senior fellow at the Brookings Institution’s Metropolitan Policy Program, who has been working for several years on blueprints for a bank.

On Capitol Hill, Representatives James L. Oberstar, Democrat of Minnesota and chairman of the House Transportation and Infrastructure Committee, has been developing his own bill, as has Representative Rosa DeLauro, Democrat of Connecticut.

Ms. DeLauro’s plan would create an infrastructure bank that would be part of the United States Treasury, where it would attract money from institutional investors, then channel the funds to projects selected by a panel. The program, which would make loans much like the World Bank, would finance projects with the potential to transform whole regions, or even the national economy, the way the interstate highway system and the first transcontinental railway once did.

The outside investors would expect a competitive return on their money, so many of the completed projects would have to charge fees, taxes or tolls. In an interview, Ms. DeLauro said she would be “looking at a broader base,” meaning the bank would finance not just roads and rails, but also telecommunications, water, drainage, green energy and other large-scale works.

But if the projects did not raise enough money, the Treasury might get stuck paying back the investors, a prospect that gave pause to so-called deficit hawks like Mr. Tiberi. In an e-mail last week, he said he agreed the nation’s road and communications networks needed to be improved but was concerned about creating another company like Fannie Mae that might need a bailout.

Inside the White House, the idea for a transportation initiative, and in particular an infrastructure bank, is one that the White House chief of staff, Rahm Emanuel, has been promoting. It was not included in the original $787 billion stimulus program because the administration and Congressional Democratic leaders wanted to pass that package as quickly as possible.

There is no shortage of projects in search of money. The problem, analysts say, is that Congress, which would create the bank, is not known for its ability to single out strategic priorities for growth. Instead, it traditionally builds broad support by giving a little something to everybody — Montana, for instance, would get a small amount of Amtrak money in return for its support for improvements along the Northeast corridor.

“We don’t prioritize,” Mr. Puentes said. “We take this kind of peanut butter approach of spreading investment dollars around very thinly, without targeting them.”

Samuel Staley, director of urban growth and land-use policy for the Reason Foundation, a libertarian research group, said the best way to spend money efficiently would be to establish the bank as a revolving loan fund so that money for new projects would not become available until money for previous projects had been repaid.

Mr. Staley expressed concern that in their zeal to spur growth and create jobs, Congress and the Obama administration would not impose such limits.

“With the $800 billion stimulus program, they were literally just dumping money into the economy,” he said. “There was little legitimate cost-benefit analysis.”


Sheryl Gay Stolberg reported from Milwaukee and Mary Williams Walsh from New York.

    Obama Offers a Transit Plan to Create Jobs, NYT, 6.9.2010, http://www.nytimes.com/2010/09/07/us/politics/07obama.html

Once a Dynamo, the Tech Sector Is Slow to Hire

September 6, 2010
The New York Times
By CATHERINE RAMPELL

For years the technology sector has been considered the most dynamic, promising and globally envied industry in the United States. It escaped the recession relatively unscathed, and profits this year have been soaring.

But as the nation struggles to put people back to work, even high-tech companies have been slow to hire, a sign of just how difficult it will be to address persistently high joblessness. While the labor report released last week showing August figures provided mildly positive news on private-sector hiring, the unemployment rate was 9.6 percent.

The disappointing hiring trend raises questions about whether the tech industry can help power a recovery and sustain American job growth in the next decade and beyond. Its tentativeness has prompted economists to ask “If high tech isn’t hiring, who will?”

“We are talking about people with very particular, advanced skills out there who are at this point just not needed anymore,” says Bart van Ark, chief economist at the Conference Board, a business and economic research organization. “Even in this sector, there is tremendous insecurity.”

Government labor reports released this year, including the most recent one, present a tableau of shrinking opportunities in high-skill fields.

Job growth in fields like computer systems design and Internet publishing has been slow in the last year. Employment in areas like data processing and software publishing has actually fallen. Additionally, computer scientists, systems analysts and computer programmers all had unemployment rates of around 6 percent in the second quarter of this year.

While that might sound like a blessing compared with the rampant joblessness in manufacturing, it is still significantly higher than the unemployment rates in other white-collar professions.

The chief hurdles to more robust technology hiring appear to be increasing automation and the addition of highly skilled labor overseas. The result is a mismatch of skill levels here at home: not enough workers with the cutting-edge skills coveted by tech firms, and too many people with abilities that can be duplicated offshore at lower cost.

That’s a familiar situation to many out-of-work software engineers, whose skills start depreciating almost as soon as they are laid off, given the dynamism of the industry.

“I’m sending out lots and lots and lots of applications, to everywhere within a 50-mile radius,” says Rosamaria Carbonell Mann, 49, a software engineer who was terminated in June when her employer closed its branch in Corvallis, Ore., and sent the work to China.

Corvallis was once a hotbed for tech start-ups. But Ms. Mann said that with layoffs from other tech companies in the area, including Hewlett-Packard, the city now has a glut of people like herself: unemployed engineers with multiple degrees. “I apply for everything I can find, but there are just not that many jobs out there,” she said.

Nevertheless, many high-tech companies large and small say they are struggling to find highly skilled engineering talent in the United States.

“We are firing up our college recruiting program, enduring all manner of humiliation to try to fill these jobs,” said Glenn Kelman, chief executive of Redfin, an online brokerage agency for buying and selling homes that is based in Seattle and San Francisco. “I do think we’re still chasing them, not the other way around.”

He added, “If there’s the one enclave that has been completely unaffected by recession, it would be Stanford computer science students.”

Meanwhile, an earlier generation of engineers is scouring for jobs, and having to compete with a more globalized pool of talent. There are no definitive statistics on how many jobs are being moved overseas. But economists who follow highly skilled employment say that some of the most prominent companies that laid off workers during the recession, like I.B.M., are expanding their work forces abroad.

“Certainly a lot of these I.T. services firms plus the core software firms like Oracle are globalizing their work, or, as they put it, ‘rebalancing’ their work forces,” says Ronil Hira, an assistant professor of public policy at the Rochester Institute of Technology.

In the past, the American jobs most susceptible to being shipped abroad were lower-skilled positions. But now emerging economies have been harvesting their long-term investments in math and science education and attracting high-tech firms — and not just textile factories or call centers — to their shores.

These higher skills have become commodities, said Catherine L. Mann, a global finance professor at the Brandeis University International Business School who studies the outsourcing of jobs. The programming language “C++ is now an international language,” she said. “If that’s all you know, then you’re competing with people in India or China who will do the work for less.”

In addition to lower wages, developing countries offer significant consumer growth, giving businesses a reason to make more products closer to the buyer, and hire locally.

And increasingly, these new, lower-cost research centers, while perhaps initially intended to adapt products for local use, are becoming sources of innovation themselves.

“There’s been this assumption that there’s a global hierarchy of work, that all the high-end service work, knowledge work, R.&D. work would stay in U.S., and that all the lower-end work would be transferred to emerging markets,” said Hal Salzman, a public policy professor at Rutgers and a senior faculty fellow at Heldrich Center for Workforce Development.

“That hierarchy has been upset, to say the least,” he said. “More and more of the innovation is coming out of the emerging markets, as part of this bottom-up push.”

The narrative is familiar to Ms. Mann, the unemployed software engineer. She said her employer, International Gaming Technology, initially told her office that it was opening a branch in China to work with the company’s casino clients in Macau and Australia.

She said she was told that the new branch would be tailoring products to local needs and doing some back-office work. But a year later it absorbed all the operations once performed by the Corvallis staff. International Gaming Technology, based in Reno, Nev., did not respond to repeated requests for comment.

This is the second time, Ms. Mann said, that an employer has sent her job abroad since she received her master’s in computer science more than two decades ago; the last time was in 2001. This week she starts a yearlong program to upgrade her programming skills, paid for by a federal program that assists workers who have been displaced by international trade.

The experience of Ms. Mann and others like her suggests that the technology industry may not be the savior of the American job market and a magic bullet for a moribund economy — even though the Obama administration has called for a revival of math and science training and emphasized the need for American companies to take the lead in fields like clean energy.

Instead, some economists and policy makers are looking to health care to lead an employment surge. They point to the field’s growing demand for new services, the need for physical proximity for many patient procedures, and a bureaucracy that entails layer upon layer of jobs.

Because these jobs seem more secure, Ms. Mann said she briefly considered making a move into health care. “That’s something that can’t be outsourced as far as I can tell, but it’s not for me,” she said. “I don’t do well looking at people’s blood.”

    Once a Dynamo, the Tech Sector Is Slow to Hire, 6.9.2010, http://www.nytimes.com/2010/09/07/business/economy/07jobs.html

One Nation, Two Deficits

September 6, 2010
The New York Times
By PETER ORSZAG

The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term. This month, the Senate will be debating an issue with significant implications for both — what to do about the Bush-era tax cuts scheduled to expire at the end of the year.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

A benign bond market, however, is a luxury we won’t enjoy forever if we fail to tackle our long-term fiscal problem. What’s more, losing the confidence of the bond market could prove painful, since it is widely known that our fiscal trajectory is unsustainable and market sentiment may therefore shift quickly and unpredictably. In any case, as the economy recovers, the dominant problem will move from depressed demand to excessive budget deficits.

Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.

Both approaches lock us into a budget scenario out of which there are few politically plausible routes of escape. Although hardly anyone wants to admit it, we’re not going to solve our budget problem over the next decade unless revenue is part of the equation.

Let’s look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. These figures are uncertain, but they’re the best we have (and they may well turn out to be too optimistic).

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

How would we do this?

One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system. It is also politically impossible, at least in the era of the 60-vote Senate. Those who fear a V.A.T. have little reason to worry — the votes aren’t there.

The beauty of extending the tax cuts for only two years is that canceling them doesn’t require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. And it would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020.

Like all plans, this one isn’t perfect. Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

Finally, a key part of this deal is actually ending the tax cuts in 2013 — and that will surely require a presidential veto on any bills to extend them after that. (Failing to follow through would be particularly problematic if the high-income tax cuts are made permanent — at a 10-year cost of more than $700 billion.) Minimizing this risk requires as much upfront clarity and commitment as possible, including a strong and unambiguous veto threat from the president.

Senate Democrats and Republicans almost never come together anymore. This month, they should fight the dual deficits rather than each other. Let’s continue the tax cuts for two years but end them for good in 2013.


Peter Orszag, the director of the White House Office of Management and Budget from 2009 to 2010 and a distinguished visiting fellow at the Council on Foreign Relations, is a contributing columnist for The Times. He will also be writing at nytimes.com/opinionator.

    One Nation, Two Deficits, 6.9.2010, NYT, http://www.nytimes.com/2010/09/07/opinion/07orszag.html

Indictment Accuses Firm of Exploiting Thai Workers

September 3, 2010
The New York Times
By JULIA PRESTON

A federal grand jury in Honolulu has indicted six labor contractors from a Los Angeles manpower company on charges that they imposed forced labor on some 400 Thai farm workers, in what justice officials called the biggest human-trafficking case ever brought by federal authorities.

The charges, prepared by Justice Department civil rights lawyers, were brought against the president, three executives and two Thai labor contractors from Global Horizons Manpower, which recruits foreign farm workers for the federal agricultural guest worker program, known as H-2A.

The indictment, which was unsealed Thursday in Hawaii, accuses Global Horizons executives of working to “obtain cheap, compliant labor” from guest workers who had been forced into debt in Thailand to pay fees to local recruiters. The company, according to the indictment, sought to “to compel the workers’ labor and service through threats to have them arrested, deported or sent back to Thailand, knowing the workers could not pay off their debts if sent home.”

The number of workers who are said to be victims is the largest ever in a human trafficking case, said Xochitl Hinojosa, a Justice Department spokeswoman.

A woman who answered at the telephone listed for Global Horizons Manpower in Los Angeles said the number no longer was used by the company. Numbers for the company in Tampa, Fla., were disconnected.

Many events described in the indictment took place in 2004 and 2005, when Global Horizons first brought hundreds of Thai workers to farms in Hawaii and Washington State. But Chanchanit Martorell, executive director of the Thai Community Development Center in Los Angeles, said the charges were the culmination of years of pressure by that group. She said questions about Global Horizons’ management of the Thai laborers arose when one of them fled a work crew in Hawaii in 2003, and found his way to Los Angeles and the center.

Since then, Ms. Martorell said, the center has identified 263 Thai guest workers who were brought to the United States on legal temporary visas by Global Horizons, but later fled what they described as oppressive conditions.

The indictment says recruiters in Thailand charged the workers — who earned as little as $1,000 a year farming in their home country — as much as $21,000 to obtain visas for the United States. Global Horizons did not disclose these fees to United States labor officials, the charges state.

Workers who were dispatched to a pineapple farm in Maui and orchards in Washington were paid far less than they had been promised, and were often housed in shoddy conditions, according to the charges; Global Horizons impounded their passports.

In recent weeks, the Equal Employment Opportunity Commission has issued findings against Global Horizons for civil rights violations, Ms. Martorell said. About 100 Thai workers have been granted residency visas for victims of human trafficking.

Among those facing charges are Mordechai Yosef Orian, president of Global Horizons, and Pranee Tubchumpol, director of international relations. Mr. Orian surrendered in Honolulu on Friday and pleaded not guilty, The Associated Press reported. Mr. Tubchumpol was detained in Los Angeles, said a spokesman for the Honolulu prosecutor.

    Indictment Accuses Firm of Exploiting Thai Workers, NYT, 3.9.2010, http://www.nytimes.com/2010/09/04/us/04trafficking.html

Growth in Jobs Beats Estimates, Easing Concerns

September 3, 2010
The New York Times
By MOTOKO RICH

American businesses added more jobs in the last three months than originally estimated, calming fears of a double-dip recession. Yet the pace of growth signaled that the wheels of the economic recovery were still spinning in place.

The private sector added 67,000 jobs in August, with some of the strongest gains in health care, food service and temporary help, according to the Labor Department. That was higher than consensus forecasts, and the government upwardly revised its numbers for June and July, suggesting that job creation was slightly stronger over the summer than originally reported.

But the continuing wind-down of the 2010 Census, as well as state and local government layoffs, led to an overall loss of 54,000 jobs in August.

With businesses adding about half the number of positions needed simply to accommodate population growth — much less dent the ranks of the jobless — the unemployment rate ticked up to 9.6 percent, from 9.5 percent.

“The overall picture is one where the labor market is still kind of treading water,” said Joshua Shapiro, chief United States economist at MFR Inc. “It’s better than sinking, but it’s certainly not surging ahead.”

The August numbers, which pushed up stock gauges on Friday, are likely to do little to assuage political pressure on the Obama administration in the run-up to the midterm elections.

Speaking from the White House Rose Garden on Friday morning, President Obama called the latest jobs report “positive news,” but said he would be unveiling “a broader package of ideas next week” to shore up the flagging economy, although he declined to give specifics. The president once again urged Congress to pass a stalled bill that would offer tax breaks to small businesses and create a $30 billion program to encourage community banks to lend.

“There’s no quick fix for this recession,” he said. “The hard truth is that it took years to create our current economic problems, and it will take more time than any of us would like to repair the damage.”

Optimists were taking their good news where they could. By the end of the day, the Standard & Poor’s 500-stock index was up 1.32 percent, continuing a rally that began in the middle of the week. Market reaction to the jobs data on Friday was tempered somewhat by a report that said growth in the services sector had slowed in August.

“I can say with greater confidence that a relapse into recession now looks even more unlikely,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “And the momentum is gradually building for a stronger fourth quarter and a better 2011.”

The Labor Department revised upward its private sector number for July, raising the number of jobs added to 107,000, from the 71,000 originally reported. And private sector hiring in June, originally reported at 83,000 and lowered to 31,000, was raised again to 61,000.

Mr. Baumohl, who also noted that consumer confidence had edged up in recent surveys and that a closely watched index of manufacturing showed earlier this week that employment was increasing, pointed to the fact that the jobs report showed that average weekly earnings rose slightly, to $774.97 in August from $772.92 in July.

The average workweek among private workers was unchanged at 34.2 hours, but among production and nonsupervisory employees, it edged up to 33.5 hours, from 33.4. Economists generally see such increases in pay and workweeks as an indicator that companies are pushing their existing workers harder to meet rising demand, moves that tend to presage hiring.

According to the government, manufacturing, which has been a bright spot since the beginning of the year and remains so in some other measures, showed a surprise setback in the government numbers released Friday.

For the first time since January, the sector lost jobs, a total of 27,000 in August. The Labor Department said the decline was in part attributable to the fact that carmakers did not shut down plants in July as they usually do, throwing off seasonal adjustments in August.

Thomas J. Duesterberg, the president of the Manufacturers Alliance-MAPI, said that the organization’s members were slowly adding workers. “It’s not the type of robust growth that we would all like to see and would need to see if we’re ever going to get back to the levels that we had before the recession,” Mr. Duesterberg said, “but nonetheless it’s growth.”

Slow growth is certainly cold comfort to those who are out of work and seeking a job, a number that rose to 14.9 million in August, from 14.6 million in July. In one small sign of improvement, the number of people out of work for 27 weeks — which grew alarmingly throughout the recession and its aftermath — declined by 323,000, to 6.2 million in August from 6.6 million in July. The median length of unemployment fell to 19.9 weeks in August, from 22.2 weeks in July.

The so-called underemployment rate — which includes people whose hours have been cut as well as those who would like work but have given up on the search out of discouragement, rose to 16.7 percent in August, compared with 16.5 percent in July. The number of people who were working part time because they could not find full-time work rose to 8.9 million in August, from 8.5 million in July.

Some struggling with unemployment say they will settle for any work, even with pay cuts.

Susan Howard, a Leander, Tex., single mother with a master’s degree, said she was laid off from her software on-demand job in June and since then has been interviewing for jobs that would pay half her previous salary.

But with only $406 a week in benefits and some child support, she has stopped paying her mortgage, deferred her car payments, reached out to a ministry for help with utility bills and enrolled her son in a reduced-cost school lunch program. “My résumé is posted on every career résumé site there is,” she said. “I have been called in for three interviews, but none of them have ever gotten back to me.”

There is unlikely to be much relief in the coming months. Most economists are forecasting lukewarm growth in the second half of the year. Growth in the second quarter was revised down last week, to 1.6 percent from 2.4 percent.

Jan Hatzius, chief United States economist for Goldman Sachs, said he believed the economy would grow at about 1.5 percent in the second half. That is not nearly enough to start bringing down unemployment in a significant way.

“Over all you generally need 3 percent G.D.P. growth or more to start making a dent in the unemployment rate on a consistent basis,” said Mr. Hatzius, referring to gross domestic product.

He noted that Friday’s report might end up being something of a Catch-22 for government action, particularly from the Federal Reserve. Last week, the Fed chairman, Ben S. Bernanke, said the central bank was prepared to act if the economy continued to weaken, but Mr. Hatzius said Friday’s labor market numbers might cause the Fed to hold its powder.

“If you had a really bad report, that would spur people into action more,” Mr. Hatzius said. “But this is going to reduce the need for immediate action.”


Sheryl Gay Stolberg and Christine Hauser contributed reporting.

    Growth in Jobs Beats Estimates, Easing Concerns, NYT, 3.9.2010, http://www.nytimes.com/2010/09/04/business/economy/04jobs.html

How to End the Great Recession

September 2, 2010
The New York Times
By ROBERT B. REICH

Berkeley, Calif.

THIS promises to be the worst Labor Day in the memory of most Americans. Organized labor is down to about 7 percent of the private work force. Members of non-organized labor — most of the rest of us — are unemployed, underemployed or underwater. Friday’s jobs report from the Bureau of Labor Statistics will almost surely show fewer new jobs created in August than the 125,000 needed just to keep up with growth of the potential work force.

The national economy isn’t escaping the gravitational pull of the Great Recession. None of the standard booster rockets are working: near-zero short-term interest rates from the Fed, almost record-low borrowing costs in the bond market, a giant stimulus package and tax credits for small businesses that hire the long-term unemployed have all failed to do enough.

That’s because the real problem has to do with the structure of the economy, not the business cycle. No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept up with what the growing economy could and should have been able to provide them.

This crisis began decades ago when a new wave of technology — things like satellite communications, container ships, computers and eventually the Internet — made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.

But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).

Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.

When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless — as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.

Eventually, of course, the debt bubble burst — and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.

It’s no coincidence that the last time income was this concentrated was in 1928. I do not mean to suggest that such astonishing consolidations of income at the top directly cause sharp economic declines. The connection is more subtle.

The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.

What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns — sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.

Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone, at least for a time. But because this situation can’t be sustained, at some point — 1929 and 2008 offer ready examples — the bill comes due.

This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.

THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.

In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.

By contrast, little has been done since 2008 to widen the circle of prosperity. Health-care reform is an important step forward but it’s not nearly enough.

What else could be done to raise wages and thereby spur the economy? We might consider, for example, extending the earned income tax credit all the way up through the middle class, and paying for it with a tax on carbon. Or exempting the first $20,000 of income from payroll taxes and paying for it with a payroll tax on incomes over $250,000.

In the longer term, Americans must be better prepared to succeed in the global, high-tech economy. Early childhood education should be more widely available, paid for by a small 0.5 percent fee on all financial transactions. Public universities should be free; in return, graduates would then be required to pay back 10 percent of their first 10 years of full-time income.

Another step: workers who lose their jobs and have to settle for positions that pay less could qualify for “earnings insurance” that would pay half the salary difference for two years; such a program would probably prove less expensive than extended unemployment benefits.

These measures would not enlarge the budget deficit because they would be paid for. In fact, such moves would help reduce the long-term deficits by getting more Americans back to work and the economy growing again.

Policies that generate more widely shared prosperity lead to stronger and more sustainable economic growth — and that’s good for everyone. The rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving. That’s the Labor Day lesson we learned decades ago; until we remember it again, we’ll be stuck in the Great Recession.


Robert B. Reich, a secretary of labor in the Clinton administration, is a professor of public policy at the University of California, Berkeley, and the author of the forthcoming “Aftershock: The Next Economy and America’s Future.”

    How to End the Great Recession, NYT, 2.9.2010, http://www.nytimes.com/2010/09/03/opinion/03reich.html

Bernanke Says He Failed to See Financial Flaws

September 2, 2010
The New York Times
By SEWELL CHAN

WASHINGTON — Ben S. Bernanke, who told Congress in 2007 that the subprime mortgage crisis was “likely to be contained,” said Thursday that he had failed to recognize flaws in the financial system that amplified the housing downturn and led to an economic disaster.

Under pointed but polite questioning from members of the Financial Crisis Inquiry Commission, Mr. Bernanke, the chairman of the Federal Reserve, signaled that the central bank was eager to embrace its expanded powers under the Dodd-Frank financial regulatory law that President Obama signed in July.

Mr. Bernanke spoke favorably of forcing huge banks to hold much more capital, particularly if they were systemically important — so much capital that being big would be costly. He declared that “for capitalism to work,” executive pay had to be linked to performance. And he said Americans were justifiably angry that bankers “who drove their companies into a ditch walked off with lots of money.”

He reiterated that the Fed could not have prevented Lehman Brothers from declaring bankruptcy on Sept. 15, 2008, the financial crisis’s nadir moment. But he said he might have unwittingly “supported this myth that we did have a way of saving Lehman,” by failing to make it clear to Congress at a hearing shortly after the bankruptcy that the Fed did not have other options.

“This is my own fault, in a sense,” Mr. Bernanke said, adding that he was worried at the time about contributing to panic in the markets. “I regret not being more straightforward there.”

Mr. Bernanke said that when he made his remarks in 2007 he thought the subprime problems were “manageable.”

“What I did not recognize was the extent to which the system had flaws and weaknesses in it that were going to amplify the initial shock from subprime and make it into a much bigger crisis,” he said.

While Mr. Bernanke stuck with his long-held stance that the Fed had not aided the housing bubble by keeping interest rates too low for too long in 2002-4, he embraced the view of Gary B. Gorton, an influential Yale finance professor.

Professor Gorton has compared the crisis to a classic bank run, but with the “banks” in this case being short-term wholesale financing markets — a loosely regulated, uninsured system known as shadow banking.

Mr. Bernanke offered an analogy of his own, likening the housing crisis to E. coli bacteria that can have deadly consequences when passed along through a vulnerable food safety system.

“E. coli got into the food system, and it created a much bigger problem,” he said. “There was an awful lot of dependence on short-term, unstable funding, which is analogous to the deposits in banks before the period of deposit insurance.”

Asked about the role of financial innovation in the economy, Mr. Bernanke, said that “innovation is not always a good thing.” Some innovations have unpredictable consequences, are used primarily “to take unfair advantage rather than to create a more efficient market,” and create systemic risks, he said.

In a 2002 speech when he was a Fed governor, Mr. Bernanke argued that central banks should not try to use monetary policy to pop asset bubbles. As part of his nearly three hours of testimony on Thursday, Mr. Bernanke held to that view, but said that at the time he had called for careful supervision and regulation to maintain financial stability.

“We didn’t do that,” conceded Mr. Bernanke, who became Fed chairman in 2006. “Going forward, we need to be able to do that.”

As he did in an address to the American Economic Association in January, Mr. Bernanke argued against the perspective that the Fed stood by passively, “not recognizing the obvious,” as housing prices soared.

“As of 2003 to 2004, there really was quite a bit of disagreement among economists about whether there was a bubble, how big it was, whether it was just a local or a national bubble,” Mr. Bernanke testified.

He added: “By the time it was evident that it was a bubble and that it was going to create risk to the financial system, it was rather late to address it through monetary policy.”

Mr. Bernanke said the most important lesson of the crisis was the need to end the “too-big-to-fail problem,” a view echoed by Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, who also testified Thursday.

The Dodd-Frank legislation gives the Fed oversight over the largest financial institutions, including those that are not banks. It gave the Fed a prominent role in the Financial Stability Oversight Council, a body of regulators with the power to seize and break up a systemically important company if it threatens economic stability. The F.D.I.C. would manage that process, known as resolution.

In deciding which large companies will fall under its supervision, Mr. Bernanke said, the Fed will look at size, complexity, interconnectedness and degree of involvement in areas like payments and settlements systems.

He also said the Fed was overhauling how it supervises banks. Alongside traditional examiners, the Fed has assigned additional finance experts, accountants, economists and lawyers to work on oversight. “We really need to take a much broader, multidisciplinary approach,” he said.

Mr. Bernanke and Ms. Bair said it was also imperative that the Basel Committee on Banking Supervision, an international coordinating body of regulators, impose tougher standards on how much and what kinds of capital banks must hold.

The increased capital requirements should include capital that is more aligned with risk and able to absorb losses more effectively, and that works in a countercyclical manner, so that banks have more of it during times of financial stress, he said.

Several European countries have expressed resistance to the Basel process, seeking either to weaken some of the requirements or to stretch out the period of time before the new rules will take effect.

    Bernanke Says He Failed to See Financial Flaws, NYT, 2.9.2010, http://www.nytimes.com/2010/09/03/business/03commission.html