Nouriel Roubini, the New York University professor who predicted the current financial crisis in 2006, talks with Bloomberg's Mark Barton about the measures required to stimulate the U.S. economy.
Roubini surprised me by advocating a massive and expensive government intervention . He is advocating, in a nutshell:
$700B stimulus package
Recapitalization of banks
Reducing the debt burden of households
Ease money supply and restore liquidity
I’m of the opinion that our economy is too dependent on housing and construction, and only a basic retooling and rethinking of our economy will bring about recovery. No amount of spending will put the current system back together again. I don’t believe his solutions will "get us out of this mess".
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Commercial properties are now facing the same events poisoning the housing market, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.
According to Fitch Ratings Ltd, the pace of commercial real estate foreclosure and default is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year.
In the Nouriel Roubini’s interview with Bloomberg’s Carol Massar on November 19, Roubini predicts the current crisis is the worst recession in 50 years, he said:
There’s a major credit crunch, and firms are having a credit crunch. They cannot borrow, households cannot borrow, and the credit crunch has gone from subprime, to near prime, to prime, to commercial real estate, to credit cards, to auto loans, to student loans, to leveraged loans, to corporate bonds. It’s just a massive credit crunch.
Home prices have to fall at least another 15%. The cumulative fall in home prices from the peak is going to be at least 40% to bring them back to the historical norm. So this housing recession is just getting worse. People are not buying homes, housing starts are collapsing, building permits are collapsing. It’s a vicious circle, and there’s no bottom to it.
Roubini has predicted that commercial real estate will be the next shoe to drop in the credit meltdown since July, 2007. You can still read his article of July 12, 2007 here and of November 14, 2007 here.
On November 17, Fitch reported the commercial real estate market saw a rise in loan delinquencies last month because there are fewer lenders willing and able to refinance mortgages for commercial properties such as malls and office buildings. With the US credit markets frozen that pace of delinquencies is expected to continue to climb in coming months. Via IDD Magazine:
“With CMBS issuance at a standstill and portfolio lenders cautiously managing their balance sheets, borrowers are facing increased difficulty accessing capital to refinance maturing loans,” Fitch said in a prepared statement. The rating agency added that given the illiquidity in the market, it expects the proportion and dollar balance of maturity defaults to continue to grow at a fast pace with delinquencies approaching close to 75 basis points by the end of this year.
The proportion of non-performing matured loans within the loan delinquency index has increased significantly over last year and particularly has trended upward in recent months. In October 2007, non-performing matured loans made up 16% of new delinquencies and 4% of the overall index. This compares to the 42% of new delinquencies and 15% of the overall index comprised of non-performing matured loans one year later, as of October 2008.
Within its portfolio of rated CMBS transactions, Fitch has identified 274 fixed-rate loans totaling $987.8 million and 29 floating-rate loans totaling $2.4 billion that are scheduled to mature in November or December 2008. All but two of the floating-rate loans have extension options remaining and are likely to extend as performing loans. Although earlier in the year, Fitch expected those fixed-rate loans with high coupons and strong debt service coverage ratios to find financing, even those loans are facing maturity defaults as lending has come close to a halt.
“Timely repayment of maturing loans will continue to be a concern until global economic pressures subside and both lender and investor confidence are restored,” the rating agency warned.
The loan delinquency index measures loans that are at least 60 days delinquent within the universe of all Fitch-rated transactions--475 transactions worth $553.1 billion.
Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.
The retail outlook is particularly bad. Circuit City and Linens ’n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores. Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money.
The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them. Credit markets have seized up as People are not willing to take risks and buying nothing.
That drives down investments already on the books. Insurance companies are seeing their stock prices fall on fears they are too invested in commercial mortgages.
Please Note! This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
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Here is a weekly column of Forbes on November 27, that was written by Dr. Doom, Nouriel Roubini:
The U.S. economy is confronting a toxic mixture: deflation, a liquidity trap and debt deflation, as well as rising household and corporate defaults. Put plainly, the signs of a "stag-deflation"--a deadly combination of stagnation/recession and deflation--are now clear.
We are in a severe recession, and now the recent readings of both the Producer Price Index and the Consumer Price Index show the beginning of deflation. The slack in goods markets--with demand falling and supply being excessive (because of years of excessive over-investment in new capacity in China, Asia and emerging market economies)--means firms have lower pricing power and a need to cut prices to sell the burgeoning inventory of unsold goods.
The slack in labor markets means lower wage pressures and lower labor-cost pressures; and the slack in commodity markets--that have already fallen by 30% from their summer peaks and will fall another 20%-30% in a global recession--means lower inflation and actual deflationary forces.
The Risk of a Liquidity Trap
When deflation sets in, central banks need to worry about it--and worry about a liquidity trap. Take the example of the 2001 recession: That was a mild eight-month recession in the U.S. and was over by the end of 2001. But by 2002, the U.S. inflation rate had fallen toward 1%. The Fed was forced to cut the Fed Funds rate to 1% and Ben Bernanke (then a Fed Governor) was writing speeches titled "Deflation: Making Sure "It" Does Not Happen Here."
So if a mild recession that was not even global led to deflation worries, how severe could deflation be in a recession that even the IMF is now forecasting to be global in 2009?
When economies get close to deflation, central banks aggressively cut policy rates, but they are threatened by the liquidity trap that being zero-bound on nominal policy rates implies. The Fed is now effectively already in a liquidity trap: The target Fed Funds rate is still 1% but expected to be cut to 0.5% in December and down to 0% by early 2009. Also, while the target rate is still 1%, the effective Fed Funds rate has been trading close to 0.3% for several weeks now as the Fed has flooded money markets with massive liquidity injections. So we are effectively already close to the 0% constraint for the nominal policy rate.
Why should we worry about a liquidity trap? When policy rates are close to zero, money and interest-bearing short-term government bonds become effectively perfectly substitutable. (What is a zero-interest-rate bond? It is effectively like cash.) Monetary policy becomes ineffective in stimulating consumption, housing investment and capital expenditure by the corporate sector. You get stuck into a liquidity trap and more unorthodox monetary policy actions need to be undertaken.
The Costs and Dangers of Price Deflation
First, if aggregate demand falls sharply below aggregate supply, price deflation sets in. There is already massive price deflation in the U.S. in the sectors--housing, autos/motor vehicles and consumer durables--where the inventory of unsold goods is huge. The fall in prices and the excess inventory forces firms to cut back production and employment; the ensuing fall in incomes leads to further fall in demand--and induces another vicious cycle of falling prices and falling production/employment/income and demand.
Second, when there is deflation, there is no incentive to consume/spend today as prices will be lower tomorrow. Buying goods today is like catching a falling knife and there is an incentive to postpone spending until the future: Why buy a home or a car today if its price will fall another 15% and purchasing today would imply having one's equity in a home or a car wiped out in a matter of months? Better to postpone spending. But this postponing of spending exacerbates the vicious cycle of falling demand and supply/employment/income and prices.
Third, when there is deflation, real interest rates are high and rising in spite of the fact that nominal policy rates are zero. If the policy rate is zero and there is a 2% deflation, the real short-term policy rate is actually a positive 2% that further depresses consumption and investment; and real long-term market rates are even higher with deflation, as market rates at which firms and households borrow are much higher than short-term policy rates.
The Deadly Deeds of Debt Deflation
Deflation also leads to the nightmare of debt deflation, a situation well analyzed by Irving Fisher during the Great Depression. If debt liabilities are in nominal terms and at a fixed long-term interest rate, a reduction in the price level increases the real value of such nominal liabilities. So debtors who are already distressed in a recession and deflation become even more distressed as the real burden of their liabilities sharply rises.
Things are even worse if the debtor had borrowed to finance the leverage purchase of assets whose prices are now falling. Suppose you are a household who borrowed at a 5% mortgage rate to purchase a home whose price is now falling at an annual rate of 15%. The effective real interest rate that you are facing on your debt is not 5% but a whopping 20% (the sum of the 5% mortgage rate plus the 15% fall in the price of the underlying asset).
In all of its manifestations, debt deflation sharply increases the risk that borrowers will be forced to default on real obligations that they cannot service. Thus, debt deflation is associated with a sharp rise in corporate and household defaults that create a spiral of deflation, debt deflation and defaults.
"Crazy" Monetary Policy to Address the Liquidity Trap and a Severe Liquidity and Credit Crunch
To address the increase in real short-term market rates, the Fed and other central banks have already undertaken quite unorthodox monetary policy moves. To address the even more severe increase in real long-term market rates, the Fed and other central banks will have to undertake even more radical and unorthodox policy actions.
The widening of the real short-term market rates has been addressed by creating a whole series of new liquidity facilities. Indeed, the Fed and other central banks that used to be the "lenders of last resort" have become the "lenders of first and only resort," as banks don't lend to each other, banks don't lend to non-bank financial institutions and financial institutions don't lend to the corporate and household sectors.
However, in spite of the Fed becoming the lender of first and only resort (even the corporate commercial paper market is now being propped by the new Fed facility), there are still major problems that remain seriously unresolved in short-term money markets and short-term credit markets. Banks and other financial institutions are still not lending to each other in spite of lower spreads as they need the liquidity received by the Fed and they worry about the solvency of their counterparties; only banks and major broker dealers have access to these facilities and thus most of the shadow banking system does not have access to this Fed liquidity; market spreads are still rising and the availability of short-term credit is becoming tighter as banks increase interest rates on credit cards, student loans and auto loans and make such loans scarcer; only rated investment-grade firms have access to the commercial paper facility, leaving millions of speculative grade or non-rated firms in an even bigger liquidity and credit squeeze; and finally, the securitization of credit cards, auto loans and student loans is currently dead.
This is why a desperate Treasury is starting to think about using the remaining TARP funds to directly unclog the unsecured consumer debt market and the securitization of such debt. Desperate times required desperate and extreme actions.
Even "Crazier" Policy Actions are Required to Reduce Long-Term Market Interest Rates
But even more desperate monetary actions are needed to address the increase in real long-term market rates. These actions are needed to prevent deflation from setting in, to reduce the credit spread (the difference between long-term market rates and long-term government bond yields) and to reduce the yield-curve spread (the difference between long-term government bond yields and the policy rate).
There are a number of tools that the Fed could use to reduce the yield-curve spread when the Fed Funds rate is already down to zero. First, the Fed could commit to maintain the Fed Funds rate at zero for a long period of time. Even this, however, may not be sufficient to reduce long yields on safe assets as such long yields also depend on liquidity premiums and risk premiums that will not be affected by an expectation of future short rates. Greenspan discovered the "bond market conundrum," when raising the Fed Funds rate from 1% to 5.25% did not much change long rates; and Bernanke rediscovered this conundrum, when reducing the Fed Funds rate down to 1% failed to significantly reduce long rates.
Such long rates depend in part on the global supply of savings relative to the demand for investment; thus they are not likely to be strongly affected by current and future expected policy rates.
Second, the Fed could do what it last did in the 1950s: directly purchase long-term government bonds as a way of pushing downward their yield and thus reduce the yield-curve spread. But even such action may not be very successful in a world where such long rates depend as much as anything else on the global supply of savings relative to investment. Thus, even radical action such as outright Fed purchases of 10- or 30-year U.S. Treasury bonds may not work as much as desired.
Next, the Fed could try to directly affect the credit spread (the spread between long-term market rates and long-term government bond yields). Radical actions could take the form of: outright purchases of corporate bonds; outright purchases of mortgages and private and agency MBS as well as agency debt; and forcing Fannie and Freddie to vastly expand their portfolios by buying and/or guaranteeing more mortgages and bundles of mortgages. One could also decide to directly subsidize mortgages with fiscal resources. And the Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices.
Some of these policy actions seem extreme, but they were in the playbook that Gov. Bernanke described in his 2002 speech on how to avoid deflation. They all imply serious risks for the Fed and concerns about market manipulation. Such risks include the losses that the Fed could incur in purchasing long-term private securities, especially the high-yield junk bonds of distressed corporations. In the commercial paper fund, the Fed refused to purchase non-investment grade securities.
Even high-grade corporate bonds are not without risk as their spreads have massively widened in recent months. Also, pushing the insolvent Fannie and Freddie to take even more credit risk may be a reckless policy choice. And having a government trying to manipulate stock prices could create another whole new can of worms of conflicts and distortions.
Finally, the Fed could try to follow aggressive policies to attempt to prevent deflation from setting in: massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex sphere to weaken the dollar; vast increases of the swap lines with foreign central banks aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit (an idea suggested by Bernanke in 2002 that he termed to be the equivalent of a "helicopter drop" of money in the economy).
The problem with many of these "extreme" policy actions is that they were tried in Japan in the 1990s and the last few years, and they failed miserably. Once you are in a liquidity trap and there are fundamental deflationary forces in the economy as the excess aggregate supply of goods faces a falling aggregate demand, it is very hard--even with extreme policy actions--to prevent deflations from emerging.
Some very aggressive policy actions--such as letting the dollar weaken sharply--may do the job, but they may also be beggar-thy-neighbor policies that would export even more deflation to other countries. The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort, spending more than its income and running ever larger current account deficits while creating a massive excess productive capacity via over-investment.
All the while, China and other emerging markets have been the producers of first and last resort, spending less than their income and running ever larger current account surpluses. With U.S. spending now faltering, a global glut of unsold goods may lead to persistent and perverse deflationary forces that may last for a longer time unless proper policy actions--mostly non-necessary monetary--are undertaken.
Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed a global stag-deflation may be the biggest challenge that U.S. and global policy makers have to face in 2009.
It will not be easy to prevent this toxic vicious circle unless:
The process of recapitalizing financial institutions via temporary partial nationalization is accelerated and performed in a consistent and credible way;
Such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall;
The debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective "loan modifications"); and
Even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
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According to Bloomberg on November 28, Strategists at Royal Bank of Scotland Group Plc. (RBS) reported that Investors should exploit the “extreme opportunity” presented by stock valuations that have overestimated the extent to which earnings will slump.
While European earnings may decline a further 18 percent, current equity prices suggest the market is predicting a 45 percent drop. U.S. earnings may contract another 15 percent. Risk premia have hit extreme, and unsustainable, highs. The price of European equities relative to trailing earnings may almost double as investors attempt to anticipate the bottom of the recession.
The US economy to lead recovery through the second half of 2009, markets invariably pre- empt economic recovery and we expect equities to rise substantially.
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According to Lyle Beckwith, a senior vice president with the Alexandria, Virginia-based National Association of Convenience Stores, the credit-card business is run by the same banks which run mortgage in the exact same way. They’re not in the business of making loans based on the ability to repay, they’re sending out cards based on a business model of making money off the interchange fee.
Accordingly, the current credit-card business is another version of subprime lending. Usually a retailer’s bank pays the cardholder’s bank between 1 and 2 percent of the purchase price each time a customer swipes a credit card. The retailer’s bank then collects the fee from the merchant. Consumers don’t see the charge, which merchants say is built into their prices.
According to the Retailer’s spokesmen, Banks make so much money from the fees that they give credit cards to people who can’t pay their debts, just as they provided mortgages to homeowners who can’t afford them.
The Banking groups and the credit-card companies argue the interchange fees ensure that retailers get paid even if cardholders default. If the fees were onerous, merchants wouldn’t be so eager to take credit cards.
Mallory Duncan, chairman of the Merchants Payment Coalition representing trade groups for 2.7 million gas stations, drug stores, supermarkets and other retailers, Department and convenience stores and gas stations are asking to Congress for negotiating the interchange fees charge them in credit card processing.
Sources :Bloomberg: Credit-Card Fees Targeted by Retailers Who Say Banks Overcharge, November 29, 2008 00:01 ESTPlease Note! This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
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Fairfax Financial Holdings Limited (FFH) poised to take advantages as others suffer. The company has low PE and recorded 3 years success for betting markets. The company’s team hedged and bet against markets because they saw catastrophe would be coming. When the current financial disaster rolls over entirely markets, Fairfax made US $2 billion profit and saved itself from current difficult situation that even Berkshire Hathaway losses its some portfolio’s values.
Fairfax's investment portfolio totaled $18.6 billion at the end of the first quarter. Since its inception in 1985, it has returned an average 9.5 percent a year on its investments, earning Prem Watsa, CEO and the founder of Fairfax Financial Holdings Ltd, quite a nickname: the Warren Buffett of Canada.
Fairfax gets $7 billion cash and has $2 billion debt in the past year. So the company has remained at US$5 billion net market capital while Berkshire Hathaway has collapsed from US$219.2 billion market cap to $120.1 billion or the Hartford Financial fromUS$27.4 billion to US$1.7 billion. It’s simply to tell that the company now has tons of cash ready to deploy now, to buy all those solid stocks.
Fairfax announced on November 20 that it has removed the hedge on its equity portfolio investments by covering its S&P and S&P/TSX60 equity index total return swaps. Prem Watsa disclosed that Fairfax had reduced its equity portfolio hedging from 100% to 65% of its equity investment portfolio and of course that at some point it may remove the hedge on its equity portfolio. And that day has come.
Prem Watsa sees that markets have been corrected very much and now stock prices are very cheap enough for long-term investment.
According to Reuters today, short selling of financial and automaker stocks has fallen sharply since July. Short Alert Research released data this week that Short interest on financial companies has fallen nearly 40 percent to an average of 3.68 percent on November 14. Short sellers expect fewer gains are possible with share prices scraping these lows.
You removed hedges last week, so do you think the bottom's been reached?
With the S&P drop year-to-date of 50% --not seen since 1931--and how worried the investment community is, it just seemed to us a lot of fear may already be discounted in the stock markets. You can't say this is the bottom; markets are a discounting mechanism and certainly still can go down some. However, we thought it was an appropriate time to close our equity index hedges.
Before we took the equity index hedges off, we asked: Suppose we were wrong and the stock markets go down further. Can we handle it?
Our analysis indicated we could. Our hedges have done their job, protecting us from the 50% market decline we saw into November. However, we asked ourselves what if the stock markets decline another 50% and --in terms of ratings and capital --all the models we use indicated that we'd be fine.
As for future stock values, trees don't grow to the sky and markets don't go to the floor, or zero. After a 50% drop, we see a ton of opportunity in terms of stock prices (in relationship to intrinsic values) we have not seen for a long, long time now.
What's your advice now to the average investor who you warned off the market six weeks ago?
We are buying many common stock positions at these prices. We are buying with the idea that the stocks we buy could go down in the short term and that is not going to affect us. You have to be able to buy with cash and not go on margin or borrow money to buy these stocks.
We would not have taken our hedges off if we didn't think we could survive a further 50% drop in the market, because a further stock market drop in the short term is also a possibility ... A good investment now would be a value-oriented mutual fund with a long-term track record but without leverage.
Is the redemption phenomenon, by hedge and mutual funds, nearly finished knocking down stock values?
We've seen more than a 20% decline in mutual fund assets in the last three months and this redemption run can last for some time. The recession may be long and deep and redemptions may continue for some time.
How will the President-elect Barack Obama affect Canada?
They are pouring money into banks, consumer credit, toxic assets. I'm not sure there is a lot of ammunition left, but it looks like the new administration is going to come with a very significant stimulus program. The Chinese have, too. At some point, these actions will bite and a recovery will begin, but we must be careful to see what the new administration will do.
Please Note! This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
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According The Norway Post, the Norwegian finance ministry lowered on Thursday its estimate of the 2008 structural non-oil budget deficit to 72.7 billion Norwegian crowns ($10.52 billion) from a previous figure of 76.8 billion.
The 5 percent adjustment, which was mainly due to higher-than-expected tax revenues, means that the 2008 budget is slightly less expansive than before, the ministry said in a statement.
The government is allowed to plug non-oil deficits by spending up to 4 percent annually of a $300 billion fund that saves oil wealth for future generations. The percentage is the assumed normal annual return on the fund.
Oil and gas exporter Norway runs big budget surpluses when petroleum cash is included, but deficits when that money is excluded.
'Lower use of oil revenues for 2008 means simultaneously that that the 2009 budget is correspondingly more expansive,' the ministry said.
Plunging oil prices to US $54.43 a barrel today from its recent high at US $147 may not affect to Norway economic stability because the country well anticipates to any oil prices shock.
Here is a part of Daniel Gross’s Article in 2004, that analyzes about relationship between Curse of Oil and Norway’s obstacle stability, via Slate.com:
Political scientists like to talk about the "curse of oil" over the past several decades, we've seen the sorry economic state of affairs that ensues when tribal kingdoms, authoritarian regimes, kleptocracies, and left-wing dictatorships get their hands on national oil revenues. Easy oil cash entrenches corrupt establishments, discourages sound long-term economic planning, and is almost never channeled in ways that promote development.
But the huge balances mean Norway can happily continue to be heavily socialist without confronting the problems that its Euro-neighbors to the south face—unemployment, high inflation, and huge national debts. Yes, fiscal budget expenditures were a whopping 38.3 percent of gross domestic product in Norway last year. But the country still runs a budget surplus. Last year, per-capita GDP was a healthy $51,755, and both unemployment and inflation are low.
In Norway, the sudden increase in oil prices has meant larger inflows to the fund and enhanced long-term welfare for its citizens. That's not how it goes down in other big oil producing countries. In Russia, the oil boom has enriched oligarchs and increased foreign currency reserves. But the quality of life in Russia continues to deteriorate. Saudi Arabia has been pumping far more oil than Norway and for a far longer time. But its oil revenues tend to flow into the bank accounts of the royal family—not into a segregated account to benefit the public at large. As a result, the richest oil nation on earth still resembles a garden-variety poor country: a 25 percent unemployment rate, tremendous inequality of wealth and assets, a massive public debt, and an undiversified economy dependent on commodity exports.
The Norwegian economy remains heavily dependent on oil (though much less than the Saudi economy): Petroleum industries account for about 17 percent of Norwegian GDP and a hefty 45 percent of exports. But the rapid growth of the fund means Norway won't suffer massively if the oil market suddenly tanks or if production begins to dwindle. (In 30 years, Norway has pumped about 29 percent of its total reserves.) In a land of high taxes, the fund functions as a substitute for national savings. When the government runs deficits, it's allowed to transfer cash out of the funds. Unlike many other oil-dependent economies—like Russia and Saudi Arabia—Norway won't have to alter spending habits dramatically if revenues suddenly decline.
Of course, Iraq isn't directly analogous to Norway—any more than it is directly analogous to Alaska. And I'm sure most Iraqis would rather have a dividend check than see their oil wealth pile up in a vast investment pool. But Iraq has endured enough internal and external shocks in the past few decades. Maybe the shattered nation needs a fiscal shock absorber more than a gift certificate.
Prime Minister Jens Stoltenberg was speaking recently in Oslo about lower oil prices, development aid and, of course, taxes. Via IHT:
How worried are you by the global slowdown?
We are going to be affected because Norway has a small, open economy and half of our GDP is exported. When economies we trade with are slowing down, it directly affects us. We are in a better position to meet the economic downturn because we have a surplus in the state budget and the trade balance. That gives us the strength to meet the recession the world is facing.
Additionally, our banks are affected by the financial crisis. We have a banking system that is quite sound. It has not suffered significant losses. The problem with our banking sector is therefore not solidity but liquidity. We have presented a package to Parliament to restore liquidity in the banking system.
Oil and gas exports were about 20 percent of GDP in 2007. With Norway's high dependence on oil, are you concerned about the price fall from a peak of $147 per barrel in July to $51 recently?
When I was minister of finance and minister of energy, I used to look at the oil price daily. But life is short, and the experts are more often wrong than right.
Norwegian businesspeople who have moved abroad say the high taxes at home discourage entrepreneurship. How do you respond?
I disagree with the picture that this is a high-tax country. We have reduced corporate taxes to 28 percent. The average personal tax rate is less than 30 percent and the marginal tax rate at over $100,000 is around 50 percent. We have a well-developed welfare state. Health and education are free.
There is one year of paternity leave financed by taxes, which is one of the reasons we have a high female participation in the work force. We are spending the money on things that are important.
People who leave Norway for tax reasons are not a big problem. It does not bother me at all.
You've been using green taxes for longer than many other countries. What are the lessons?
In the 1990s, taxes were shifted from labor to pollution. They have been a great success. I believe the solution to climate change is to put a price on carbon, to make market forces work for a greener environment.
You have been surprisingly outspoken about immigration and have put through 13 new measures to deal with it. How do you square this with Norway's reputation for openness?
We have quite a high number of asylum seekers relative to our population. We are eager to defend the idea of asylum and to integrate those that fulfill the criteria. But although we maintain the principle of collective protection in emergency situations, we will move away from generalized country assessments. Each individual who applies for asylum will be give an individual assessment.
But we are also increasing our development aid. It is 0.98 percent of GDP, the highest in the world. Our aim is to reach 1 percent. The official UN Millennium Development Goal is 0.7 percent of GDP.
In a speech a few months ago, you said the need for strong trans-Atlantic security was greater than ever and that NATO's door was open to Georgia and Ukraine joining. Is this part of a new Cold War with Russia?
We are not in a new Cold War with Russia, but we are facing some serious challenges. We have a good bilateral relationship with Russia, also cooperating in managing fisheries, oil and gas and the environment, but negotiating from a position of security from our platform within NATO. We are a peaceful nation but the support for NATO is strong.
Please Note! This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.
You are welcome to republish this article, or any portion thereof. Please, cite the actual/original source. I would be grateful if you could link back.
The French government reacted furiously to the Commission’s argument tied with French’s plan to shore up its six main retail banks capital over injecting cash to the banks’ balance sheet. EU competition commissioner has blocked the plan and was arguing “They have to apply the same criteria to everyone . . . support should be sufficient to offset the negative impact of the current financial crisis and no more”. The Austrian, Spanish and Hungarian framework schemes are still awaiting a green light.
Christine Lagarde, French finance minister, persuaded Neelie Kroes, EU competition commissioner, today to lift her veto on France’s €10.5bn ($13.3bn) support package but Ms Kroes is sticking to her view that banks cannot use state aid to increase their lending books.
French intended to recapitalise all its lenders at the same time to ensure they did not tighten credit to business and households. Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy.
The finance ministry wanted to provide €10.5bn in subordinated loans to BNP Paribas, Société Générale, Crédit Agricole, Caisse d’Epargne, Banque Populaire and Crédit Mutuel. In return, the banks agreed to increase the stock of credit to households, business and local government by 3-4 per cent in 2009.
French officials said they accepted the argument that banks rescued from collapse by injections of public money, such as the UK’s Northern Rock or Dexia, the Franco-Belgian lender, should have to wind down their loan portfolios and eventually sell off their assets.
However, France’s six high-street banks were fundamentally sound but were under pressure from the markets to bolster their balance sheets, officials said. They added that EU leaders and the Commission endorsed this preventative recapitalisation approach in October.
The French plan is one of a number of banking aid measures notified to Brussels but still not approved. The Austrian, Spanish and Hungarian framework schemes are still awaiting a green light.
A number of aid packages to individual institutions, such as that proposed for Germany’s Commerzbank, also remain under discussion.
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Goldman Sachs today has reduced its forecast on quarterly notebook shipment growth in the fourth quarter of 2008 from 6% to only 1%, while shipments in the first quarter of 2009 will drop 18% sequentially.
On November 19, Goldman Sachs is projecting a 5 percent decline in 2009 in developed economies (the United States, Western Europe, and Japan), or 65 percent of IT spending, compared with 4 percent expected growth in 2008 and 7 percent growth in 2007. The slowdown will span all vertical markets (financial services, communications, and so on).
The good news is Goldman Sachs expects IT spending in developing economies, which accounts for 35 percent of IT spending, to hit 7 percent growth in 2009
The report notes that Dell and Hewlett-Packard are gaining in share of server dollars spent, while Sun Microsystems and IBM are losing share. Dell took the No. 1 spot through aggressive discounting, while HP's share remains strong due to its strength in blade computing, according to the report. IBM is apparently being hit by its System x servers, down 18 percent year over year.
For the first time IBM has ever been a share-loser in the history of Goldman Sachs' survey, reflecting "lagging product sets."
Microsoft’ gains apparently come from enterprise product upgrades like SQL Server and SharePoint Server, according to the report.
According to the report, 52 percent of survey respondents are planning decreased budgets for 2008 in the past three months, which will almost certainly minimize a fourth-quarter budget flush. Indeed, 41 percent of respondents say that their "end-of-year IT spending activity will be less than recent years," and only 17 percent expect fourth-quarter IT spending to increase.
Market intelligence firm IDC on November 12, said worldwide IT spending will grow just 2.6 percent in 2009 compared with the previous year, down from the IDC's pre-crisis forecast of 5.9 percent growth. IDC expects IT spending to return to growth rates approaching 6.0 percent in 2012 but estimates more than 300 billion dollars in industry revenues will have been lost due to slower spending over the next four years.
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China's Reserves To Pass $2 Trillion; China's Reserves Can Stimulate The Economy Report and analysis by Maithreyi Seetharaman of Bloomberg News Video courtesy of Bloomberg Video
According to Bloomberg, National Bureau of Statistics chief economist Yao Jingyuan, said China's foreign-exchange reserves will "hopefully" reach US$2 trillion this year.
Trade surpluses helped to swell the reserves, the world's biggest, to US$1.9 trillion at the end of September, according to the central bank. Larger reserves would strengthen the nation's finances as the government boosts spending and cuts interest rates to counter the financial crisis.
Yao quoted the US$2 trillion figure while arguing that China was stronger than when the Asian financial crisis hit in 1997 and 1998.
The reserves, along with high levels of savings by Chinese households, will help the nation to weather the crisis, bureau spokesman Li Xiaochao wrote in a report published yesterday on the finance ministry's Website.
IMF forecast China’s foreign exchange reserve to reach $2.2 trillion by the end of December and $2.7 trillion by the end of 2009. Diversifying away from investing in U.S. Treasury bills has brought losses.
ETFs/Stocks :
iShares FTSE/Xinhua China 25 ETF FXI ProShares UltraSh FTSE/Xinhua China 25 FXP
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According to Reuters, Bank of America is continuing to face further credit risk and losses after acquired Countrywide Financial Corp and bought Merrill Lynch. The Bank has more than $250 billion in residential mortgages from Countrywide acquisition and charge offs in the portfolio are increasing as BAC has stopped offering some of the most toxic types of mortgages.
Today, UBS cut its price target on Bank of America Corp (BAC) by 48 percent, citing tighter credit conditions, uncertainty over near-term prospects of the Merrill Lynch & Co (MER) deal and risk of additional write-downs.
Tight credit conditions will continue into 2009 as banks focus on maintaining sufficient capital and liquidity levels in a difficult operating environment, analyst Matthew D O'Connor said in a note to clients.
"This will likely put further pressure on both consumers and commercial borrowers, leading to higher credit losses in 2009," he said.
Analyst O'Connor said there is a risk in Merrill's earnings power as its businesses related to capital markets are facing continuous pressure, and recent widening of credit spreads could mean additional write-downs at both Bank of America and Merrill.
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International PV strategy conference Shanghai by SolarPlaza 25 November 2008. Photo courtesy of Solarplaza
In the meeting of the European Photovoltaic Industry Association (EPIA) in Valencia on the 4th September 2008, The Association unanimously agreed that photovoltaic energy could provide 12% of European electricity demand by 2020. The Current economic downturn causes reducing budget on new PV installation plan. The Plan of solar tax credits cut are also expected will give more pressure to Solar Industry in the future.
Spain as the world's biggest market in 2008 has reduced its support for solar energy. Feed-in tariffs will be cut by 30% in 2009 and, even more significantly, only 500 MWp of new installed PV power will be eligible for this feed-in tariff. This could lead to a decrease in volume for the Spanish market of more than 60%.
While The US Federal alternative-energy investment tax credits will expire on December 31, 2008. After the expiration date, the Solar Industry will face higher cost on panel installation except the Government extends the tax credits.
In the 3rd China International New Energy Summit was held in Beijing on Nov. 27 2008, Suntech Power (STP) CEO Shi Zhengrong told that the company is expecting 0% gross margin in Q4, compared to 21.6% gross margin in Q3. The gross margin drop is mainly due to the dramatic drop of PV module ASP and the weakening Euro. It is reported that nearly half of the company’s factory has been shut down due to weakening demand.
Gordon Johnson, solar analyst at Hapoalim Securities, asserted in a research note today that the Street is under-estimating the size of the 2008 solar marker in Spain. He thinks there will be 2.1 GW of solar installations in Spain this year, well beyond the 1.1 GW he previously estimated.
He contends that many projects have been rushed ahead of next year’s 500 MW cap on subsidized solar installation in Spain for next year. As a result, he thinks Spain will actually surpass Germany and be the largest solar market for all of this year. But here’s the thing: as a result, he thinks that there will be much more inventory flooding into the world market next year than the Street is expecting, severely pressuring solar industry pricing.
Johnson thinks that solar demand growth will plunge from 61% this year to -2.5% next year. Johnson argues that “the entire solar value chain will be negatively affected by the pending massive decline in the world’s largest solar consuming market” - Spain - in 2009.
Jesse Pichel, an analyst at Piper Jaffray, has a much more upbeat view of the group. In a research note yesterday, he noted that the Obama Administration may seek to stimulate demand in the U.S. by making improvements to the current investment tax credit program, including replacing tax credits with cash refunds, increasing the tax credit percentage for a two year period, providing financing and encouraging solar installations on government buildings.
Nomura Research analyst Shailesh Jaitly earlier this week picked up coverage of the solar sector with a bearish stance on the group. Jaitly launched on five companies, setting a Buy rating on Suntech (STP), Neutral ratings on Canadian Solar (CSIQ), E-Ton and Motech, and a Reduce rating on Trina Solar (TSL). Jaitly forecasts that demand is Europe, which is now 77% of the market is “expected to contract severely,” pushing down solar module pricing 19% sequentially in Q4 and another 13% in Q1.
Nomura expects a 50% fall in ASPs from now through the end of 2010, reaching grid parity. Jaitly also notes that the slowdown in the semiconductor industry is resulting in a flood of polysilicon into the solar sector, further pressuring prices. Not least, the Nomura analyst thinks there is a risk that polysilicon prices could fall towards the marginal cost of production, which at older plants Jaitly says is $30-$40/kg, a fraction of the current price.
Macquarie Reseach analyst Kelly Dougherty yesterday repeated a long-term bullish stance on the solar sector, but nevertheless chopped price targets and estimates for First Solar (FSLR), Sunpower (SPWRA), Energy Conversion Devices (ENER) and Evergreen Solar (ESLR). New targets for:
FSLR, $160, from $220.
SPWRA, $50, from $70.
ENER, $40, from $63.
ESLR, $2.50, from $3.50.
“The near-term outlook for the solar sector surely isn’t pretty. Activity has all but ceased for some companies in select markets and pricing is falling precipitously for many,” Dougherty writes. “This is due to the impact of a massive credit crunch coupled with expectations for a significant price decline next year as tip over into a module over-supply situation. Those projects that are going forward are being done at higher funding costs by financiers that have become increasingly discerning, especially when it comes to the technology and the modules being used.” And the slide of the Euro, Dougherty adds, “is exacerbating the issue.” Doughtery says the fundamentals of solar remain strong long term, and suggests investors “really assess the longer-term solar landscape and invest in those companies that are best positioned to weather what’s likely to be some pretty choppy waters over the next few quarters.”
ETFs/Stocks :
Claymore/MAC Global Solar Index ETF TAN First Solar, Inc. FSLR JA Solar Holdings Co., Ltd. JASO Evergreen Solar, Inc. ESLR Canadian Solar Inc. CSIQ SunPower Corporation SPWRA SunPower Corporation SPWRB Energy Conversion Devices ENER Trina Solar TSL Suntech Power STP China Sunergy Co., Ltd. (ADR) CSUN LDK Solar Co., Ltd. LDK ReneSola Ltd. (ADR) SOL Solarfun Power Hldgs Co., Ltd. SOLF Yingli Green Energy Hold. Co. YGE
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According to Telegraph, the troubled bank, Royal Bank of Scotland, said Investors only signed up to buy just fewer than 56 million new shares, or 0.24% of the total offered by RBS in October.
Under the terms of its agreement with the government, the government agreed to buy any shares not purchased by investors. The Treasury will take up the remaining 22.9 billion shares and control 57.9% of the bank.
The RBS shares were on offer at 65.5 pence each, but held little appeal for investors because they traded well below that in the run up to the November 25 capital raising deadline, falling as low as 41.7 pence on November 18. RBS shares closed at 55 pence yesterday.
RBS was one of three British financial services firms that tapped government help to fulfill stricter capital requirements intended to help Britain's battered banks survive the credit crisis. Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they cannot sell to investors but some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continues.
The RBS was Britain's second-biggest before a run on its shares in September and October forced it into the arms of the government as investors became increasingly concerned about its capital position. The bank may now post its first annual loss in 40 years as bad loans rise, and has taken more than £7bn of credit losses this year. RBS will probably take more write-downs in the fourth quarter, newly-appointed chief executive Stephen Hester said earlier this month.
Outgoing RBS chief executive Sir Fred Goodwin and chairman Sir Tom McKillop apologized last week at a meeting in Edinburgh to approve the £20bn capital raising.
The bank is expected to buy the preference shares back from the government as soon as possible because it will be forbidden from paying any dividends to ordinary shareholders while the preference shares are outstanding.
The drastic fundraising plan comes on top of a £12 billion pounds rights issue by RBS earlier this year—at the time the biggest ever rights issue in Europe.
RBS has been one of the hardest hit European banks in the financial crisis because of its large exposure to sub-prime loans and its expensive purchase of ABN Amro bank just before the credit crunch.
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Japanese factory output falls 3.1% from September, as recession deepened; Report and analysis by Elliot Gotkine of Bloomberg News Video courtesy of Bloomberg News Video
Japan deepened into unprecedented export recession last month as manufacturers sharply cut back production, consumers spending dropped and jobless rose. The Trade Ministry said today that Factory output fell 3.1% from 1.1% in September. Household spending fell a worse-than-expected 3.8%, drops for eight consecutive months.
Exporter companies plan to cut its production output by 6.4% this month and will cut further by 2.9% in December as global financial crisis worsens. Japan’s exports tumbled 7.7% last month, the fastest pace in seven years, while exports to Asia, half of total Japan’s shipments, fell for the first time since January 2002.
Companies plan to fire at least 30,067 temporary and part-time workers by March 31 next year. Toyota Motor Corp., the world’s second biggest carmaker, will lay off half of its temporary staff. The Company will cut 3,000 contract staffs and slashed output by 17% in October. The Company reduced its net profit full-year forecast to ¥550 billion, or $5.5 billion - about a third of last year's earnings.
The Electronic Giant Panasonic became the latest victim to the global whiplash. It revised its annual profit forecast by 90% yesterday.
The Government said Japan’s inflation slowed for a second month. Consumer prices excluding fresh food rose 1.9% from a year earlier.
Meanwhile, Japan's unemployment rate stood at 3.7 percent in October, down a slight 0.3 percentage point from the previous month and better than a market forecast of 4.2 percent.
The number of jobless in October totaled 2.55 million, a decline of 160,000 from a year earlier, the Ministry of Internal Affairs and Communications said Friday.
The bleak Japanese output data followed China's warnings on Thursday that the world's fastest-growing major economy was in a sharp slowdown that threatened its stability, and a drop in euro zone business sentiment to a 15-year low that prompted calls for a big cut in the region's interest rates.
Some economists saw Japan's economy shrinking for a full year, which would be the country's longest ever contraction.
Japan tackled its last decade-long spell of deflation with a policy of massively inflating banks' balances with zero-interest cash, but analysts are divided whether the central bank is ready to drive its rates, now at 0.3 percent, to zero again.
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According to IHT, the outlook for major companies in South Korea was the worst in 11 years because of the difficulty in borrowing from increasingly tight-fisted banks and weakening markets. The economic slump is more serious than has been thought
South Korea Government moves to improve liquidity after Korean banks have been hit especially hard by the global downturn because of their reliance on short-term credit markets and have become increasingly reluctant to risk loans to local companies as the economy loses strength.
The Central Bank announced it would tap its US $30 billion credit line that was supplied by the Fed in October, to inject US $4 billion into banking system through an auction on Tuesday. The Bank of Korea has spent $10.2 billion since October to supply foreign currency liquidity to credit-strained local traders through swap deals, depleting its foreign reserves.
South Korea has produced $25.5 billion of capital account deficit in October as a result of foreign exchange contract losses.
According to Breitbart, South Korea has become a net debtor for the first time in eight years as of the end of September, the central Bank of Korea said Friday. The country's foreign debt reached $425.9 billion at the end of September, compared with $420.6 billion three months earlier. Credit owned by South Korea reached $399.9 billion, down from $422.3 billion three months earlier, the bank said.
Even the current account swung into a surplus for the first time in four months to reach its highest level in almost four years, but at $3.41 billion did little to offset the hit on the capital account. The surplus is expected to narrow to about $1 billion in November, with falling commodity prices helping to offset weakening exports.
South Korea's central on November 11, has signed a 63-day repurchasing agreement to buy 1 trillion won (755.9 million U.S. dollars) worth of bank and other special bonds. In the previous day, Fitch had downgraded several emerging countries, including South Korea.
The Bank of Korea on November 7, lowered interest rates for the third time in four weeks after a flurry of deep rate cuts across Europe failed to calm panicky investors. The bank reduced the key rate by 25 basis points to 4 percent, the lowest since 2006, adding to 100 basis points of cuts in October.
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In the Spiegel interview with George Soros on November 24, Mr. Soros described that the present situation dramatic and overwhelming has gone beyond his wildest imagination. The financial markets are under great pressure because of the lack of leadership during the transition period. In the next two months, the markets will experience maximum pressure. The US Government’s policy let Lehman Brothers go bankrupt was a fatal mistake. They did not anticipate that the default of Lehman Brothers would cause cardiac arrest in the markets. The economy fell off the cliff.
Spiegel: Mr. Soros, in spite of massive interventions by governments and federal banks the financial crisis is getting worse. The stock markets are in free fall, millions of people could lose their jobs. More and more companies are in trouble, from General Motors in Detroit to BASF in Ludwigshafen. Have you ever seen anything like it?
Soros: Never. I find the present situation dramatic and overwhelming. In my latest book “The New Paradigm for Financial Markets: The Credit Crisis of 2008” I predicted the worst financial crisis since the 1930s. But to tell you the truth: I did not actually anticipate that it would get as bad as it did. It has gone beyond my wildest imagination.
Spiegel: What are your fears for the coming months?
Soros: I think that the dark comes before dawn. The financial markets are under great pressure because of the lack of leadership during the transition period. In the next two months, the markets will experience maximum pressure. Then we will see some initiatives from the Obama administration. How long the crisis lasts will depend on the success of these measures.
Spiegel: The markets don't seem to have much confidence in the new president -- in stark contrast to the enthusiasm in the population. Since Election Day on November 4, stocks have fallen by almost 20 percent.
Soros: I have great hopes for Barack Obama. But at the time of the election the financial community had not yet fully grasped the magnitude of the economic decline. They did not anticipate that the default of Lehman Brothers would cause cardiac arrest in the markets. The economy fell off the cliff, you begin to see mangled bodies lying at the bottom.
Spiegel: Was it a policy mistake to let Lehman Brothers go bankrupt?
Soros: It was a fatal mistake. I would have never expected that the authorities let such a big investment bank go.
Spiegel: Will there be more victims?
Soros: Possibly. CitiBank, one of the world’s largest banks, is currently at the center of attention (eds. note: The $300 billion US government plan to stabilize CitiBank had not been approved by the time of this interview). There are some other bodies lined up for potential trouble. The situation is very similar to the 1930s -- but it is going to unfold differently. We have learned not to allow the financial market to collapse. We will spend all the money in the world to prevent that from happening.
Spiegel: Obama is supposed to save the banks, bail out the auto industry and boost the economy in general. Can a single person ever live up to such high expectations?
Soros: Perhaps not, but the problems can be handled much better than they have been by the current administration.
Spiegel: Currently, Treasury Secretary Henry Paulson is in charge of the bail-out. What are your misgivings about his performance?
Soros: He reacted to problems as they arose; he had no capacity to anticipate them. When he allowed Lehman Brothers to fail, the breakdown of the financial markets found him totally unprepared. He went to Congress not with a plan but with a plan to develop a plan. And the plan he had in mind -- to purchase toxic assets -- was ill-conceived. Injecting equity capital into the banking system made much more sense and he eventually came to see that, but again he went about it in the wrong way. Then he stopped doing anything, leaving a vacuum in leadership, and the markets collapsed.
Spiegel: What are your expectations for the next Secretary of the Treasury?
Soros: I think we need a large stimulus package which will provide funds for state and local government to maintain their budgets -- because they are not allowed by the constitution to run a deficit. For such a program to be successful, the federal government would need to provide hundreds of billions of dollars. In addition, another infrastructure program is necessary. In total, the cost would be in the 300 to 600 billion dollar range.
Spiegel: In addition to the $700 billion bailout for the financial industry?
Soros: Definitely. I think this is a great opportunity to finally deal with global warming and energy dependence. The US needs a cap and trade system with auctioning of licenses for emissions rights. I would use the revenues from these auctions to launch a new, environmentally friendly energy policy. That would be yet another federal program that could help us to overcome the current stagnation.
Spiegel: Your proposal would be dismissed on Wall Street as "big government." Republicans might call it European-style "socialism."
Soros: That is exactly what we need now. I am against market fundamentalism. I think this propaganda that government involvement is always bad has been very successful -- but also very harmful to our society.
Spiegel: Would you advise the new president to say that publicly?
Soros: He has already spoken about changing the political discourse. I think it is better to have a government that wants to provide good government than a government that doesn't believe in government.
Spiegel: However, even a strong government can't perform miracles. It needs money from the taxpayers. There is a lot of talk in the US about the new role of the state and the government -- but no one seems to be willing to pay for it. Obama has announced to cut taxes for 95 percent of working Americans. Isn't that a contradiction?
Soros: At times of recession, running a budget deficit is highly desirable. Once the economy begins to recover, you have to balance the budget. In 2010, the Bush tax cuts will expire and we should not extend them. But we will also need additional revenues. Should the government not receive them, we will all get punished with higher interest rates.
Spiegel: Everybody says we have to regulate the financial markets more. That sounds good, but is it realistic? Can one really tame the markets?
Soros: Between regulators and market participants, there is a cat and mouse game going on which has been going on indefinitely…
Spiegel: …where often the mice, the market participants, have the upper hand.
Soros: Because they got the extra boost from market fundamentalists. But the outcome was disastrous, as we see now. I think it is better to have a cat and mouse game where the cat has the upper hand than a cat and mouse game where the mice are ruling. Because the latter means that the market participants are given free range. That was actually the big misconception of our national hero Ronald Reagan, who always talked about the magic of the market.
Spiegel: So you support stricter regulation and more efficient control of the markets?
Soros: Indeed. However, you have to recognize that regulations will never be completely successful and they will always be full of holes. You must constantly be ready to fill new holes. Actually regulation should be kept to a minimum, but there has to be some cooperation between market participants and authorities -- as was the case in the early postwar years. The Bank of England was a very successful regulator by cooperating with market participants. This cooperative spirit was broken by the market fundamentalists.
Spiegel: Not in Germany. We have many semi-private banks that largely dominate the market. Politicians serve on their supervisory boards. But they are in particularly bad shape.
Soros: These public-private partnerships are very, very dangerous. The most rotten part of the financial system in the US consisted of the government sponsored entities, Fannie Mae and Freddie Mac. They really kicked off this crisis. The state should set the rules and enforce them -- but not become involved as a market player.
Spiegel: You are one of the most powerful speculators in the world and have been heavily involved in your fund's activities over the past few months. How do you cope with the dilemma of being a speculator -- who often profits from a business transaction that might hurt society?
Soros: This is a false issue. I always play by the rules. At the same time, I try to improve the rules. In so doing I often suggest changes from which I would not personally benefit. I have the common interest at heart, not my personal interest.
Spiegel: But the perception many people have of you and your colleagues is very different. They blame speculators for the current financial crisis -- is that the reason for your decision to give billions of dollars to charity and your foundation?
Soros: People think I am giving money because I have pangs of conscience.
Spiegel: Isn't there some truth to it?
Soros: No. It is a total misconception. The big events in which I participated would have occurred whether I took part in them or not. For example, whether I had been born or not, the British pound would have been forced out of the European Exchange Rate Mechanism in 1992.
Spiegel: But are you really such a little wheel as you claim? If you bet against grain, rice or oil, many other investors follow suit. That could hurt consumers who can no longer afford essential foodstuffs or energy. You can definitely influence markets.
Soros: Since I became a public figure, the man who allegedly "broke the Bank of England,” I have been cast as a financial guru who can influence markets. That has actually created more moral problems for me. It has forced me to impose certain self-constraints in my statements -- exactly because I can move markets, like the investor Warren Buffett. Therefore, we try to act very responsibly.
Spiegel: Does the world need hedge funds?
Soros: I think that hedge funds are a very efficient way of managing money. But I clearly see the risks. Hedge funds use credit and credit is a source of instability. My conclusion is that transactions involving credit should be regulated.
Spiegel: Now you sound like a person who runs to a police station and tells the officers: "Please, handcuff me -- I am dangerous!"
Soros: Not really. I think there needs to be appropriate regulation of the financial markets, but it is impossible to prevent speculation. There is very little difference between speculation and investment. The only difference is basically that investments are successful speculations because if you successfully anticipate the future you make a speculative profit. I don't have a bad conscience at all. I am very proud to be a successful speculator.
Spiegel: Average citizens are not much impressed. They no longer trust Wall Street.
Soros: That mistrust is well placed. Those very prestigious institutions on Wall Street pursue their self-interest, and that is not identical to the common interest -- which needs to be protected.
Spiegel: Many people also no longer have confidence in the bailout measures taken by the Bush administration. Some critics claim that Treasury Secretary Henry Paulson is simply trying to bail out his former colleagues on Wall Street. Paulson was once the CEO of Goldman Sachs.
Soros: That may be going too far. But it is true that Paulson sees the problems too much from the perspective of a Wall Street banker.
Spiegel: He is also reluctant to push for salary caps for CEOs or bonus restrictions at banks receiving government aid.
Soros: Giving government aid to a bank basically transforms it into a utility. The huge salaries in this sector are only a symptom of a more profound misalignment. The profitability of the finance industry has been excessive. For a while, 35 percent of all corporate profits in the UK and the US came from the financial sector. That was absurd.
Spiegel: We talked a lot about the losers of the current financial disaster. Do you also see winners?
Soros: China could easily emerge as the great winner if the Chinese leaders handle the situation well. On the other hand, they could also turn out to be the biggest losers if they handle it poorly. If the management turns out be wrong, this could lead to a political crisis in China. It's still too early to declare winners and losers.
Spiegel: Could Obama be the first "post-American president" -- because his country loses economic force and "soft power"?
Soros: If Obama is wise, he will find common ground with China to solve this crisis. If he wants to do it alone, we will go into a worldwide depression because America is not in a position by itself to clean up the mess it created.
Spiegel: Mr. Soros, thank you very much for this conversation.
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