Justastory

This nicely written story by Lyndsey Layton appeared in the Washington Post this week. Americans have been disguising food as something more upmarket and selling it at vastly inflated prices. “Sturgeon caviar” was, in fact, Mississippi paddlefish. I bet it happens in the UK.

The expensive “sheep’s milk” cheese in a Manhattan market was really made from cow’s milk. And a jar of “Sturgeon caviar” was, in fact, Mississippi paddlefish.
Some honey makers dilute their honey with sugar beets or corn syrup, their competitors say, but still market it as 100 percent pure at a premium price.
And last year, a Fairfax man was convicted of selling 10 million pounds of cheap, frozen catfish fillets from Vietnam as much more expensive grouper, red snapper and flounder. The fish was bought by national chain retailers, wholesalers and food service companies, and ended up on dinner plates across the country.
“Food fraud” has been documented in fruit juice, olive oil, spices, vinegar, wine, spirits and maple syrup, and appears to pose a significant problem in the seafood industry. Victims range from the shopper at the local supermarket to multimillion companies, including E&J Gallo and Heinz USA.
Such deception has been happening since Roman times, but it is getting new attention as more products are imported and a tight economy heightens competition. And the U.S. food industry says federal regulators are not doing enough to combat it.
“It’s growing very rapidly, and there’s more of it than you might think,” said James Morehouse, a senior partner at A.T. Kearney Inc., which is studying the issue for the Grocery Manufacturers Association, which represents the food and beverage industry.
John Spink, an expert on food and packaging fraud at Michigan State University, estimates that 5 to 7 percent of the U.S. food supply is affected but acknowledges the number could be greater. “We know what we seized at the border, but we have no idea what we didn’t seize,” he said.
The job of ensuring that food is accurately labeled largely rests with the Food and Drug Administration. But it has been overwhelmed in trying to prevent food contamination, and fraud has remained on a back burner.
The recent development of high-tech tools — including DNA testing — has made it easier to detect fraud that might have gone unnoticed a decade ago. DNA can be extracted from cells of fish and meat and from other foods, such as rice and even coffee. Technicians then identify the species by comparing the DNA to a database of samples.
Another tool, isotope ratio analysis, can determine subtle differences between food — whether a fish was farmed or wild, for example, or whether caviar came from Finland or a U.S. stream.
The techniques have become so accessible that two New York City high school students, working with scientists at the Rockefeller University and the American Museum of Natural History last year, discovered after analyzing DNA in 11 of 66 foods — including the sheep’s milk cheese and caviar — bought randomly at markets in Manhattan were mislabeled.
“We put so much emphasis on food and purity of ingredients and where they come from,” said Mark Stoeckle, a physician and DNA expert at Rockefeller University who advised the students. “But then there are things selling that are not what they say on the label. There’s an important issue here in terms of economics and consumer safety.”
It is not clear how many food manufacturers, importers and retailers are testing products, but large companies with valuable brands to protect have been increasingly using the new technology, said Vincent Paez, director of food safety business development at Thermo Fisher Scientific, (more…)

This article is from the New York Times – for the first time in many years workers have failed to return from the (Chinese) New Year break – no longer drawn from the agricultural fields by the lure of industrial readies, instead the signing bonus is being introduced for factory workers…whatever next for the Chinese economy – now virtually the only source for cheap Western consumer goods…

GUANGZHOU, China — Just a year after laying off millions of factory workers, China is facing an increasingly acute labor shortage.

As American workers struggle with near double-digit unemployment, unskilled factory workers here in China’s industrial heartland are being offered signing bonuses.

Factory wages have risen as much as 20 percent in recent months.

Telemarketers are turning away potential customers because recruiters have fully booked them to cold-call people and offer them jobs.

Some manufacturers, already weeks behind schedule because they can’t find enough workers, are closing down production lines and considering raising prices. Such increases would most likely drive up the prices American consumers pay for all sorts of Chinese-made goods.

Rising wages could also lead to greater inflation in China. In the past, inflation has sown social unrest.

The immediate cause of the shortage is that millions of migrant workers who traveled home for the long lunar New Year earlier this month are not returning to the coast. Thanks to a half-trillion-dollar government stimulus program, jobs are being created in the interior.

But many economists say the recent global downturn also obscured a longer-term trend: China has drained its once vast reserves of unemployed workers in rural areas and is running out of fresh laborers for its factories.

Since China does not release reliable, timely statistics on employment, wages are considered the best barometer of labor shortages. And temp agencies here in Guangzhou raised their rate for factory workers this week to $1.17 an hour, from 95 cents an hour before the new year holiday.

The rate was 80 cents an hour two years ago, before the global financial crisis (more…)

Saw this in today’s Washington Post. Sign me up.

Google, the world’s biggest online search engine, wants to turbocharge your Internet connection.

The company said Wednesday it is getting into the broadband service business with trials for fiber networks that will deliver Internet access speeds that are 100 times faster than what most Americans are getting today.

The company said in a blog that it will build fiber-to-the-home connections to a small number of locations across the country that will deliver Internet access speeds of 1 gigabit per second. The company didn’t say what areas would be part of its experiment, but said prices would be competitive and that its network would reach at least 50,000 and potentially up to 500,000 people. A source who spoke on the condition of anonymity said the company doesn’t currently have plans to expand beyond the initial tests but will evaluate as the tests progress.

“Our goal is to experiment with new ways to help make Internet access better and faster for everyone,” wrote product managers Minni Ingersoll and James Kelly in the blog titled, “Think big with a gig: our experimental fiber network.”

Some of the fastest connections through cable, DSL and fiber access cap off around 20 to 50 megabits a second. Google chief executive Eric Schmidt told The Washington Post during a visit late last year that ultra-high-speed Internet connections were imperative for a next generation of applications to take off for the Web. Currently, he said, most network services fall short.

At such speeds, a rural health center could receive streaming three-dimensional medial imaging over the Web and discuss health issues with a physician in a Los Angeles, for example. Downloading high-definition, full-length feature films would take about five minutes, Google said.

This last month I have been reading Henry Thoreau’s work “Walden” which is all about jacking in the materialist rat race and going off to live next to the land in a small shack out in the woods. When I found this article in the Guardian it was almost identical – but here and now rather than 1845 (Thoreau was way ahead of his time) so here it is for an alternative Christmas story…..as I am so heartily sick of the mainstream ones!

In six years of studying economics, not once did I hear the word “ecology”. So if it hadn’t have been for the chance purchase of a video called Gandhi in the final term of my degree, I’d probably have ended up earning a fine living in a very respectable job persuading Indian farmers to go GM, or something useful like that. The little chap in the loincloth taught me one huge lesson – to be the change I wanted to see in the world. Trouble was, I had no idea back then what that change was.

After managing a couple of organic food companies made me realise that even “ethical business” would never be quite enough, an afternoon’s philosophising with a mate changed everything. We were looking at the world’s issues – environmental destruction, sweatshops, factory farms, wars over resources – and wondering which of them we should dedicate our lives to. But I realised that I was looking at the world in the same way a western medical practitioner looks at a patient, seeing symptoms and wondering how to firefight them, without any thought for their root cause. So I decided instead to become a social homeopath, a pro-activist, and to investigate the root cause of these symptoms.

One of the critical causes of those symptoms is the fact we no longer have to see the direct repercussions our purchases have on the people, environment and animals they affect. The degrees of separation between the consumer and the consumed have increased so much that we’re completely unaware of the levels of destruction and suffering embodied in the stuff we buy. The tool that has enabled this separation is money.

If we grew our own food, we wouldn’t waste a third of it as we do today. If we made our own tables and chairs, we wouldn’t throw them out the moment we changed the interior decor. If we had to clean our own drinking water, we probably wouldn’t contaminate it.

So to be the change I wanted to see in the world, it unfortunately meant I was going to have to give up cash, which I initially decided to do for a year. I got myself a caravan, parked it up on an organic farm where I was volunteering and kitted it out to be off-grid. Cooking would now be outside – rain or shine – on a rocket stove; mobile and laptop would be run off solar; I’d use wood I either coppiced or scavenged to heat my humble abode, and a compost loo for humanure.

Food was the next essential. There are four legs to the food-for-free table: foraging wild food, growing your own, bartering, and using waste grub, of which there is loads. On my first day, I fed 150 people a three-course meal with waste and foraged food. Most of the year, though, I ate my own crops.

To get around, I had a bike and trailer, and the 34-mile commute to the city doubled up as my gym subscription. For loo roll I’d relieve the local newsagents of its papers (I once wiped my arse with a story about myself); it’s not double-quilted, but I quickly got used to it. For toothpaste I used washed-up cuttlefish bone with wild fennel seeds, an oddity for a vegan.

What have I learned? That friendship, not money, is real security. That most western poverty is of the spiritual kind. That independence is really interdependence. And that if you don’t own a plasma screen TV, people think you’re an extremist.

People often ask me what I miss about my old world of lucre and business. Stress. Traffic jams. Bank statements. Utility bills.

Well, there was the odd pint of organic ale with my mates down the local.

• Mark Boyle is the founder of The Freeconomy Community. In a subsequent blog he responds to the comments below.

My week has been disrupted by health issues – so apologies to regular readers for the non-appearance of stories in the past fourteen days. I may well post a separate story about this – as it is interesting – still under consideration.

This story in the Independent  caught my interest. Road traffic levels – ie the number of cars and lorries actually using the road has dropped for the first time in nearly forty years. Some commentators have said that this points to real problems in the road haulage business – there’s no doubt that’s true. However, one of the dads watching school sports with me the other week told me that his car (a vintage Mercedes) had been stolen from outside his house a couple of weeks ago and after much discussion they had decided not to replace it. My kids have been pressing me for a year now on the vehicle issue. I wonder how much of the current decline is due to impulses like this – as well as the obvious economic pressures?

Traffic on Britain’s roads is decreasing significantly for the first time since the three-day week of the early 1970s, suggesting the car economy is heading for a crash, official figures revealed yesterday.

In a sign that the country is already in recession, fewer car and lorry journeys on motorways, rural and urban roads were made over the last six months compared to the same period a year ago.

The Department for Transport (DfT) recorded two consecutive quarters where road traffic has decreased year on year – the first time for more than 30 years. If the trend continues to the end of the year, it will hugely undermine the “great car economy” championed by Margaret Thatcher.

At the same time, sales of new cars have fallen by 23 per cent and are at their lowest since 1996. The motor industry is suffering across the world, with Volvo, the Swedish giant, selling just 115 heavy trucks over the past few months, compared to 41,970 during the same period last year – a 99.7 per cent fall.

And the jobs of 3,700 people at two UK car plants are at risk after General Motors warned it would be bankrupt within months unless it received a bailout from the US government.

The new traffic figures emerged as the Government prepares to announce car-related tax cuts as part of Gordon Brown’s strategy to get Britain through the recession. Planned vehicle excise duty increases for older cars are expected to be scrapped, while ministers are examining plans by the German government for tax reductions on green vehicles. On Friday the Prime Minister said he would work with other EU leaders on fiscal policy to support economic growth – a signal that tax cuts to reinvigorate the economy are being considered.

As Mr Brown and the Conservative leader, David Cameron, battle it out over the economy, a poll today puts the Conservatives 13 points ahead of Labour. The ICM survey for The Sunday Telegraph suggests that despite Labour’s surprise win in the Glenrothes by-election, the “Brown bounce” could be short-lived.

Besides the three-day week in 1973 and two world wars, traffic has steadily increased since the beginning of mass production of the motor car more than a century ago. But the new DfT figures show a 2.2 per cent decrease between July and September this year. This followed a 0.5 per cent decrease between April and June. The decline runs against the official predicted trend of an increase in traffic of 1-2 per cent a year.

Traffic congestion has also decreased on motorways and A-roads. The average vehicle delay on the slowest 10 per cent of journeys was 3.67 minutes, down from 3.95 minutes for the year ending September 2008.

Britain is in the early stages of a recession, with unemployment rising and industry shrinking, leading to fewer cars and HGVs on the roads. But during the recession of the 1990s, traffic remained static, suggesting there are other reasons for the decline.

It would appear thousands of motorists are giving up driving, either because of soaring fuel costs, rising parking and car taxes or because of the environmental cost.

Neil Greig, director of policy and research at the Institute of Advanced Motorists, said: “It is too early to say there is a definite long-term trend here, but there is no doubt these are the best figures we have to go on suggesting a decline in traffic.”

Tony Bosworth of Friends of the Earth said: “The Government must help people to use their cars less – and tackle climate change – by giving them better public transport alternatives, and making it safer and easier to cycle and walk.”

Adrian Ramsay, deputy leader of the Green Party, said: “It’s good to see that people are making better use of other travel options as they feel the pinch of the rising cost of using the car. There will be a limit to how many people can make this choice. Too many towns and cities have such poor and expensive public transport that people are stuck using the car.”

When she was Prime Minister, Margaret Thatcher hailed the car-based economy as the ultimate expression of the individual over the state. In the 1980s and 1990s, road traffic rose substantially from 215 billion vehicle kilometres in the year 1980 to 378.7 billion in 2000. Last year traffic reached 513 billion vehicle kilometres.

Car ownership has steadily increased over the past decade, with the proportion of households in Britain without access to a car falling from 30 per cent in 1997 to 25 per cent in 2007. Homes with two or more cars outnumber those with no cars, increasing from 25 per cent to 32 per cent.

Road transport produces around a quarter of carbon dioxide emissions. Nearly 60 per cent of this is from cars. This summer petrol reached 118p a litre, but many retailers have since lowered this to below £1 a litre after criticism from the Prime Minister.

Gary Mahoney, 50, from Liverpool, works for the council’s environmental protection department. He gave up his Toyota Corolla seven months ago.

“The car was something of a family heirloom and I used it for the five-mile trip to work, as well as to take my mum round for her shopping. The car died about seven months ago and I decided to scrap it. I was sentimentally attached to it but it was the right time to get rid of it. I was increasingly uncomfortable with having the car because of my job. I am aware of the damage cars can do, particularly in terms of air pollution.

“Now I cycle to work, car-share with a colleague, or I take the bus and I walk a lot more than I did before. I feel a lot fitter physically and I get to work feeling a lot more alert than I used to. I also feel better about myself and better about the environment. I would encourage people to think about doing the same as me, if their circumstances allow it. I don’t miss having a car at all.”

Ian Griggs

America’s real president speaks out against the drug wars that are turning Mexico into another Colombia. Failed State? War Zone. The picture below shows a relatively small haul from an army raid in Mexico City recently.
The main story is from  The Washington Post, more even handed than me, that’s for sure.

MONTERREY, Mexico, March 26 — Secretary of State Hillary Rodham Clinton said Thursday that Mexico and the United States had agreed to develop a “checklist” of tasks for both sides to intensify the fight against Mexican drug gangs engaged in a bloody turf war.

Speaking near the end of a two-day visit, Clinton said the list would include timelines committing the United States to speed up delivery of drug-fighting aid and getting Mexico to move faster on reforming its judicial and law enforcement institutions.

Clinton also said she was “confident” that a trade tiff with Mexico over trucking would be resolved quickly and that Mexico’s recent decision to slap tariffs on dozens of U.S. products “will be withdrawn.”

Clinton’s visit came as the U.S. government expressed alarm over the surge of drug violence in Mexico, where President Felipe Calderón has deployed the army in a desperate effort to restore order. More than 7,000 people have been killed since January 2008 in attacks by traffickers on their competitors and security forces.

Clinton called on Mexicans to support their government’s fight against the gangs and urged students to use the Internet to send tips on illegal activity to authorities.

“This is the responsibility of citizens as well as leaders,” she said at a speech at the Tecnologico de Monterrey university. “It is a mutual responsibility, and it’s particularly important for the young people of Mexico, who have enormous power right now, to strengthen your democracy, to call for more reforms, to shine a bright light on corruption.”

Monterrey, about 130 miles south of the U.S. border, is Mexico’s third-largest urban area. It is home to some of the country’s most prosperous families, known for their multinational businesses and pricey collections of modern art. But it has seen its former tranquillity shattered by drug violence.
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On the eve of Clinton’s trip, authorities announced the arrest of a man they called a leading cartel figure in the Monterrey area, Héctor Huerta Ríos. Days earlier, they picked up a suspect accused of organizing a gun-and-grenade attack on the U.S. Consulate in the city last October.

During her trip, Clinton emphasized that the United States shares responsibility for the drug war because of the millions of Americans who abuse cocaine, heroin and other drugs that fuel the trade, as well as the traffickers’ easy access to U.S. guns. That stance won her glowing headlines in Mexico, where many people say the American government has neglected its responsibility for the problem.

On Thursday morning, Clinton visited a gleaming new police training facility in eastern Mexico City that is receiving funds through the $1.4 billion Merida Initiative, a U.S. effort started last year to help train and equip Mexican security forces.

She watched police with dogs practice sniffing suitcases for drugs and carrying out a hostage-rescue exercise. She then walked through a hangar to observe two new Black Hawk helicopters purchased by the Mexican government for drug-fighting operations. The U.S. government has pledged to provide more helicopters, but the delivery has been delayed, to the dismay of Mexican authorities.

Among other priority topics during her visit was the dispute over the U.S. Congress’s recent decision to end a pilot program that allowed some Mexican trucks to transport goods in the United States.
U.S. labor unions fought the program, arguing that the vehicles were not safe. Mexico said the move violated the North American Free Trade Agreement and imposed tariffs on such U.S. products as wine and sunglasses.

Between meetings, Clinton met with indigenous students and visited the Basilica of Guadalupe, a shrine to Mexico’s most beloved religious icon.

Fernando Alvarez, 48, was part of a crowd of people who gathered outside a police line to catch a glimpse of Clinton. “Mexicans like her because of President Clinton,” he said. “President Clinton is worshipped. He is very human. He is not very formal. That’s kind of the Mexican way of living.”

In Washington, Dennis C. Blair, the top U.S. intelligence officer, sought to crush perceptions that the United States was worried about Mexico’s stability.

“Mexico is in no danger of becoming a failed state,” he told journalists. Blair said the spike in violence in Mexico showed that the CalderÃn government’s anti-drug policies were having an effect.

Blair said recent U.S. aid to Mexico included assistance in intelligence-gathering to give CalderÃn an advantage against the cartels. He offered no

This is a nicely written story by Jyoti Thottam from Pune in India published in Time magazine – about the world’s cheapest car, retailing for under 100,000 rupees or about £1,300. The makers have plans to sell the car in kit form which would be assembled by dealers….hmmm. It’s clearly one way forward.  But where’s that really high performance electric battery car I’ve been looking for….

In New Delhi in the early 1970s, my family traveled by scooter in the classic, death-defying Indian fashion. My father would drive, with me, a toddler, standing in front gripping the handlebars and my mother seated pillion, my infant sister in her arms. My father was a civil engineer and my mother a nurse, and in India at that time, cars for a young family were far out of reach.

More than 30 years later, I recently listened to Ratan Tata, chairman of one of India’s largest companies, describe a family just like mine as the inspiration for the Nano, the ultra-cheap “people’s car” that Tata Motors officially launches today. “What sparked it off was riding in a car and looking at them and saying, ’surely there’s a safer way that these people can be transported,’” Tata recalls.

That incident was the beginning of a six-year quest by Tata Motors, India’s largest automaker, to develop a car for the common man costing less than Rs 100,000 (about $2,000), roughly the same price as a motorcycle. Many thought Tata was bound to fail, that a car so cheap wouldn’t be much of a car at all. The Maruti 800, India’s best-selling sub-compact, costs almost twice as much. The chairman of Suzuki Motor, Osaka Suzuki, once said: “Tata will not be able to make a one-lakh car.” (Lakh is an Indian word for 100,000.)

The company has proven the doubters wrong. The Nano is going on sale at Tata’s 470 outlets in India; the base model does indeed carry a sticker price of Rs 100,000. Now, with global car sales in the worst slump in decades — Tata Motors itself is experiencing financial difficulties — the battered automotive industry is looking to the debut of the world’s cheapest car for clues to a future that could revolve around smaller, more fuel-efficient and more cheaply produced vehicles.

In an exclusive March 5 interview with TIME, Tata downplayed the tough market conditions and the impact that sagging consumer demand could have on Nano sales. Although car loans are harder to come by in India due to the credit crisis, the country’s economy is still growing. “If I had conceived a million-dollar supercar today, I think you’d have every reason to question whether that’s the right product at the right time in the planet that we are living in today,” Tata says. The Nano, he argues, is the right car for this difficult time. “What has happened in the changing economic situation globally reinforces, if nothing else, the fact that a low-cost car has a place.”

Tata Motors engineers developed the Nano by redesigning every component to minimize cost and weight, while trying to maintain performance and comfort. To see how well they accomplished their mission, I was offered the chance to drive a Nano on a test track at Tata Motors’ main plant in the western Indian city of Pune.

The first thing you notice is that the dashboard holds just two gauges: speedometer and fuel level. This is the basic model, and it’s stripped down to the bare essentials. But driving the car is surprisingly easy. The gearshift is smooth, the car accelerates adequately and you never feel cramped or low to the ground. The Nano doesn’t feel like a cheap, lightweight car that’s going to tip over with the first sudden turn.

Outside the Tata Motors facility, our photographer got to drive a fully equipped, bright yellow Nano along the highways, cobbled avenues and side streets of Pune. This car had air conditioning, worth the extra money in India (optional-equipment costs had not been released at the time this was written), but running the aircon sapped some of the power of the tiny, two-cylinder engine. Other drawbacks of the car: The storage space is hard to access because the hatchback doesn’t open, the brakes aren’t progressive, and the car we drove pulled slightly to the left even though there were just 40 km on its odometer.

Those quibbles are unlikely to make a difference to potential buyers. The Nano’s target customers are people riding two-wheelers, and for most of them, this is the only car they could hope to buy. Even without spending anything on marketing so far, Tata executives expect demand to far exceed their initial annual production capacity of 45,000 Nanos. Tata Motors had planned to build about 250,000 cars a year, but the company was forced to shut down its original Nano factory last fall after protests by people displaced by its construction turned violent. That disruption forced Tata Motors to relocate its main Nano production line and delayed the launch. Because plants in Pune and Pantnagar are now producing the car in reduced numbers, the company is bracing for long waiting lists and disappointed customers.

The lower volume means the Nano will do little for Tata Motors’ revenue and profits, at least initially. Vaishali Jajoo, a senior automotive research analyst at Angel Broking, an investment firm in Mumbai, says that even at projected output of about 250,000 cars a year, she expects the Nano will add just 3% to annual sales. Because the profit margin on Nano sales is small, “It will take at least four to five years to break even” by recouping development costs, Jajoo says. Fully equipped Nanos have higher margins, but the company has not yet decided how many of those it will produce. A company spokesman declined to comment on analyst reports regarding the Nano’s launch, calling them “speculative.”

Initially, the Nano will be sold only in India. The company plans to begin selling a European version in 2011. It has no plans yet to export the Nano to the U.S., although that has not been ruled out.

The Nano’s slow start comes at a time when Tata Motors is struggling financially due to slumping demand. The company in the quarter ending Dec. 31 reported a $58.5 million loss, its first loss in seven years. Loans for Tata Motor’s $2.3 billion purchase of loss-making luxury car brands Jaguar and Land Rover from Ford Motor are coming due. “That’s a major cash-flow crunch for them,” Jajoo says. Jaguar and Land Rover sales have tanked. The company is pursuing several options to meet its obligations, including getting a bailout from the British government.

The Nano certainly won’t solve Tata Motors’ immediate problems. But Tata says he hopes the groundbreaking vehicle will in the long run help redefine not only how much cars cost, but also how they are made. The future of the car industry, he says, lies in design and marketing — not manufacturing, which involves high costs and increasingly can be farmed out to other companies. If the Nano really takes off, Tata Motors may try “distributed manufacturing” — selling Nano kits to be assembled and sold by independent dealers. This, says Tata, would be a step toward fully outsourced manufacturing. “What I tried to describe on the Nano is an attempt to look at that as a business model,” Tata says. A new way of doing business may be something the beleaguered auto industry needs even more than a cheap new car.

It’s interesting to see key European issues discussed by the Americans. Actually I believe the Washington Post is more objective than the British newspapers, in this article by Craig Whitlock today. The crucial fact buried in this one is that Europe held two different meetings at the same venue – one for the Eastern Europeans and one for the “main players”. Their headline was E.U. Denies Request for Bailout of E. Europe – Members Sharply Split Over Economic Action

BERLIN, March 1 — European leaders Sunday rejected a Hungarian plea for a $240 billion bailout of struggling Eastern European countries, as divisions continued to fester over how to prevent economic ills from spreading across the continent.

Germany, Europe’s largest economy, led opposition to the Hungarian proposal. German Chancellor Angela Merkel said a broad, regional rescue plan was ill-conceived, though she did not offer specific alternatives.

“Saying that the situation is the same for all Central and Eastern European states, I don’t see that,” she said Sunday after a European Union summit in Brussels. “You cannot compare Slovenia or Slovakia with Hungary.”

Several Eastern European countries have been slammed by currency devaluations and other economic ailments in recent months, as global investors have warned that the region is ripe for a financial meltdown.

Hungary and Latvia have received bailouts from the International Monetary Fund, and Romania has said it may ask for one. The E.U., as well as the World Bank and other financial institutions, has approved aid, but national leaders say much more is needed.

The 27-member E.U., hamstrung by political infighting, has been unable to agree on how to respond. The E.U. was created as a common economic market; its members spent a generation easing border restrictions, coordinating regulations and harmonizing fiscal policies. But faced with the worst global economic crisis since World War II, members are accusing one another of protectionist impulses and national rivalries.

Hungary’s prime minister, Ferenc Gyurcsany, had proposed the massive rescue fund for Eastern Europe last week. On Sunday, he warned that old conflicts could reemerge and that “large-scale defaults” would result if the E.U. did not come to the aid of its newest members, who have spent the past two decades trying to recover from communism.
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“We should not allow a new Iron Curtain to be set up and divide Europe into two parts,” Gyurcsany told reporters in Brussels before the start of the summit. “This is the biggest challenge for Europe in the last 20 years.”

Disagreements are so widespread that E.U. leaders held two separate summits Sunday.

In the first, elected officials from Eastern European countries, which were granted admission to the E.U. starting in 2004, gathered in Brussels to discuss how to give their region more of a voice in deliberations that have historically been dominated by the continent’s economic powers: Germany, France, Britain and Italy.

Eastern European officials said they were frustrated that few of them have been included in talks with the United States, China, Japan and Western European countries over how to respond to the global economic crisis.

“None of those people around the table are actually from a country that is in the catching-up period in the E.U.,” Mikolaj Dowgielewicz, Poland’s European affairs minister, said Sunday, referring to the time since the collapse of communism two decades ago. “You have lots of old member states. There is certainly an issue here.”

Several Eastern European countries also want the E.U. to make it easier for them to replace their unstable currencies — such as the Polish zloty and the Hungarian forint — with the euro. Germany, France and other Western countries have insisted the new members follow a strict, gradual path into the euro club that limits deficit spending. The recession, however, has made the rules more painful to follow.

At the same time, Eastern European leaders have been squabbling among themselves, with officials from relatively healthy economies taking pains to distance themselves from their weaker neighbors.

Poland and the Czech Republic, for instance, also frowned on the Hungarian bailout proposal, saying they did not need to be rescued and did not appreciate being lumped together. “When it comes to any specific plans for Eastern Europe, we don’t need those plans,” Dowgielewicz told reporters.

“We do not want any new dividing lines,” added Czech Prime Minister Mirek Topolanek, whose country sponsored the summit and holds the rotating E.U. presidency until July. “We do not want a Europe divided along a north-south or an east-west line.”

According to the Independent a normally reliable poll shows that almost  40% of Britons anticipate serious rioting in city centres in the coming months. Hmm. Could be right. The picture shows December’s Athens riots as a taste of what we’re in for.

More than a third of voters believe the Army will have to be brought in to deal with riots on British streets as the recession bites, a poll showed today.

The widespread fear of serious unrest was disclosed as a senior police officer warned activists were planning a “summer of rage” and could find rioters easier to recruit because of the credit crunch.

Superintendent David Hartshorn, who heads the Metropolitan Police’s public order branch, said known activists were planning a return to the streets centred on April’s G20 summit of world leaders in London.

And intelligence shows they may be able to call on more “footsoldiers” than normal due to the unprecedented conditions – which have led to youth violence in Greece and mass protests elsewhere in Europe.

YouGov polling for Prospect magazine found 37 per cent thought such “serious social unrest in several British cities” was certain or likely – although a slim majority (51 per cent) disagreed.

Almost three quarters (73 per cent) said they feared a sustained return to mass unemployment.

And a clear majority (64 per cent) also favoured forcing the under-25s to do a year of full-time, modestly-paid community service such as working with the sick and elderly or helping with environmental projects.

Labour MP Frank Field told Prospect the main political parties should join forces to develop the idea.

“The time has come to look at this idea. A new bipartisan commission should be established to look into how it could be done, perhaps led by figures as respected as David Blunkett or David Davis,” he said.

Although the biggest support for a compulsory scheme was among the older generations, a majority of 18-30 year olds (52 per cent) also gave it their backing.

Talking about the prospect of disorder, Mr Hartshorn told the Guardian: “Those people would be good at motivating people, but they haven’t had the ‘footsoldiers’ to actually carry out [protests].

“Obviously the downturn in the economy, unemployment, repossessions, changes that. Suddenly there is the opportunity for people to mass protest.

“We’ve got G20 coming and I think that is being advertised on some of the sites as the highlight of what they see as a ’summer of rage’,” he told the newspaper.

Gordon Brown’s spokesman said: “The Prime Minister’s view on this is that of course he understands people’s concerns and he also understands that people are angry, for example about the behaviour of some of the banks.

“That’s why he is absolutely determined that the Government does everything possible to deal with those concerns and help people and businesses get through what is a global recession.”

YouGov polled 2,270 people between February 10-12.

This article appeared today in the Washington Post. I have only included recession credit crunchy stories where they have been interesting or well written. This piece was done by Annys Shin.

The unsold cars and trucks piling up at dealerships and assembly lines as consumers cut back and auto companies scramble for federal aid are just one sign of a major problem hurting the economy and only likely to get worse.

The world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores. Japan yesterday said its economy shrank at an 12.7 percent annual pace in the last three months of 2008 as global demand evaporated for Japanese cars and electronics. Business everywhere are scrambling to bring supply in line with demand.

Downsizing can be tricky, though. No one knows how much worse the economy will get, and while everyone waits for the recession to peter out, businesses are grappling with how to cut costs and survive without sabotaging their ability to grow when the economy picks up.

And there is a lot to cut.

“There is over-capacity in everything,” from “retail to manufacturing to housing,” said Richard Yamarone, chief economist at Argus Research. “If capacity is too large, you don’t need that many people employed, which is another reason we’re seeing such high job losses.”

As long as capacity far outstrips demand, businesses have little reason to expand, buy new equipment or hire workers. Even if the government funds bridge repairs and banks step up lending, many industries still have to go through massive restructuring before growth can resume. But executives say they have to tread carefully. If they put off critical investments in technology or research for too long, they could hobble their recovery and even the economy’s.

Few industries have been as stung as severely by excess capacity as the U.S. auto industry, which produces millions more vehicles than it can sell. In 2008, there were enough automotive assembly plants in North America to churn out 18.3 million vehicles a year, according to the Center for Automotive Research. Analysts estimate that consumers this year will buy about 11 million. At current sales levels, it would take 116 days to sell all the cars and trucks clogging lots.

Automakers are scheduled to submit plans today outlining how they hope to restructure their operations to deal with a smaller marketplace, while still developing the new fuel-efficient cars that may be key to their future.

Auto suppliers are also trying to figure out how to survive in the face of massive excess capacity globally.

At its plant in Strasburg, Va., International Automotive Components, a Michigan-based supplier, secured wage and benefit concessions from workers in 2007 in hopes of staying competitive. But when Ford closed a factory in Norfolk, IAC had to lay off more than 200 workers, a third of the workforce in Strasburg. Since then, IAC has been able to line up more work for the plant.

“The unfortunate thing is we know . . . it comes at the cost of other workers whose plants were unable to survive,” said Karen Foster, president of United Auto Workers Local 2999, which represents the IAC employees at the affected plant.

There are echoes of the automakers’ plight throughout the economy. Sandra Berg, chief executive of Ellis Paint in Los Angeles, an industrial paint and coating manufacturer, recently found herself confronting over-capacity head on. Her company had been growing steadily since 2000 and was able to hand out bonuses for 2008. The downturn started to affect business toward the end of last year. Then came January, and “we just slammed into a brick wall,” Berg said.
Since the new year, as sales have plummeted, Ellis Paint has announced two rounds of layoffs, imposed a hiring freeze and cut pay for management by 5 percent. The company has cut everywhere but sales, marketing, and research and development. “Our goal is to keep our expenses at the level of sales. I don’t need to make a lot of money. I just need to break even . . . and look for the opportunities,” Berg said.

Non-manufacturing sectors are trying to get rid of excess capacity as well. Retail chains such as Ann Taylor and Gap are closing stores after years of expansion, and others, such as Mervyns, are closing for good. “We’ve tremendously expanded the square feet of stores but not the number of yuppies occupying them,” said Standard & Poor’s economist David Wyss.

Some analysts say over-capacity is so rampant that it will stymie government efforts to unfreeze credit markets. Banks have little reason to lend not only because they still have bad debt on their books but also because businesses don’t have a pressing need to expand, said Mike Shedlock, an investment analyst with Seattle-based Sitka Pacific who writes the popular blog Mish’s Global Economic Trend Analysis.

“What is it that we need more of?” Shedlock said. “Do we need more Wal-Marts, more Pizza Huts, more nail salons?”

Strip malls and stores proliferated alongside housing developments, but many of those houses are empty; there were never enough people to fill them in the first place, and there won’t be anytime soon.

Harvard economist Edward Glaeser estimates that from 2002 to 2007, the country’s housing stock increased by 8.65 million units, outpacing the number of new households, which increased only by 6.7 million over the same period. Taking into account a rise in the number of vacation homes, Glaeser estimates an overhang of about 1.3 million vacant units. Absorbing that excess, he said, could take an additional two years.

Over-capacity in the housing industry has spilled over into countless other peripheral industries — forcing cuts at chemical companies, home improvement stores and furniture manufacturers. The slump has prompted layoffs at PPG Industries, a leading paint company; Owens Corning, which makes roof shingles; and Therma-Tru, a door-manufacturing company. Therma-Tru recently moved up plans to close its plant in Fredericksburg later this year, citing “weaker-than-expected business forecasts.”

Some businesses that were careful to manage inventories during the boom are facing a hard adjustment.

Ben Anderson-Ray, who runs Hubbardton Forge, a small maker of high-end lighting fixtures in Vermont, said he’s had to lay off 26 employees after initially cutting hours, even though he expanded the business steadily and his customers aren’t stuck with massive quantities of unsold goods.

For now, Anderson-Ray said, he has not scaled back work on new products; he simply cannot afford to do so. As one of the last lighting companies that manufactures its goods in the United States, Hubbardton Forge has survived in part because of its original designs and constant innovation. It cannot compete with overseas producers on price.

“If our order rates improve, we have the capacity in place to come back,” Anderson-Ray said. But if order levels fall further over the next few months, he may have to consider further cuts. “We are watching our orders every day,” he said.

Some analysts see ending the credit crunch as soon as possible as critical to preventing lasting damage. Harvard economist Diego A. Comin, in his research on Japan’s decade-long bout of economic stagnation in the 1990s, found that demand stayed low long enough that businesses didn’t make necessary investments. Computer adoption rates, for example, slowed, as did productivity growth. Businesses lost ground to competitors in countries such as South Korea, which made it harder for Japan to emerge from its slump.

Investing in new products and processes matters even more in highly competitive global industries plagued by over-capacity.

“In China, during the boom, there was huge over-capacity in various lines of activity ranging from shoes and clothing, light manufacturing — all of that stuff. So that is why from the perspective of U.S. companies, we have found it so important to be on the innovative edge,” said Harvard business professor Joseph L. Bower. “The only way to create value is to be on the innovative, high-tech, fashion-forward side.”

If the credit crunch in the United States persists, “companies will find it difficult to invest in technology for a while, and then once the financial markets are back on track and demand recovers, companies will find themselves in a difficult position,” Comin said. “Productivity growth will be declining for a while. They will have a hard time catching up.”

I’ve noticed during the course of the Obama’s election campaign he has referred to Lincoln often – and I thought it apposite on this important day to refer to Lincoln’s second inauguration speech on March 4th 1865. In about four week’s time Lincoln would be dead, assassinated. My source for the story is bartleby online, which is a good source for all kinds of historical stuff.

Fellow-Countrymen: this second appearing to take the oath of the Presidential office there is less occasion for an extended address than there was at the first. Then a statement somewhat in detail of a course to be pursued seemed fitting and proper. Now, at the expiration of four years, during which public declarations have been constantly called forth on every point and phase of the great contest which still absorbs the attention and engrosses the energies of the nation, little that is new could be presented. The progress of our arms, upon which all else chiefly depends, is as well known to the public as to myself, and it is, I trust, reasonably satisfactory and encouraging to all. With high hope for the future, no prediction in regard to it is ventured.On the occasion corresponding to this four years ago all thoughts were anxiously directed to an impending civil war. All dreaded it, all sought to avert it. While the inaugural address was being delivered from this place, devoted altogether to saving the Union without war, urgent agents were in the city seeking to destroy it without war—seeking to dissolve the Union and divide effects by negotiation. Both parties deprecated war, but one of them would make war rather than let the nation survive, and the other would accept war rather than let it perish, and the war came. One-eighth of the whole population were colored slaves, not distributed generally over the Union, but localized in the southern part of it. These slaves constituted a peculiar and powerful interest. All knew that this interest was somehow the cause of the war. To strengthen, perpetuate, and extend this interest was the object for which the insurgents would rend the Union even by war, while the Government claimed no right to do more than to restrict the territorial enlargement of it. Neither party expected for the war the magnitude or the duration which it has already attained. Neither anticipated that the cause of the conflict might cease with or even before the conflict itself should cease. Each looked for an easier triumph, and a result less fundamental and astounding. Both read the same Bible and pray to the same God, and each invokes His aid against the other. It may seem strange that any men should dare to ask a just God’s assistance in wringing their bread from the sweat of other men’s faces, but let us judge not, that we be not judged. The prayers of both could not be answered. That of neither has been answered fully. The Almighty has His own purposes. “Woe unto the world because of offenses; for it must needs be that offenses come, but woe to that man by whom the offense cometh.” If we shall suppose that American slavery is one of those offenses which, in the providence of God, must needs come, but which, having continued through His appointed time, He now wills to remove, and that He gives to both North and South this terrible war as the woe due to those by whom the offense came, shall we discern therein any departure from those divine attributes which the believers in a living God always ascribe to Him? Fondly do we hope, fervently do we pray, that this mighty scourge of war may speedily pass away. Yet, if God wills that it continue until all the wealth piled by the bondsman’s two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said “the judgments of the Lord are true and righteous altogether.”
With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation’s wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations.

I read this article written by Sam Jones on the Financial Times website this afternoon, ft.com. I have avoided covering too much about the financial ups and downs of GB’s finest as it all tends to be very well covered everywhere else – but a major bank losing a quarter of its value in a single afternoon, that’s a story.

BARC down 24.85 per cent. RBS down 13.03 per cent.

- On an afternoon when the market is up, and the next nearest faller is Lloyds, down 5 per cent.

A flurry of rumours abound. Talk that Barc won’t be included in the putative UK government bad bank scheme; talk of monoline exposure; and talk of the impact from the downgrades on credit card companies to which Barc is exposed.

None of which, as rumours, seem to have the mettle to force Barc to lose a quarter of its value on a Friday afternoon – by our judgment at least.

Mayfair’s finest must certainly be enjoying this. It certainly seems like there’s been a raid on the day the short selling ban on UK financials expired. (Though on the other hand, Barc’s performance has been dismal all week.)
But we would draw readers’ attention to one other set of facts – presumably not the proximate cause of this afternoon’s panic, but certainly worth bearing in mind.

Last week, Sir Nigel Rudd resigned as deputy chairman of Barclays amid rumours of a spat with chairman John Varley over the valuation of certain assets on the bank’s balance sheet (a notion which has been dismissed by friends of both Rudd himself and Barclays).

Barclays is an industry leader in synthetics – corporate CDOs, structured credit products, et cetera. Before Christmas, there were a number of warnings circulating about the potential for disaster in this market – on almost the same scale as that seen in ABS CDOs.

Yesterday, rating agency Moody’s issued this notice (emphasis ours):

New York, January 15, 2009 — Moody’s Investors Service announced today that it has revised and updated certain key assumptions that it uses to rate and monitor corporate synthetic CDOs, a type of collateralized debt obligation backed by a pool of credit default swaps referencing corporate credits.

Moody’s is revising its assumptions to reflect the expected stress of the global recession and tightened credit conditions on corporate default rates, which are likely to be more variable and extreme than those in other recent historical downturns. Specifically, the changes announced today include: (1) a 30% increase in the assumed likelihood of default for all corporate credits in synthetic CDOs, and (2) an increase in the degree to which ratings are adjusted according to other credit indicators such as rating Reviews and Outlooks. Moody’s also announced an increase in the default correlation it applies to corporate portfolios as generated through a combination of higher default rates and an increase in investment grade and financial sector asset correlations.

Based on initial assessment, Moody’s expects to lower the ratings of a large majority of corporate synthetic CDO tranches by three to seven notches on average. The actual magnitude of the downgrades will depend on transaction specific characteristics such as tranche subordination, vintage and portfolio composition.

Those kind of cuts could have disastrous implications for banks’ asset risk weightings under the Basel II regime. Although many banks use their own internal methods to calculate risk weightings, rather than relying on an external rating-based approach, it will be very hard for banks to justify to auditors the use of models that are out of line with the kind of assumptions the rating agencies are now adopting.

Conclusion: any bank with large holdings of synthetic CDOs may be forced to make large writedowns and more seriously, stump up huge extra amounts of regulatory capital.

And which UK banks are big with synthetics? Barc and RBS, by our memory. More info to follow.

This entry was posted by Sam Jones on Friday, January 16th, 2009 at 16:45 and is filed under Capital markets. Tagged with barclays, rbs, Synthetic CDO.

We all know this story – how Mr Madoff misplaced 50 billion dollars  and deceived the likes of  Nicola Horlick and other grown up investors the world over. It made me read about Charles Ponzi, the inventor of the eponymous Ponzi scheme. Does anybody out there notice a looky-likey resemblance? The story best encapsulating these links between the two ran in the New York Times yesterday.

 The $50 billion fraud that federal authorities say Bernard L. Madoff perpetuated has already been called the largest Ponzi scheme in history (though Dealbook reports there seem to be other contenders for that distinction).

On the surface, at least, it would seem that Mr. Ponzi and Mr. Madoff could hardly be more different. Mr. Madoff, 70, was a fixture in the high-flying worlds of finance and philanthropy, with a reputation that extended from Manhattan’s moneyed elite to the exclusive golf clubs of Palm Beach, Fla. Mr. Ponzi, who died in 1949, was a fast-talking immigrant and college dropout, whose scheme — according to Mitchell Zuckoff, Mr. Ponzi’s biographer — rested on the eagerness of ordinary working people to benefit from the wealth they saw being generated around them during the last Gilded Age.

“He had his nose pressed against the glass,” Mr. Zuckoff, a professor of journalism at Boston University and a former reporter for The Boston Globe, said in a phone interview on Monday. “He was not linked with Wall Street and New York, though he had dreams of being like Rockefeller.” (more…)

I am posting this story today, lucidly written by Michael J. de la Merced in The New York Times about the forthcoming demise – to my surprise – of what has been a key source of stories for me – the consistently robust (or so I thought) Chicago Tribune. The picture shows “billionaire real estate investor Samuel Zell”. Looks like a nice guy to me.

The Tribune Company filed for bankruptcy protection in a federal court in Delaware on Monday, as the owner of The Los Angeles Times, The Chicago Tribune and the Chicago Cubs baseball team struggled to cope with mountains of debt and falling ad revenue.

Tribune, which was acquired last year by billionaire real estate investor Samuel Zell, had hired bankruptcy advisers like Lazard and the law firm Sidley Austin in recent weeks as it negotiated with creditors over debt covenants. (Read the bankruptcy petition here.)

It is only the latest — and biggest — sign of duress for the newspaper industry yet. Several newspaper companies have struggled to cope with declining revenues and mounting debt woes. Tribune has pared back the newsrooms of many of its papers, and it sold off Newsday to Cablevision’s Dolan family earlier this year. It is unclear what Tribune’s filing means for other newspaper publishers on the brink.

“Over the last year, we have made significant progress internally on transitioning Tribune into an entrepreneurial company that pursues innovation and stronger ways of serving our customers,” Mr. Zell, who holds the titles of Tribune chairman and chief executive, said in a statement. “Unfortunately, at the same time, factors beyond our control have created a perfect storm — a precipitous decline in revenue and a tough economy coupled with a credit crisis that makes it extremely difficult to support our debt.

The Tribune Company owns 23 TV stations and 12 newspapers, including two of the eight largest in the country by circulation. As of Sept. 30, The Los Angeles Times had weekday circulation of 739,000 and the Chicago Tribune had 542,000.

Tribune has been trying to sell the Chicago Cubs baseball team; the team’s stadium, Wrigley Field; and the company’s share in a regional cable sports network. Such a deal, which could bring the company more than $1 billion, has been a crucial part of its strategy since last year.

But the sale — originally expected to take place before the last baseball season — has been delayed by several factors, including the tight credit market.

It is not clear how recent federal allegations of insider trading against Mark Cuban, believed to be the highest bidder, could affect the sale.

In a court filing, Tribune said it had nearly $13 billion in debt, compared to $7.6 billion in assets. Most of that debt was taken on when Mr. Zell acquired the company — a deal he struck using mostly borrowed money. All of the now privately held company’s equity is owned by an employee stock-ownership plan, which is likely to get wiped out. (Because the ESOP is relatively new, its losses are likely to be small. When United Airlines filed for bankruptcy in 2002, its employee plan, created in the mid-1990s, suffered much bigger losses.)

The company had to contend with hefty interest payments over the next year. In its court filing, Tribune listed a $69.6 million bond issue that was to mature on Monday.

Another pressing problem was a maintenance covenant on some of its debt that limits its borrowings to no more than nine times earnings before interest, depreciation and amortization.

Even if the company continues to make interest payments, failure to maintain that level of debt means technical default — which does not always lead to a bankruptcy filing. Other newspaper publishers have halted making interest payments on their debt, but have yet to file.

Tribune said in a statement that it has enough cash to keep operating as usual. Barclays, one of its existing lenders, agreed to amend an existing $300 million financing facility, as well as to provide a $50 million letter of credit. The latter is part of an overall debtor-in-possession financing package, which is usually extended to companies that file for bankruptcy. More details of the DIP financing could not be learned.

The top creditors listed by Tribune in its court filing include big banks like JPMorgan Chase, Merrill Lynch and Deutsche Bank. JPMorgan listed some of the firms it had syndicated its debt to as well; that list comprises private investment firms like Kohlberg Kravis Roberts’s KKR Financial, Highland Capital Management and Davidson Kempner Capital Management.

A CreditSights analyst, Jake Newman, wrote in a research report published last month that Tribune avoided technical default in the third quarter partially through some accounting adjustments. “We think the company will have difficulty meetings its year-end covenant compliance,” Mr. Newman wrote.

Tribune hired Lazard several weeks ago to assess its options, these people said. It also hired Sidley, a longtime outside adviser to Tribune that has a well-respected bankruptcy practice as well.

In its filing Monday, Tribune also said that it has retained Alvarez & Marsal, a restructuring adviser, as a consultant. Alvarez & Marsal is also advising Lehman Brothers, the collapsed investment bank whose filing was the largest corporate bankruptcy in American history.

Tribune’s problems have long been reflected in the price of its bonds. Tribune bonds maturing Aug. 15, 2010 with a 4.88 percent coupon traded at $13.25 on Friday, suggesting severe levels of distress.

–Michael J. de la Merced

It’s about time I ran a serious article about the economy after weeks of crisis – and Melvyn King gave an interesting analysis of what’s been going down in his speech to the Confederation of British Industry this Tuesday, which I am publishing in full here. However when I searched for an image of “King addressing CBI” this one came up, so I thought I would include it anyway. Pound drop, don’t stop….or something.

My first memories of Leeds are from a wet summer in 1958. I was ten years old, we lived on the moors above Hebden Bridge, and my father took me to my first Test Match – England against New Zealand at Headingley. It rained all day on both Thursday and Friday, and, when play started in mid-afternoon on Saturday, on a drying wicket New Zealand were bowled out by Laker and Lock for 67. So I became a slow bowler. I was taught to bowl – slow left arm – at Old Town primary school by the headmaster, Alfred Stephenson. During the morning break he would mark the wickets in chalk in the playground, and draw a small circle exactly on a length. If we could pitch the ball within that circle he would give us a farthing. As we improved, and the payout of farthings increased, the morning break became shorter and shorter – my first lesson in economic incentives, or what is known in the trade as “moral hazard”.
So let me move forward 50 years to the events of 2008, and describe the nature of the financial crisis, the steps that governments and central banks have taken to deal with it, and, most important, the implications of recent events for the UK and world economies. Since August 2007, the industrialised world has been engulfed by financial turmoil. And, following the failure of Lehman Brothers on 15 September, an extraordinary, almost unimaginable, sequence of events began which culminated a week or so ago in the announcements around the world of a recapitalisation of the banking system. It is difficult to exaggerate the severity and importance of those events. Not since the beginning of the First World War has our banking system been so close to collapse. In the second half of September, companies and non-bank financial institutions accelerated their withdrawal from even short-term funding of banks, and banks increasingly lost confidence in the safety of lending to each other. Funding costs rose sharply and for many institutions it was possible to borrow only overnight. Credit to the real economy almost stopped flowing. In financial markets, confidence in others fell to a point where investors sought refuge in government instruments such as US Treasury Bills, which at one point yielded a negative return. Central banks around the world were providing enormous amounts of liquidity to some institutions while at the same time taking large deposits from others. Eventually, on 6 and 7 October even overnight funding started to dry up. Radical action was necessary to ensure the survival of the banking system. And on the morning of 8 October that action was taken when the Prime Minister and Chancellor unveiled a UK plan for recapitalising the banking system on which the Bank, FSA and Treasury had been working for a while. Why was radical action necessary? When the financial turmoil began in August 2007, markets for a number of financial instruments, including mortgage-backed securities, dried up. Most observers expected this closure to be short-lived, and the predominant view was that the crisis was one of (a lack of) liquidity. But, as time passed and markets did not re-open, it became clear that the problem was deeper seated, and concerned the solvency of the banking system and the sustainability of its funding model. Attempts to deal with the problem by injections of liquidity from central banks led to temporary alleviations of the symptoms, but, after an initial improvement, conditions would deteriorate again. The scale of central bank liquidity support during the crisis has been unprecedented, and all central banks have increased the scale of their lending in broadly similar ways. The UK taxpayer now has a larger claim on the assets of banks (in the form of collateral held by the Bank of England) than the total equity value of UK banks. Massive injections of central bank liquidity have played a vital role in staving off an imminent collapse of the banking system. Such lending can tide a bank over while it is taking steps to remove the cause of the concerns that generated a run or lack of confidence. But it can also serve to conceal the severity of the underlying problems, and put off the inevitable day of reckoning. I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks. Central bank liquidity is sticking plaster, useful and important, but not a substitute for proper treatment. Just as a fever is itself only a symptom of an underlying condition, so the freezing of interbank and money markets was the symptom of deeper structural problems in the banking sector. So let me explain why a major recapitalisation of the banking system was necessary, was the centrepiece of the UK plan (alongside a temporary guarantee of some wholesale funding instruments and provision of central bank liquidity), and was in turn followed by other European countries and the United States. Securitised mortgages – that is collections of mortgages bundled together and sold as securities, including the now infamous US sub-prime mortgages – had been marketed during a period of rising house prices and low interest rates which had masked the riskiness of the underlying loans. By securitising mortgages on such a scale, banks transformed the liquidity of their lending book. They also financed it by short-term wholesale borrowing. But in the light of rising defaults and falling house prices – first in the United States and then elsewhere – investors reassessed the risks inherent in these securities. Perceived as riskier, their values fell and demand for securitisations dwindled. For the same reason, the value of banks’ mortgage books declined. Banks saw the value of their assets fall while their liabilities remained unchanged. The effect was magnified by the very high levels of borrowing relative to capital (or leverage) with which many banks were operating, and the fact that banks had purchased significant quantities of securitised and more complex financial instruments from each other. Not only were these assets difficult to value, but the distribution of losses across the financial system was uncertain. Banks’ share prices fell. Capital was squeezed. Markets were sending a clear message to banks around the world: they did not have enough capital. At the Annual Meetings of the IMF and World Bank in Washington ten days ago, the message was reinforced by our colleagues from Japan, Sweden and Finland, who, with eloquence and not a little passion, reminded those present of their experience in dealing with a systemic banking failure in the 1990s. Recapitalise and do it now was the lesson. Recapitalisation requires a fiscal response, and that can be done only by governments. Confidence in the banking system had eroded as the weakness of the capital position became more widely appreciated. But it took a crisis caused by the failure of Lehman Brothers to trigger the coordinated government plan to recapitalise the system. It would be a mistake, however, to think that had Lehman Brothers not failed, a crisis would have been averted. The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else. So where does this leave us? The recapitalisation plan is having a major impact on the restoration of market confidence in banks. Perhaps the single most important diagnostic statistic is the credit default swap premium – an indicator of market concerns about solvency of banks. These premia have fallen markedly since the announcement of the UK plan. From the close of business on 7 October to now the premia on the UK’s five largest banks have more than halved. We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner. As concerns about the viability of our banks recede, banks should regain the confidence of the market as recipients of funding. There are already some signs of greater activity. But the age of innocence – when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates – will not quickly, if ever, return. In itself that does not affect the ability of banks to fund lending, but confidence has been badly shaken after the traumatic events of the past few weeks. New sources of funding will develop only slowly, although the temporary government guarantees of new lending to banks will help. So it will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy. And we cannot assume that there will not be problems in other parts of the financial system and in some emerging market economies to be overcome before the crisis can truly be described as over. With the plan for recapitalisation in place, the focus of attention has moved to the outlook for the UK and world economies. Over the past month, the economic news has probably been the worst in such a short period for a very considerable time. The most recent activity indicators for the second of half of the year have fallen sharply. In the UK, unemployment continues to rise and, over the past three months, has risen at the fastest rate for seventeen years, albeit from a relatively low level. House prices declined by about 5% in the third quarter and are 13% lower than a year ago. The recent weakness of the housing market is likely to continue. And if the news on the domestic front were not sufficiently discouraging, the rest of the world economy also appears to be slowing rapidly. Why has the outlook deteriorated so quickly? The banking crisis dealt a severe blow to the availability of credit. Growth in secured lending to households fell to an annualised rate of 1.9% in the three months to August, its lowest level in more than a decade. The Bank of England’s survey of credit conditions suggests that the terms on which banks provide credit to companies have tightened even further. And, on some estimates, the supply of finance to the UK corporate sector has ground to a halt. This credit shock has come on top of a fall in real disposable incomes resulting from the rise in energy and food prices earlier in the year. So, taken together, the combination of a squeeze on real takehome pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession. At the same time, consumer price inflation, our target measure, has risen from around the 2% target at the beginning of the year to a worryingly high rate of 5.2% in September. Oil and other commodity and food prices have all been rising very rapidly. In those circumstances, it was sensible to allow those price changes to be absorbed by movements in consumer prices. The alternative would have been an even sharper slowdown in the economy. Central banks in other countries also find themselves in a similar position. Over the past year or so, CPI inflation rose from 2.0% to 5.6% in the United States and from 1.7% to 4.0% in the euro-area. It is surely probable that the drama of the banking crisis, which is unprecedented in the lifetime of almost all of us, will damage business and consumer confidence more generally. But two pieces of good news should temper the gloom. First, the banking system will be recapitalised and, in due course, the banking system will resume more normal lending, although by normal I do not mean the conditions that prevailed prior to August 2007. Second, oil prices have now fallen from a peak of $147 a barrel only three months ago to around $70 today. And wholesale gas prices have now also started to follow oil prices down. That will help to support the growth of real incomes as well as bringing down inflation. So, what should the Monetary Policy Committee do now? It must continue to set Bank Rate in order to meet the 2% inflation target, not next month or the month after, but further ahead when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy. This is the time not to abandon but to reinforce our commitment to stability. The slowdown in demand, and the recent falls in energy prices, will bring inflation back towards the target. The Committee must balance the risk that a prolonged slowdown in domestic demand pulls inflation materially below the target against the risk that today’s high inflation rate becomes embedded in inflation expectations. During the past month, the balance of risks to inflation in the medium term shifted decisively to the downside. And the MPC – in an action co-ordinated with six other major central banks – cut Bank Rate by half a percentage point to 4.5%. Looking ahead, the outlook is obviously very uncertain – both for the world as well as our own economy. The MPC cannot simply extrapolate the past into the future. The prospects for oil and other commodity prices are difficult to assess. So too are the period over which bank lending will return to normal and the extent of the damage to business and consumer confidence. Moreover, the credit crunch affects not just demand but also the supply potential of the economy, complicating the assessment of the inflationary impact of changes in the level of demand. The associated shift of resources away from those parts of the economy that have flourished in recent years towards other areas of economic activity will moderate the increase in potential output while that adjustment is taking place. The MPC must monitor carefully all the available evidence about fastchanging patterns of spending, supply and prices. It will act promptly to ensure that inflation remains on track to meet our target.
The downturn in the economy will affect not just monetary policy but fiscal policy too. That subject is for another occasion, but there is one point I do want to make tonight. The cost of supporting the banking system will inevitably raise the level of national debt. Managed properly, however, such a rise in national debt need not prove inflationary. Indeed, within a reasonable period it should be possible for the Government to reduce its stake in the banking system, for example by selling units in a Bank Reconstruction Fund, and repay the additional debt that had been issued. That is one difference between past increases in national debt in times of war and the increase now to pay for recapitalisation of the banking system which involves the acquisition of an asset. Let me take you back again to 1958. In the very first television interview given by a Governor of the Bank of England, Cameron Cobbold explained national debt to Robin Day on “Tell the People”, the highlight of ITN’s Sunday evening schedule fifty years ago. Here is the exchange:
Cobbold: The National Debt represents the sums of money which the Government have over the years borrowed from the public, mainly in this country and, to some extent, abroad. That is really the amount of expenditure which they have failed over the period to cover by revenue.
Day: Have we paid for World War II?
Cobbold: No.
Day: Have we paid for World War I?
Cobbold: No.
Day: Have we paid for the Battle of Waterloo?
Cobbold: I don’t think you can exactly say that.

On this occasion, we should have little difficulty in evaluating when we have paid for the recapitalisation. There are, though, questions about the source of the funding and the level of borrowing by the country as a whole from overseas. For several years, the UK banking sector has been relying extensively on external capital flows, principally shortterm wholesale funding, to finance its lending activities. Those external inflows have 9 fallen sharply – a mild form of the reversal of capital inflows experienced by a number of emerging market economies in the 1990s. Unless they are replaced by other forms of external finance, the adjustments in the trade deficit and exchange rate will need to be larger and faster than would otherwise have occurred, implying a larger rise in domestic saving and weaker domestic spending in the short run. With the bank recapitalisation plan in place, we now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions. The past few weeks have been somewhat too exciting. The actions that were taken were not designed to save the banks as such, but to protect the rest of the economy from the banks. I hope banks will come to appreciate, just as the New Zealanders at Headingley in 1958, the Yorkshire virtues of patience and sound defence when batting on a sticky wicket. I have said many times that successful monetary policy would appear rather boring. So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing. The long march back to boredom and stability starts tonight in Leeds. ENDS

Rather than run a story today about the demise of Lehman Brothers or the financial problems of AIG, or the imminent coming of a second 1930’s style recession – in my view these have all been well covered by the mainstream media and perhaps later in the week I shall pick a particular aspect of them to comment upon……….

I had dinner with friends in the banking sector  two weeks ago. They are not prone to using the word “Armageddon” very often – so I guess I will have to include some financial sector stories soon enough.

In the meantime I was interested to read about something new today, a rival for Google in China called Baidu – which works in a different way from our oft-used engine –  this very good and full account below is written by Andrew Orlowski for website The Register. Andrew’s well-written article gives more detail if you want to visit the original feature. Baidu is huge and different – and I had never even heard of it before.

Baidu is renowned as China’s glittering internet success story, and as the start-up that gave Google a bloody nose. It dominates the web in the world’s second biggest economy with 70 per cent market share, and on Wall Street carries a market cap of almost $12bn.

But Baidu’s success comes at a price, for the legitimate music business, for the development of China and of its intellectual property (IP) law, and for any internet company wishing to do business in China.

Baidu owes its success to its MP3 Search service, which takes surfers directly to music. It’s known as “deep linking”, and early this year, sound recording owners represented by IFPI filed a copyright infringement case against Baidu, claiming damages worth $9m.

Yet the scale of Baidu’s operation, uncovered by a forensic six-month investigation conducted in China for The Register, has surprised the music business.

“Although we already had some doubts about Baidu mp3 search, when we saw the investigation results presented, it was really a shock,” Susanna Ng, EMI Music Publishing Managing Director, Asia Pacific told China’s Fortune Times.

Music searches using Baidu return results that are heavily skewed in favour of unlicensed music, while they rarely return search results for licensed music sites. Meanwhile, the unlicensed MP3s appear to systematically move around a complex network of domains in response to infringement notices.

Chinese web surfers may be forgiven for missing the news. Baidu fails to link to news stories critical of the company, including some of the findings below; these have been covered only by a handful of publications within China. It’s a chilling reminder of the ability of a web search engine to control and shape public discourse.

We’ll explain what Baidu does, and why it’s in trouble. And the grim prospects for anyone hoping to build an internet business in China – with an unstoppable Baidu.
What does Baidu do?

Most full-length recorded music in China is unlicensed, infringing material. Some estimates put the figure as high as 98 per cent. A popular act can expect to sell as few as 2,000 copies. Yet China is not quite the lawless frontier these figures suggest.

In March this year, another Chinese top five music search engine, Zhongsou had its servers seized and subjected to the maximum fine for copyright infringement by state administration authorities. This was the first public case of a music search engine being convicted for hosting MP3 files. Government appointed bodies such as the Music Copyright Society of China (MCSC) and the China Audio-Video Copyright Association (CAVCA) are both active in attempting to support businesses that reward the creators. Baidu’s notorious MP3 Search is the biggest problem they face.

MCSC’s Director of Legal Services Liu Ping used the following real life analogy to describe deep-linking:

“If Google’s search works as a guide by giving directions and telling you the address while taking you right to the door of your destination, Baidu’s search brings you directly through the door, right inside the room and helps you take away the CD from shelves without the owner’s permission.” Liu Ping considers this to be beyond the scope of a search engine, and a practice which moves Baidu into the area of transmission of music.

Baidu has amassed numerous lawsuits over the practice, with MCSC and the IFPI involved in a number of these. Baidu’s defence is that as a network service provider it cannot be responsible for the legality of the sites it indexes and is therefore not liable for damages. Nevertheless, Article 23 of China’s Copyright Law says that it is jointly liable “where it knows or has reasonable ground(s) to know” that the linked works are infringing material.

However, our investigation suggests close enough linkage between Baidu’s business and the infringing material for it to be viewed as something more than ‘just’ a network service provider.

Baidu’s MP3 Search was monitored for six months at the end of last year, analyzing search results using 600 songs spread across multiple genre. A number of areas that seemed incongruous to a pure and neutral search engine were discovered, and three details emerged.

Firstly, a network of mysterious sites with closely related domain names contributed more than 50 per cent of the search links returned by Baidu. The songs hosted on the mystery sites were unreachable except through the Baidu search engine. Furthermore, infringement notifications resulted in unlicensed songs simply moving from one of these domains to another.

Secondly, Baidu does not link to the two leading paid download sites in China, 9Sky and Top100. While Google for example will return results for a song search to licensed providers (7Digital, Amazon, eMusic or even iTunes) as well as Torrent trackers, Baidu is much more selective.

Thirdly, music blogs and forums naturally form a significant source of music search links for any search engine. But with Baidu, these contributed to only 30 per cent of the music search links on Baidu’s MP3 Search.

The cumulative effect is to keep the “free music flowing” for Baidu’s users – with devastating consequences not just for creators, but for rival internet businesses.

I read comments in the Economist this week about house prices in the States –how they had in effect now fallen further than they did in the Great Depression of the 1930’s. Hmm. I’m following that with extracts from a feature in the Financial Times written by Norma Cohen assessing the same issue in Britain. Oh dear. The words negative equity appear in it.

Unfortunately, new figures this week reveal that house prices have already fallen by more over the past 12 months than in any year during the Great Depression. The S&P/Case-Shiller national index fell by 14.1% in the year to the first quarter. Admittedly, other property indices show smaller drops, but most economists now favour this measure. The index goes back only 20 years, but Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back more than a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, at the worst point of the Depression.

And things are even worse than they look. In the deflationary 1930s, America’s general price level was falling, so in real terms home prices declined much less than they did nominally. Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year. In nominal terms, the average home is now worth 16% less than at the peak in 2006, and the large overhang of unsold houses suggests that prices have further to fall.

And from the FT looking at the British situation:

House prices have suffered their biggest annual fall since the property slump of the early 1990s, a leading index revealed on Thursday, in news that sent shares in some of Britain’s largest home lenders and builders tumbling.

Year on year, house prices are now 4.4 per cent below their levels of May 2007, according to the Nationwide house price index. On an annual basis, that is the biggest fall since December 1992, when the UK was in the throes of a severe housing downturn.

In May alone the index recorded a 2.5 per cent drop, its biggest one-month fall, wiping £5,000 off the average British home. The three month moving average, which smoothes out unreliable single month volatility, also slid sharply. In the three months to the end of May house prices fell by 2.9 per cent compared with the three months to the end of April.

Fionnuala Early, Nationwide’s chief economist, said the streak of falling prices has lasted seven months, the longest consecutive period of declines since 1992.

Separately on Thursday, the CBI employers group released a survey showing retail prices were rising at their fastest rate since February 1990, which underscored the quandary facing the Bank of England as it considers future interest rate policy. Yet retail sales were reported to be below average levels for May and are set to remain so in June.

The Bank of England has said it does not believe falling house prices lead to a drop in consumption. However, the fact that inflation remained so stubbornly high – and was likely to rise further according to the Bank’s own forecasts – made it hard for its Monetary Policy Committee to consider rate cuts even if consumption slowed sharply.

Ms Early said: “As higher prices of essential items squeeze consumer spending power and housing market weakness weighs down on confidence, the balance of risks to inflation in the medium term could shift enough to lead the MPC to cut rates sooner than the markets currently expect.”

But traders did not share such expectations: sterling futures markets last night were pricing in two quarter-point rises in interest rates over the next year. The moves suggest markets have been so unsettled by inflation data they are now over-shooting.

Danny Gabay, economist at Fathom Consulting, said inflation alone was reason to believe that consumption was likely to slow this year, dragging the UK economy down with it. “Now real disposable income is being crushed by higher food and utility bills,” he said.

Gary Styles, economics director at Hometrack, cautioned against viewing the latest data from Nationwide as a precursor to the wave of negative equity in the early 1990’s. “A lot of those people who are now in negative equity that we are talking about are those who had little or no equity in the first place,” he said.