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Posts Tagged ‘Economy’

China Reserve-Ratio Cut May Signal Slowdown

Posted in Board Of Intellectual Capital, Economy, Investments, Market research, tagged , , , , , , , , , , , , , , , , , , , , , on December 1, 2011| Leave a Comment »

Article from Bloomberg.

China’s reduction in reserve requirements for banks, the first since 2008, may signal government concern that a slowdown in the world’s second-biggest economy is deepening.

Reserve ratios will decline by 50 basis points effective Dec. 5, the central bank said on its website yesterday. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG.

A report due today may show that China’s manufacturing contracted for the first time since February 2009, and the nation’s stocks had their biggest decline in almost four months yesterday. Premier Wen Jiabao aims to sustain the economic expansion as Europe’s debt crisis saps exports, a credit squeeze hits small businesses and a crackdown on real-estate speculation sends home sales sliding.

“The deceleration of growth may have become faster than expected on increased external uncertainty, a sagging property market” and difficulties for smaller companies, said Liu Li- gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. who previously worked for the World Bank. The manufacturing report may be “worse than expected,” Liu said.

The Purchasing Managers’ Index may dip to 49.8 for November, a level marking a contraction, according to the median estimate in a Bloomberg News survey of 18 economists. That data is due at 9 a.m. local time today. Consumer price gains eased to 5.5 percent in October, compared with a government target of 4 percent, as exports rose the least in almost two years.

Joint Action

The policy move yesterday came two hours before the U.S. Federal Reserve, the European Central Bank and the monetary authorities of the U.K., Canada, Japan and Switzerland said they were cutting the cost of emergency dollar funding to ease strains in financial markets.

Spurring lending in China, the nation that contributes most to global growth, may boost confidence as Europe’s crisis worsens. Stocks and the euro rallied after the moves.

China is at “the beginning of monetary easing,” said Qu Hongbin, a Hong Kong-based economist for HSBC Holdings Plc, adding that “aggressive” action is warranted. While more reserve-ratio cuts may follow, interest rates may remain unchanged until inflation is below 3 percent, he said.

The latest change means that reserve requirements for the biggest lenders will fall to 21 percent from a record 21.5 percent, based on past statements.

‘Liquidity Crunch’

Mizuho Securities Asia Ltd. said that the timing of the Chinese announcement “could be linked” to the move by the Fed and others. In October 2008, China cut interest rates within minutes of reductions by the Fed and five other central banks as the global financial crisis worsened.

“Some form of coordination may have gone into this,” said Ken Peng, a Beijing-based economist at BNP Paribas SA. “But I think China is pretty urgently in need of a reserve ratio requirement cut anyway — otherwise, we’d have a liquidity crunch in the New Year.”

Barclays Capital yesterday forecast at least three more reserve ratio cuts by mid-2012 and said two interest-rate reductions are likely next year.

Yesterday’s move may have been partly a response to inflows of foreign-exchange drying up, according to UBS’s Hong Kong- based economist Wang Tao. Central bank data released this month suggested that capital has been flowing out of China.

Growth is slowing across Asia, the region that led the world recovery, with India today reporting its economy expanded the least in two years and Thailand cutting interest rates. In China, the clampdown on property speculation has added to the threat of a deeper slowdown after a 9.1 percent expansion in the third quarter that was the smallest in two years.

Home Sales

Property risks are “overshadowing” the outlook as falling sales threaten to trigger developer collapses, the Organization for Economic Cooperation and Development said this week. Agile Property Holdings Ltd. (3383), the developer in which JPMorgan Chase & Co. owns a stake, has said it will stop buying land until at least February and is slowing construction at some projects.

October housing transactions declined 25 percent from September and prices fell in 33 of 70 cities, according to government data. The Shanghai Composite Index fell 3.3 percent yesterday after Xia Bin, an academic adviser to the central bank, said credit should remain “relatively tight” and people shouldn’t hope for a reversal of housing market curbs.

China hasn’t raised interest rates since July, the longest pause since increases began in October last year. Benchmark one- year borrowing costs stand at 6.56 percent. The last interest- rate cut was in December 2008, during the global financial crisis.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate.”

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U.S. Debt and the Greece Analogy

Posted in Board Of Intellectual Capital, tagged , , on June 28, 2010| Leave a Comment »

Article from WSJ.

“An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

The roots of the apparent debt market calm are clear enough. The financial crisis, triggered by the unexpected default …”

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Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case

Posted in Board Of Intellectual Capital, boic, Economy, tagged , , , , , , , on June 18, 2010| Leave a Comment »

Here is a good article from Bloomberg.

“The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them.

‘Worst-Case Scenario’

The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.

If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.

Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.

“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.

Unfinished Business

A 20 percent decline in housing prices is possible, said David Rosenberg, chief economist for Gluskin Sheff & Associates Inc. in Toronto. Rosenberg, whose forecasts are more pessimistic than those of other economists, predicts a 15 percent drop.

“Worst case is probably 25 percent,” he said.

The median price of a home in the U.S. was $173,100 in April, down 25 percent from the July 2006 peak, according to the National Association of Realtors.

Fannie and Freddie are deeply wired into the U.S. and global financial systems. Figuring out how to stanch the losses and turn them into sustainable businesses is the biggest piece of unfinished business as Congress negotiates a Wall Street overhaul that could reach President Barack Obama’s desk by July.

Neither political party wants to risk damaging the mortgage market, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and White House economic adviser under President George W. Bush.

“Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said.

‘Safest Place’

With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative — cutting the federal lifeline and letting the companies default on their debts — would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values.

“People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”

Congress created the Federal National Mortgage Association, known as Fannie Mae, in 1938 to expand home ownership by buying mortgages from banks and other lenders and bundling them into bonds for investors. It set up the Federal Home Loan Mortgage Corp., Freddie Mac, in 1970 to compete with Fannie.”

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U.S debt to rise to $19.6 trillion by 2015

Posted in Board Of Intellectual Capital, Economy, tagged , , , , , , on June 9, 2010| Leave a Comment »

Here is an article from Reuters.

“The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress.

The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year.

“The president’s economic experts say a 1 percent increase in GDP can create almost 1 million jobs, and that 1 percent is what experts think we are losing because of the debt’s massive drag on our economy,” said Republican Representative Dave Camp, who publicized the report.

He was referring to recent testimony by University of Maryland Professor Carmen Reinhart to the bipartisan fiscal commission, which was created by President Barack Obama to recommend ways to reduce the deficit, which said debt topping 90 percent of GDP could slow economic growth.

The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The rising debt is contributing to voter unrest ahead of the November congressional elections in which Republicans hope to regain control of Congress.

The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.

By 2015 the net public debt will rise to an estimated $14 trillion, with a ratio to GDP of 73 percent, the Treasury report said.”

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Higher education’s bubble is about to burst

Posted in Uncategorized, tagged , , on June 7, 2010| Leave a Comment »

Here is an article from Washington Examiner.

“SUNDAY REFLECTIONS CONTRIBUTOR — It’s a story of an industry that may sound familiar.

The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.

Yes, this sounds like the housing bubble, but I’m afraid it’s also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it’s better for us to face up to what’s going on before the bubble bursts messily.

College has gotten a lot more expensive. A recent Money magazine report notes: “After adjusting for financial aid, the amount families pay for college has skyrocketed 439 percent since 1982. … Normal supply and demand can’t begin to explain cost increases of this magnitude.”

Consumers would balk, except for two things.

First — as with the housing bubble — cheap and readily available credit has let people borrow to finance education. They’re willing to do so because of (1) consumer ignorance, as students (and, often, their parents) don’t fully grasp just how harsh the impact of student loan payments will be after graduation; and (2) a belief that, whatever the cost, a college education is a necessary ticket to future prosperity.

Bubbles burst when there are no longer enough excessively optimistic and ignorant folks to fuel them. And there are signs that this is beginning to happen already.

A New York Times profile last week described Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt — debt that her degree in Religious and Women’s Studies did not equip her to repay. Payments on the debt are about $700 per month, equivalent to a respectable house payment, and a major bite on her monthly income of $2,300 as a photographer’s assistant earning an hourly wage.

And, unlike a bad mortgage on an underwater house, Munna can’t simply walk away from her student loans, which cannot be expunged in a bankruptcy. She’s stuck in a financial trap.

Some might say that she deserves it — who borrows $100,000 to finance a degree in women’s and religious studies that won’t make you any money? She should have wised up, and others should learn from her mistake, instead of learning too late, as she did: “I don’t want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back.”

But bubbles burst when people catch on, and there’s some evidence that people are beginning to catch on. Student loan demand, according to a recent report in the Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven’t collapsed yet, but they’re looking shakier — kind of like the housing market looked in 2007.

So what happens if the bubble collapses? Will it be a tragedy, with millions of Americans losing their path to higher-paying jobs?

Maybe not. College is often described as a path to prosperity, but is it? A college education can help people make more money in three different ways.

First, it may actually make them more economically productive by teaching them skills valued in the workplace: Computer programming, nursing or engineering, say. (Religious and women’s studies, not so much.)

Second, it may provide a credential that employers want, not because it represents actual skills, but because it’s a weeding tool that doesn’t produce civil-rights suits as, say, IQ tests might. A four-year college degree, even if its holder acquired no actual skills, at least indicates some ability to show up on time and perform as instructed.”
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