Has the Economy Hit Bottom Yet?

Has the Economy Hit Bottom Yet?
By VIKAS BAJAJ
Copyright by The New York Times
Published: March 14, 2009
http://www.nytimes.com/2009/03/15/weekinreview/15vikas.html?hp


The economist John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”

Still, we have to ask: was that the bottom we just hit?

After months of punishing economic news, the gloom seemed to lift last week if only for a moment. The stock market shot up 12 percent in four days. Two of the nation’s biggest banks said they had returned to profitability. General Motors said it wouldn’t need another $2 billion in government help this month. And retail sales were better than expected.

Then again, perhaps that’s what passes for good news these days.

The market is still down by more than 50 percent since its high 17 months ago. Yes, the banks made money, but for just two months, and never mind the billions of bad assets that remain on their books. G.M. will still, in all likelihood, need billions in taxpayer help down the road and there’s no guarantee it will survive. And those retail sales numbers? They were still bad, just not as bad as analysts were expecting.

Still, there was a sense among some economists and Wall Street analysts that if the bottom was not touched, perhaps the freefall was at least slowing. No less than Lawrence Summers, President Obama’s top economic adviser, said on Friday that while the economic crisis would not end anytime soon, there were early signs that it was easing.

Which leads to a question: When we do hit the bottom — this year or years from now — how will we know?

There’s no easy answer.

Mr. Galbraith was not the first or last economist to acknowledge fallibility at predicting turning points. (Just think back to assurances by top government officials in early 2007 that the growing problems with subprime mortgages were “contained.”)

Forecasting the end of the current recession is even more difficult because it will hinge on how quickly and efficiently governments resolve the crisis in the banking system. Many investors continue to worry that the world’s biggest financial institutions are insolvent, despite assurances from Washington that those firms have plenty of capital.

How political leaders diagnose and fix the banks will be critical. Analysts say misguided and erratic government responses exacerbated Japan’s “lost decade” in the 1990s and the Depression of the 1930s. “The things that can screw it up are bad policies,” said Thomas F. Cooley, dean of the Stern School of Business at New York University.

In the end, there’s probably no way to know for sure that we’ve hit bottom until we’re on the rebound. Still, analysts say there are some key indicators that might help in spotting a bottom and recovery at a time when it can be hard to see past the despair.

STOCKS

History shows that the stock market usually hits bottom before the economy does.

In October, Warren E. Buffett, one of the world’s most successful investors, said he was buying American stocks because they usually rise “well before either sentiment or the economy.” But even he acknowledged not having “the faintest idea” what would happen in the next month or year.

Since then, stocks have dropped by another 20 percent, and with the market at levels last seen in 1997, stocks are cheap by historical standards. The price-to-earnings ratio — which investors use to gauge how much they are paying for each dollar of corporate profit — is around 13, about 20 percent lower than the average of the last 130 years.

But many investors remain on the sidelines. Money market funds have swollen to $3.8 trillion, up from $2.4 trillion two years ago. And the cash banks are holding in their vaults and at the Federal Reserve has more than doubled in the last nine months.

What has made the current recession so pernicious is the eroding pressure of deflation, the general decline in prices that has hurt both businesses and consumers. They earn less and the value of their businesses and homes has fallen, yet they still owe as much as they did before, said Russell Napier, a consultant with Credit Lyonnais and author of “Anatomy of the Bear: Lessons From Wall Street’s Four Great Bottoms.”

He said he believed stocks would not rise until deflation ended and businesses could charge higher prices to pay off debts. Early indications suggest that this may be happening and that the stock market may be near the bottom, Mr. Napier said. He pointed to three indicators that often signal that economic growth and inflation are on the way — the prices of copper, corporate bonds and inflation-protected Treasury securities. Prices for all three are higher today than they were in November.

“All the indicators suggest you should be buying and not selling,” he said. Still, Mr. Napier acknowledged that stocks, while cheap, could fall further. Measured by their 10-year price-to-earnings ratio, stocks were a lot less expensive in the early 1980s, when the ratio fell to less than seven, and in the 1930s, when it was below six.

Nouriel Roubini, the economics professor from New York University who predicted much of the current crisis, has warned that corporate earnings and stock prices could continue to fall, perhaps precipitously.

HOME PRICES

To determine whether home prices are still inflated, economist use ratios that compare the cost of buying a home to renting or to median family income. If the ratios move sharply higher, as they did in recent years, it suggests home prices might be inflated. When they are falling, as they are across the country and particularly in places like San Diego, Phoenix and Tampa, owning a home becomes more affordable.

Barry Ritholtz, a professional investor who writes the popular economics blog The Big Picture, has a simpler, more subjective, approach: Assume a young couple earning two modest incomes is looking to buy a two- or three-bedroom starter home in a middle-income neighborhood in your city. Can they qualify for a mortgage and afford to buy it?

“If the answer is no, then you are not at a bottom in housing,” said Mr. Ritholtz, who estimates that the decline in national home prices is only half-complete.

Just as prices in the bubble did not go up uniformly in all parts of the country, they will not reach bottom together, said Ronald J. Peltier, chief executive of Home Services of America, a real estate brokerage firm.

In places like Riverside, Calif., and Miami, where homes are selling for half or less than what they sold for three or four years ago, real estate may be close to the bottom. One telling sign is that first-time home buyers and investors are snapping up homes, though they are mostly buying from banks selling foreclosed properties at deep discounts. Sales of existing homes in California jumped by more than 50 percent in January from a year earlier. But the median price was down more than 40 percent, to $224,000.

At the same time, prices have come down a lot less in urban areas like Manhattan and, not surprisingly, the number of homes being sold is down by as much as 50 percent from a year ago. Prices in these urban areas will have to fall much more before many young couples can afford starter homes.

Of course, those who bought at the peak of the market will suffer the greatest pain if they are forced to sell. But Mr. Peltier and other specialists say the current dismal market will only be resolved by lower prices, easier lending and an improving economy.

CONSUMER SPENDING

Americans like to buy things, and for at least the last decade, many economists assumed they would continue to spend on cars, clothes and the latest digital toy, good times or not. Consumer spending has rarely declined in the post-World-War-II era and when it has, it bounced back quickly.

The current recession is severely testing that article of faith. Personal consumption fell by about 1 percent in the second half of last year — the first sustained decline since 1980. Economists say consumption will be slow to recover because debt-saddled Americans are saving more or paying down debt. The savings rate — the amount of money consumers did not spend — jumped to about 3 percent late last year, from practically zero, still far below its postwar average of 7 percent.

A sign that consumption has hit bottom may come when the savings rate begins to flatten. Spending should then rebound as pent-up demand gives way. Car sales, for instance, have fallen to levels last seen in 1981, when the population of the United States was about three-quarters of what it is today. Many families are deferring car purchases and making do with what they have. Eventually, however, they will have to replace their aging vehicles.

In a study of economic cycles, Edward E. Leamer, an economist at the Anderson School of Management at the University of California at Los Angeles, found that auto sales and home building tended to lead recoveries.

An increase in international trade would be another early indicator that consumer spending here and abroad has hit the floor and begun to rebound.

After growing at an average of 7 percent a year for most of this decade, global trade was little changed from March to September last year, according to the Organization for Economic Co-operation and Development. Many large economies including the United States, Japan and China have reported a sharp drop in exports and imports in recent months. There was more bad news on Friday, when the Commerce Department reported that exports from and imports to the United States fell by about 12 percent in January.

“Seeing global trade pick up would be a very positive sign,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard.

Tobias Levkovich, chief United States equity strategist at Citigroup, has another indicator for spotting when we have hit bottom: When we stop behaving like children in the backseat of the car asking their parents, “Are we there yet?”




Federal Reserve plan stuns investors
By Krishna Guha in Washingto
Copyright The Financial Times Limited 2009
Published: March 18 2009 18:17 | Last updated: March 18 2009 23:40
http://www.ft.com/cms/s/0/15eb2de2-13d8-11de-9e32-0000779fd2ac.html


The Federal Reserve on Wednesday stunned investors by announcing plans to buy $300bn of US government debt, triggering a plunge in bond yields and the dollar.

In a further display of aggression, the US central bank also said it was more than doubling its purchases of securities issued by housing giants Fannie Mae and Freddie Mac to $1,450bn. It said it now expected to keep interest rates near zero for an “extended period” of time.

The yield on 10-year US Treasuries plummeted 50 basis points to 2.50 per cent, while private borrowing rates fell by roughly half as much. Equities bounced with big gains in troubled banks such as Citigroup and Bank of America. But the dollar fell 3.2 per cent against the euro and 2.3 per cent against the yen.

Goldman Sachs said the Fed was throwing the “kitchen sink” at the problem. The plan to buy Treasuries caught investors off guard. “It appears that they wanted to give the market a jolt,” said Peter Hooper, an economist at Deutsche Bank.

The last time the central bank attempted to bring down yields on long-term securities through direct intervention came during the ill-fated Operation Twist in the 1960s. Recent comments by Ben Bernanke, Federal Reserve chairman, and William Dudley, New York Fed president, did not suggest that Treasury purchases were imminent.

But the deterioration in the US outlook, problems rolling out the US financial rescue plan and the Bank of England’s success in buying UK government gilts seem to have persuaded the Fed to act.

Alan Ruskin, a strategist at RBS, said it was a “flip-flop” that “could be cast as a sign of desperation” but “confirmed that Bernanke will do whatever it takes to get some hold of the problem”.

The Fed said it would concentrate on Treasuries with maturities of two to 10 years. It said its objective was to “improve conditions in private credit markets” – not to help the government finance its mounting deficits. The Bank of Japan said it was stepping up its purchases of Japanese government debt by about a third to Y1,800bn a month.

Wednesday’s Fed announcement will increase the size of its balance sheet by another $1,150bn to about $3,000bn even before the roll-out of a $1,000bn scheme to finance credit markets. Once this scheme is fully implemented, its balance sheet could approach $4,000bn – nearly a third the size of the US economy.

A swollen Fed balance sheet runs the risk that the US central bank may find it difficult to manage down the money supply when the economy turns, raising the possibility of inflation.

Gold surged in response to the Fed’s announcement, rocketing from a session low of $884.10 a troy ounce to a high of $942.90, a jump of 6.6 per cent.

Additional reporting by Michael Mackenzie, Kiran Stacey and Anuj Gangahar in New York





New York Times Editorial: The Fed Does Battle, Again
Copyright by The New York Times
Published: March 20, 2009
http://www.nytimes.com/2009/03/21/opinion/21sat1.html?_r=1&ref=opinion


The Federal Reserve’s recent moves to revive the economy are aggressive and, given the deteriorating economy, warranted. But the risks involved must be acknowledged. And more must be done.

This crisis is unlikely to turn around until President Obama and his aides come up with a plan for failing banks that does not arbitrarily reject the idea of nationalization. They must also follow through on their housing plan to reverse the tide of unnecessary foreclosures.

Last year, when a cut to near-zero in the benchmark interest rate failed to spark economic activity, the Fed began to buy up mortgage-backed securities as a way to pump dollars into the economy. On Wednesday, it announced that it would buy hundreds of billions of dollars more and as much as $300 billion of Treasury bonds.

Together with other Fed programs, the aim is to lower borrowing costs for consumers, businesses and the government. More borrowing and spending, in turn, would bolster the impact of the fiscal stimulus package passed in February.

Unfortunately, there is no guarantee that this will work. With unemployment rising, debt loads high and household wealth falling, consumers may be reluctant to resume spending anytime soon, no matter how low rates and prices go. And even if consumers and businesses want to borrow, banks — stung by their own losses — may not be willing to lend.

If the economy continues to contract, the Fed might have to ramp up its purchases, and Congress might have to approve another round of fiscal stimulus. That could lead to other problems.

To buy up securities, the Fed creates money. To provide fiscal stimulus, Congress borrows money. The more money that is created and borrowed, the greater the risk of future inflation and higher interest rates.

Rising prices are not an issue right now. Even concern about distant inflation would be misplaced if it led to paralysis in the face of the current crisis.

But a forthright acknowledgment of the risks is necessary to keep policy makers from venturing too far into dangerous territory. It should also persuade the White House to move on other important policies that have been mismanaged or delayed.

It has been nearly six weeks since Treasury Secretary Timothy Geithner announced the outline of a plan to stabilize the banks. Details are expected soon, but the delay has fed uncertainty about the banking system and the administration’s ability to right it. Delay has also proved to be politically costly.

The growing public fury over bailouts and bonuses will likely make it more difficult to win Congressional support for the bank plan. Mr. Obama and Mr. Geithner must reassert control by explaining the full depth of the problems with American banks and delivering a workable strategy to address them.

Mr. Obama’s antiforeclosure plan — offering banks incentives and guidelines to rework troubled loans — is reportedly off to a slow start, too. A month after it was announced, the banks are still updating their systems to process applications for the relief and awaiting clarification on a few points of the plan. Are those really unavoidable delays, or are they signs of yet more resistance from the mortgage industry to modifying bad loans?

When he unveiled the plan, Mr. Obama said that he would support legislation to let bankrupt homeowners have their mortgages modified under court protection. The legislation would essentially tell lenders that unless they do the right thing and voluntarily rework loans, the process will be turned over to a bankruptcy judge.

That stick is still missing. A bill to amend the bankruptcy law has passed the House, but it is stalled in the Senate. Mr. Obama should be pounding the table for its passage. The Fed is putting up a fight. The administration needs to do more.





US consumer prices rise in February
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: March 18 2009 12:51 | Last updated: March 18 2009 14:38
http://www.ft.com/cms/s/0/cc54bbfc-13b0-11de-9e32-0000779fd2ac.html


Prices in the US rose in February for the second consecutive month on the back of rebounding prices for energy, apparel and cars, the labour department said on Wednesday.

In February the consumer price index increased by 0.4 per cent, leaving it 0.2 per cent higher than the same month a year ago.

The monthly figure was slightly higher than the 0.3 per cent rise that economists forecasted and compared with a 0.3 per cent increase in January. Consumer prices were up 0.2 per cent year-on-year.

The monthly increase could ease fears of a deflationary trap that were stoked after prices were flat or declined during the final five months of 2008. As the economic recession deepened in the second half of last year companies slashed prices to clear stocks.

“This is a partial reversal of the massive fall discounts, nothing more,” said Ian Sheperdson, chief US economist at High Frequency Economics.

Core price inflation, which excludes food and energy and is the measure by which economists judge the risk of general deflation, rose by 0.2 per cent and was 1.8 higher than in February 2008. Core prices rose by 0.2 per cent in January.

Energy prices climbed 3.3 per cent last month after rising by 1.7 per cent in January following five months of declines. Prices of energy were pushed higher by petrol, which rose by 8.3 per cent on the price index in February after climbing by 6 per cent during the previous month.

Prices for new motor vehicles, medical care, clothing and education all rose last month. Housing prices were flat and food prices eased in February. But economists were quick to warn that deflationary pressures remain and that the recent upswing in prices could be temporary.

“The ballooning output gap and soaring unemployment rate is likely to mean that core inflation moderates from here,” said Paul Dales, US economist at Capital Economics. “We don’t think that it will follow the headline rate into negative territory, but that risk will keep the Fed on its toes.”

In January consumer prices were unchanged from the same month a year earlier. It was the lowest annual change since August 1955 when consumer prices fell by 0.4 per cent year-on-year.

Last year US prices rose at the slowest pace since 1954 as the recession brought the headline measure of prices to the brink of deflation. Core prices in the US increased by 1.8 per cent on the year, the smallest gain since 2003.

The rise in consumer prices follows a report on Tuesday that US wholesale prices rose in February for the second consecutive month.

The producer price index for finished goods increased by 0.1 per cent last month, trailing economists’ forecasts. Compared with February 2008, wholesale prices were down by 1.3 per cent. Excluding food and energy, core producer prices rose by 0.2 per cent last month.

Separately on Wednesday the commerce department said that the US current account deficit narrowed to $132.8bn in the fourth quarter of last year from a revised $181.3bn in the third quarter. Slumping US demand and shrinking imports narrowed the deficit, which now stands at 3.7 per cent of gross domestic product, to its lowest level since the last quarter of 2003.

Economists predict that the swelling US savings rate could bring the current account deficit to 2.5 per cent of GDP this year, down from a peak of 6.3 per cent in 2006.




New US jobless claims eased last week
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: March 19 2009 13:41 | Last updated: March 19 2009 13:41
http://www.ft.com/cms/s/0/e327e668-1489-11de-8cd1-0000779fd2ac.html


New US jobless claims eased last week but the number of workers continuing to claim unemployment benefits hit a fresh record high as companies continued to shed workers.

Initial claims fell to 646,000 from a revised 658,000 the week before, the labour department reported on Thursday. The results were better than consensus estimates of 655,000 new claims.

But the number of people continuing to claim unemployment benefits through the first week of March rose by 185,000 to 5.47m, the highest total since tracking began in 1967. The insured unemployment rate rose from 3.9 per cent to 4.1 per cent, the highest level since 1983.

The four-week average of weekly jobless claims also rose last week to the highest total since 1982. Average weekly claims increased to 654,750, up from a revised average of 651,000.

Although jobless figures have been shattering records recently, when adjusted for population growth the claims are still well below the peaks of the mid-1970s and early 1980, says Ian Sheperdson, chief US economist at High Frequency Economics.

Weekly claims would need to breach 1m to match such lows.

Government figures released earlier this month showed that unemployment rose to 8.1 per cent in February, the highest rate since 1983, as another set of dire official figures showed staff being axed across the economy.

“There is no sign of even a temporary easing in the downward pressure on employment,” Mr Sheperdson said.

The number of jobs lost in February reached 651,000, the third consecutive month in which more than 600,000 posts have been shed – a sequence last recorded in 1939.

Economists predict that as many as 700,000 jobs may be lost this month.

“The March payroll loss will likely be at least as large as in February, and there will be another sizable gain in the unemployment rate,” said Abiel Reinhart, economist at JPMorgan Chase.









US housing starts show surprise surge
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: March 17 2009 14:38 | Last updated: March 17 2009 15:57
http://www.ft.com/cms/s/0/b50c2ea2-12ee-11de-94bc-0000779fd2ac.html


US residential building showed renewed signs of life last month, as falling construction costs lured builders to break ground, offering a glimmer of hope that the real estate slump could be near a bottom.

Housing starts grew for the first time in eight months, rising by 22.2 per cent from January to an adjusted annual rate of construction of 583,000 in February, commerce department figures showed on Tuesday. The results beat economists’ expectations of 450,000 new starts.

The figure marked a sharp rebound from January’s revised 477,000, which was the lowest since records began in 1959, and was the sharpest monthly surge since January 1990. Housing starts remained down on the year, off by 47.3 per cent.

The monthly spike was driven by the more volatile multi-family home sector, which saw housing starts climb by 79.7 per cent last month as builders broke ground on condominiums and townhouses. Single-family starts ticked up by 1.1 per cent in the month. Builders benefited from mild weather in February after a harsh January.

“The level of housing construction is becoming so low in absolute terms that starts will bottom out in the months ahead,” said John Ryding and Conrad DeQuadros, economists at RDQ Economics, in a note to clients.

During the peak of the home construction boom monthly housing starts peaked at 2.27m in January 2006

The results could lift the spirits of homebuilders, who have been feeling gloomy in recent months. On Monday that National Association of Homebuilders’ index of homebuilder sentiment remained near is historical low. It remained unchanged at 9 and has been stuck in single-digits for five months in a row. Any number under fifty indicates a negative view.

Declining home prices and rising rates of foreclosures have brought home resales to record lows in recent months, making the rise in new construction more surprising. In February the number of default notices, auction sales and bank repossessions jumped by 30 per cent compared with the same month last year, according to figures from RealtyTrac, and home prices have fallen by 27 per cent since their 2006 peak.

The latest official figures showed that residential construction spending fell by 3.3 per cent in January from the prior month and was off by 9.1 per cent year-on-year.

But new building rose the most in the northeast and midwest, where it increased in February by 88.6 per cent and 58.5 per cent, respectively, from the prior month. Construction also picked up in the south, rising by 30.2 per cent, but continued its free-fall in the west, dropping by 24.6 per cent.

Permits issued to build homes, which signal future construction trends, also grew in February. Building permits were up by 3 per cent to 547,000 from January, but were off by 44.2 per cent on the year.

Economists warned not to get too carried away with the surprising results, as the fundamentals of the housing market remain fragile and hopes of a bottom could be “wishful thinking”.

“Already bloated inventory levels and a persistent weakness in demand suggest that there is further to run on the downside for residential construction,” said Richard Moody, economist at Mission Residential.

Separately, government data showed on Tuesday that US wholesale prices rose in February for the second consecutive month, easing fears of a pending deflation trap.

The producer price index for finished goods increased by 0.1 per cent last month, trailing economists’ forecasts. Compared with February 2008, wholesale prices were down by 1.3 per cent.

The overall growth was driven by increasing petrol prices, which rose by 8.7 per cent in February after climbing by 15 per cent the previous month. The impact of rising petrol prices was blunted by falling food prices, which declined by 2 per cent in February. Excluding food and energy, core producer prices rose by 0.2 per cent last month.

“While food prices have started to fall sharply, deflationary pressures have yet to spread beyond the energy and food sectors,” said Paul Dales, US economist at Capital Economics.

Leading the rise in core prices were increases in the price of tobacco, women’s clothing and light trucks.







Bernanke fears lack of will to end crisis
Copyright by The International Herald Tribune and Reuters
Published: March 16, 2009
http://www.iht.com/articles/2009/03/16/business/usecon.php


WASHINGTON: The U.S. recession could last most of the year, said Ben Bernanke, the Federal Reserve chairman, warning that the biggest risk was that the political will needed to fix the fractured financial system could be lacking.

"This decline will begin to moderate and we'll begin to see a leveling off," Mr. Bernanke said when pressed during an interview on the CBS television program "60 Minutes" about whether he sees the recession ending this year. "We won't be back to full employment. But we will, I hope, see the end of these declines that have been so strong in the last couple of quarters."

Mr. Bernanke told Congress in January that the Fed believed there was a reasonable prospect that the recession that took hold in December 2007 would end this year and that 2010 would be a year of recovery.

In the rare on-the-record interview, shown Sunday, he largely stuck to that view, while suggesting that recent developments might have dimmed the outlook a bit.

"We'll see the recession coming to an end, probably this year," Mr. Bernanke said. "We'll see recovery beginning next year."

Government efforts to combat the crisis have been criticized as stock markets have plunged and unemployment has soared even as the authorities have stepped in to prop up companies such as American International Group.

The financial system remains fragile, despite a $700 billion bailout of banks approved by Congress in October, and President Barack Obama has said more money will likely be needed to repair debt-laden banks.

The Fed chairman said his greatest worry is that lawmakers and the public will withdraw support for efforts aimed at stabilizing the shattered banking system.

"The biggest risk is that, you know, we don't have the political will," he said. "We don't have the commitment to solve this problem, and that we let it just continue."

If that occurs, he said, "we can't count on recovery."

Recent economic data have pointed to an intensifying economic downturn. The U.S. unemployment rate rose to a 25-year high in February as employers cut 651,000 jobs, taking the recession's job loss total to 4.4 million. Home and auto sales have slid in recent months, and manufacturing has contracted.

Last week, Mr. Obama and his top aides issued some of their most optimistic remarks since the new president had taken office, concerned that a grim outlook among investors or the public might become part of the problem.

Lawrence H. Summers, director of the National Economic Council, said that low stock prices offered "the sale of the century."

Yet in an interview Sunday, Mr. Summers struck a note of caution.

Asked on "This Week," on ABC, whether a bottoming of the economy was in sight, Mr. Summers said, "No one can make that judgment." Job losses were likely to continue for some time, he suggested, noting: "We've got an economy that's losing 600,000 jobs a month. It's probably not going to stop imminently."

And queried about whether the unexpected profit reports for this year from Citibank and some other major banks meant that they were "out of the woods," he replied, "I wish I could say that."

"It's going to take some time" for the administration's rescue efforts to gain serious traction, he said.

But Mr. Summers insisted that the administration economic team was moving expeditiously to flesh out its financial rescue efforts.

"On Monday, you're going to see the details of one key component of the plan," he said. Mr. Obama is expected to propose offering hundreds of millions in federal lending aid to help struggling small-business owners and to move aggressively to increase bank liquidity.

According to The Associated Press, the package will include $730 million from the stimulus plan to immediately reduce small-business lending fees and increase the government guarantee on some Small Business Administration loans to 90 percent. The government also will take steps to increase bank liquidity, with more than $10 billion aimed at unfreezing the secondary credit market, according to officials briefed on the plan who sought anonymity to avoid pre-empting the president's announcement.

Concerns have risen that the administration is moving too slowly, and perhaps too opaquely, to shore up banks and deal with so-called toxic assets weighing on many banks' books.

"There's a lack of confidence because this administration has not come forward with a plan on how to take these impaired assets out of the market," Representative Eric Cantor of Virginia, the House Republican whip, said on NBC.

But Christina D. Romer , another administration adviser, indicated that a plan was near. "I can tell you that that kind of a blueprint is top on our agenda, and I expect it to come out very soon," she said.



Geithner faces critical test over bank plan
By Edward Luce in Washington
Copyright The Financial Times Limited 2009
Published: March 17 2009 19:03 | Last updated: March 17 2009 20:23
http://www.ft.com/cms/s/0/ca89a806-1314-11de-a170-0000779fd2ac.html


Tim Geithner, America’s beleaguered Treasury secretary, faces a critical test of his credibility when he unveils a much-awaited plan to take toxic assets off bank balance sheets – in an announcement expected in the coming days.

Mr Geithner, whose initial announcement last month on the troubled asset purchase plan disappointed the market, has become the target of criticism in Washington and on Wall Street, with some questioning whether he can deliver.

Speaking on condition of anonymity, senior Democratic figures questioned whether Mr Geithner has the credibility with the markets and Capitol Hill to push through a new request for funds. “The more time passes, the more convinced I am that Tim Geithner is becoming a liability for the administration,” said one Democratic lawmaker.

Analysts say President Barack Obama would face steeper odds persuading Congress to authorise more money to recapitalise the banking sector if Mr Geithner was the one making the request. Mr Obama included a $250bn (€192bn) financial sector bail-out item in the budget he announced last month implying the administration will need up to $750bn more in troubled asset funds.

“I don’t think Tim Geithner will last beyond June – he has no credibility with the markets,” said Chris Whalen, managing director of Institutional Risk Analytics, a financial research group. “Given what we already know about the toxic asset purchase plan, I very much doubt he is going to turn this situation around.”

Mr Geithner, previously the head of the Federal Reserve Bank of New York, was initially hailed for his knowledge of the complex financial issues at the centre of the crisis – and for being a known quantity on Wall Street.

Treasury officials could not be reached for comment. But defenders of Mr Geithner, who remains the only official at the Treasury department to have been confirmed by the Senate, say he is being unfairly singled out as the lightning rod for the growing public anger on Wall Street’s misuse of emergency taxpayer funds. They say the Obama administration would have a difficult time requesting new bailout funds from Congress, whoever the Treasury secretary was.

“I am quite certain that Tim Geithner has the full backing of the president and will continue to have it,” said Roger Altman, a former senior Treasury official in the Clinton administration. “The main question is can anybody, including President Obama himself, persuade Congress to give new money in this climate?”

Mr Geithner is also attracting much of the blame for controversies over the misuse of funds that have already been disbursed – some of it under the Bush administration. On Tuesday, Richard Shelby, the ranking Republican member of the Senate banking committee, blamed Mr Geithner for the administration’s failure to prevent executives at AIG from paying out $165m in bonuses.

On Monday, Mr Obama instructed Mr Geithner to explore every avenue to claw the bonuses back. AIG has received more than $160bn in public funds in the past four months.

Jim Sarni, portfolio manager at Payden & Rygel, a US investment management firm, said the real issue was the removal of toxic assets from financials and restoring confidence in banks, which policymakers were not yet doing.

Additional reporting by Michael Mackenzie and Aline van Duyn in New York







US industrial production slides again
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: March 16 2009 14:11 | Last updated: March 16 2009 14:11
http://www.ft.com/cms/s/0/e69774a6-1233-11de-b816-0000779fd2ac.html


US industrial production fell for the fourth month running in February, dropping by 1.4 per cent on weak factory and manufacturing output as global demand has continued to erode.

The monthly decline was slightly worse than expected and was driven lower by warmer temperatures across the US, which slowed the output of utilities. Industrial output was off by 11.2 per cent compared with the same month in the prior year and fell to its lowest level since 2002 last month, the Federal Reserve said on Monday.

“There is no relief in sight as inventories rocket and exports plunge,” said Ian Sheperdson, chief US economist at High Frequency Economics.

Economists expected industrial production would fall by 1.3 per cent last month after a revised 1.9 per cent decline in January. Output has declined in 10 of the last 12 months.

Utility output was down by 7.7 per cent in February after rising by 2.6 per cent in January. Mining fell by 0.4 per cent and manufacturing was off by 0.7 per cent, its best showing in four months.

Blunting the manufacturing decline was a surprising bounce in car production, which rose by 10.2 per cent last month after plunging 24.7 per cent in January, as stalled plants reopened.

“Manufacturing has been severely pressured by a collapse in global trade and inventory liquidation” economists at RDQ Economics wrote in a note to clients. “It is far too soon to say that the pressures on manufacturing are easing.”

Meanwhile, the capacity utilisation rate, a measure of the proportion of plants in use, across all industries fell one point to 70.9, matching the record low last seen in 1982. Investment in business equipment fell again last month, dropping by 1.3 per cent and signalling that the decline in business investment will continue to worsen.

“An increasingly constrained consumer, deepening woes for the housing sector, and a need to pare inventories will all continue to weigh heavily on domestic demand,” said Joshua Shapiro, chief US economist at MFR.



Game theory and GM’s bail-out
By Nicole Bullock in New York
Copyright The Financial Times Limited 2009
Published: March 17 2009 18:55 | Last updated: March 17 2009 18:55
http://www.ft.com/cms/s/0/586ee9b6-1323-11de-a170-0000779fd2ac.html


As the end of March deadline approaches for General Motors to negotiate one of the most complex financial restructurings in history, clues to the outcome may lie in the pages of game theory textbooks.

Game theory is a branch of applied mathematics that deals with how people interact, particularly in strategic situations where choices are based on others’ decisions and expectations about those decisions.

GM’s is a game of brinksmanship where each party – the US government, the company, creditors and unions – tries to hold out for a better deal, in the hope that the others will cave in first to prevent bankruptcy.

Ironically, the “weakest” party often wins, said Avinash Dixit, a professor in the department of economics at Princeton University. “The best example of this is the banks, which last year said: ‘Give us $1,000bn or the world will come to an end’,” Mr Dixit said. “And so, the government did.”

With GM, the unions and bondholders are wagering that the government will again be the most anxious to avoid failure.

Here the underlying fear is that a bankruptcy might be the tipping point for another Great Depression. But multiple financial rescues and signs of waste and misuse of aid money have led to bail-out fatigue in the US, which could be a powerful bargaining chip in 11th-hour negotiations.

“The government’s strongest suit seems to be the growing public opposition, plus the Lehman [Brothers] example which implicitly tells the unions and the bondholders that not everyone gets rescued,” Mr Dixit said.





US plans $5bn in car supplier aid
By Tom Braithwaite in Washington, Bernard Simon in Toronto and John Reed in London
Copyright The Financial Times Limited 2009
Published: March 19 2009 15:43 | Last updated: March 19 2009 15:43
http://www.ft.com/cms/s/0/c7fb9618-1499-11de-8cd1-0000779fd2ac.html


Suppliers to the US car industry will get access to $5bn in federal financing as part of a bail-out package for the troubled sector, the Treasury department said on Thursday.

The loan insurance deal is smaller than suppliers had requested but was broadly welcomed by the industry and its investors, with shares in large suppliers rising sharply.

“The Supplier Support Program will help stabilise a critical component of the American auto industry during the difficult period of restructuring that lies ahead, “ said Tim Geithner, Treasury secretary, in a statement.

“The program will provide supply companies with much needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need,” he said.

Suppliers will be able to access goverment-backed credit insurance for money owed by suppliers. They will also be able to sell their receivables to the scheme at a “modest discount”. It only applies to domestic companies.

However, the Treasury said it was not looking to safeguard the future of all suppliers and that the “failure of certain suppliers is a natural, albeit painful, part of the business cycle”.

The Obama administration’s auto task force is due to decide on whether to extend a much bigger rescue package to General Motors and Chrysler before the end of this month, but acted first to help suppliers, which are particularly exposed in the recession.

Production cutbacks by carmakers have put the parts industry under immense strain. Almost every North American assembly plant is currently working below capacity.

Several big suppliers, including American Axle, Lear and Visteon, have disclosed in recent weeks that their auditors have cast doubt on their ability to survive as a “going concern”. Suppliers, especially those heavily reliant on General Motors, Ford and Chrysler, have struggled to obtain credit.

Automotive suppliers asked the Treasury for $25.5 bn of emergency aid in February, warning that a million jobs could be at risk from the sector’s collapse.

Suppliers had asked for $10.5bn of federal loan guarantees to back their accounts receivable from General Motors, Ford Motor and Chrysler, which banks are no longer acccepting as collateral, so that they could arrange new loans.

Their submission to Treasury included an additional request for government loan guarantees worth $8bn, and $7bn to create a “quick pay” scheme to speed up their reimbursement for parts.

The squeeze has been especially acute since plants reopened after an extended Christmas shutdown. Suppliers have had to ship components and meet expenses, but must typically wait 45-60 days for payments to roll in.

The Motor Equipment Manufacturers Association estimates that payments by the three Detroit carmakers to suppliers will total only $2.4bn this month, compared with $8.4bn a month in the already depressed fourth quarter of 2008.

“Suppliers need a substantial cash outflow in order to purchase raw materials and bring employees back to work”, the association said earlier this month.

Automotive suppliers are the largest manufacturing employers in seven states, including Ohio, Indiana, Kentucky, Michigan, Missouri, South Carolina and Tennessee. The industry estimates that it supports 4.5m jobs across the US.

Furthermore, carmakers have expressed fears that the failure of one big supplier could force the closure of numerous assembly plants. Even foreign carmakers with plants in North America, such as Toyota, have expressed support for assistance to the parts industry.

Shares of beleagured suppliers shot up on news of the government bailout. Lear, which specialises in seats, almost doubled to $1.34. American Axle, which is heavily dependent on business from GM, gained a third to $2.04.