The Texas-Mexico border
Scenes from la frontera
Fence politics in Texas
Monday
IN A tiny town at the very bottom of the United States, a little old lady is sassing the Border Patrol about Michael Chertoff, the secretary of the Department of Homeland Security (DHS).
“You’ll find out that Chertoff and I don’t see eye-to-eye,” says Eloisa Tamez.
“Yes, ma’am,” says the agent.
“Your boss. My enemy,” she says.
That attitude is common down here. The Secure Fence Act of 2006 calls for 700 miles of fence to be built along the 2,000-mile border between the United States and Mexico. When the DHS started building the fence in Arizona, there were few direct complainants, but that border is mostly uninhabited.
Eloisa TamezThe Texas border, conversely, is studded with twinned cities, from Brownsville-Matamoros at the Gulf of Mexico to El Paso-Ciudad Juárez at the western tip of Texas. More than 2m people live in the El Paso-Juárez conurbation alone.
And Texas, unlike the other border states, already has a physical border with Mexico—the Rio Grande. In some places the river is barely a trickle, but it’s there. Construction on the fence is supposed to start in Texas in July, but DHS has to deal with some lawsuits first.
The Border Patrol agent shifts awkwardly. He seems embarrassed and aggrieved: “I don’t know why you’re upset with me. I’m just seeing how you’re doing.” He is a recent recruit, a big blond kid from Oklahoma, and this is his first encounter with Ms Tamez.
They will probably meet again. She can often be found along this dirt road, which covers the levee. The Border Patrol dislikes people coming this close to the border, but it’s her property. She lives in a modest house in El Calaboz, perhaps 50 yards from where we’re standing, and lately she’s been giving a lot of tours of her backyard.
Ms Tamez’s family was given this land in 1767 as part of a Spanish land-grant programme. She thinks that only the King of Spain should be able to rescind her rights to it, but over the years the original porcione has been hacked away for various reasons. She retains claim to only three acres, and plans call for the fence to go right through it.
She is suing the Department of Homeland Security, saying that they did not follow correct procedure in asserting the government’s eminent-domain claims. “I saw my father and grandfather working hard to get this land to give fruit. So it's not about how much money they might give me, which is nothing,” she says.
Most property owners down here are not suing. Some are too poor for legal help; others quail at the prospect of taking on the government. But several are. Pamela Taylor sailed from England to Texas after the second world war because she had married a soldier from Brownsville, a nearby town. She has been living here for more than 50 years. Once she came home to find a man who had just crossed the river sitting in her rocking chair. Her home will be entirely behind the fence.
Paul and Tim Loop, a pair of farming brothers, don’t know how they are going to access their crops. Residents of Granjeno, a tiny town with just one business, worry that their community will be entirely obliterated.
“We get so concerned about the animals that are about to be extinct," Ms Tamez continues, “when by doing this they are extinguishing a culture and a population that’s going to be gone forever.” She is a member of the Lipan Apache tribe, but she is referring more generally to the culture of la frontera, a strip of land that has switched hands often and has a blend of Anglo, Spanish, and Native American traditions.
The animals are also a point of concern. The border is home to obscure species like ocelots and green jays. Mr Chertoff has been given special dispensation to waive certain laws to get the fence built quickly, and he has used this power to ignore several environmental regulations.
On June 23rd the Supreme Court declined to hear a case brought by the Sierra Club focusing on the impact of a section of fence in Arizona. The court may have reasoned that since the fence was already built the damage was done. There is another lawsuit pending focusing on the Lower Rio Grande Valley National Wildlife Refuge. Maybe the jays still have a chance.
TuesdayIn 2004 and 2005, Keith Bowden travelled the length of the Rio Grande by bicycle and raft. In “The Tecate Journals”, his excellent account of the trip, he writes that he has reservations about Matamoros, which is just across the river from Brownsville. In 1989 a student was kidnapped and killed by drug traffickers. They put his brain in a kettle with blood and scorpions. “I love the border and am a hard guy to intimidate,” writes Mr Bowden. “But I can never think of Matamoros without thinking of that kettle.”
A mural in Nuevo LaredoTourism is an important part of the border economy, especially on the Mexican side. But over the past few years, Mexico’s increasingly fierce drug wars have made things harder for the public-relations people. My plan for the week is to travel along the border from Brownsville to El Paso, reporting a few stories along the way. This strikes some people in Austin, where I live, as foolish. “Please do me a favour,” said my mechanic. “Bring someone with you. Someone with a gun.” His colleague counselled vigilance: “Pretend you’re in ’Nam.”
According to tourism officials in Matamoros, the city used to get as many as 30,000 students during spring break; this year they had about 1,000. When I returned to the hotel last night after meeting with Ms Tamez, my (unarmed) companion had gotten worked up reading State Department travel advisories about Matamoros. There is some activity at the base of the bridge in Mexico—perhaps a dozen people waiting for the bus and several soldiers with machine guns. Past that, the streets are empty. We walk in uneasy silence until we find a restaurant with some signs of life. Tacos, guacamole, mushrooms and Dos Equis improve our spirits. Everything is normal in the restaurant, except that when the Los Angeles Dodgers, LA’s baseball team, hit a home-run the waiter plops a helmet on the nearest patron and take a few celebratory swings at his head.
More Americans are crossing the border as health-care tourists. For someone without medical insurance, hospital visits and pharmaceuticals are considerably cheaper in Mexico. But nobody is going for fun. Nowhere is this more obvious than in Laredo and Nuevo Laredo, 200 miles up the river from Brownsville and just a few hours down the interstate from San Antonio and Austin.
The two Laredos are a busy port, with 13,000 trucks crossing each day and more than $100 billion in trade a year. It also used to be a festive destination for Texans, full of bars, restaurants and considerably seedier pursuits. But in 2005 a crime wave in Nuevo Laredo mostly killed the tourist industry. In 1990 the Republican nominee for governor, Clayton Williams, cheerfully volunteered that he had spent some time in the Boys Town district of Nuevo Laredo because it was the only place a young man could get “serviced” in those days. (Mr Williams was also famous for a joke comparing rape to bad weather: “If it’s inevitable, relax and enjoy it.” He was too much of a meathead for Texas, and narrowly lost his election to the Democrat, Ann Richards, who was later unseated by George W. Bush. If not for Mr Williams’s indiscretions, Mr Bush may never have become president. John McCain, the Republican presidential nominee, got in trouble earlier this year when his campaign planned to hold a fundraiser with Mr Williams.)
International Bridge No.1 in Laredo leads to Avenida Guerrero, a typical tourist corridor, apart from the fact that it has no tourists. It’s an easy walk, and crowds of locals stream back and forth all day. A man trots alongside us for a minute offering us anything we want—a dentist, a doctor, a farmacia, a hotel with a pool, a marriage, a divorce. But the effort is half-hearted and he soon peels away. No one else even tries.
We stroll over to Señor Frog's, once a monument to ridiculous behaviour. It's closed, but I’m surprised to see signs of life at the other end of the block, as men are scrubbing and painting El Tropical Bar & Grill in preparation for a July 4th opening. Robert Candelaria, the owner, remembers Señor Frog’s (“Also called Mr Frog’s”) fondly, but boasts his place will be classy, with beer on tap. He says that since the military arrived in Nuevo Laredo—there are tanks and machine guns here, too, mostly around the bridge—the tourists have been coming back. I haven't seen any, but I hope he’s right. Only then can El Tropical avoid the sad fate of Señor Frog’s.
Back on the Texan side, we stop in at the Museum of the Rio Grande Republic. There we learn about a swathe of land between the Rio Grande and the Nueces River that had declared itself independent of Mexico in 1840. It spent only 11 months that way, while both Texas and Mexico laid claim to it. Rick Villareal, who runs the museum, grew up in Laredo before the streets were paved. He is “totally opposed” to the fence. Among other things, he says, it will dissuade Texans from using the river. He recently trapped some opossums on his property and went down to the riverbank to release them, where he was confronted by Border Patrol agents and asked to explain himself.
The belief that the fence will effectively put the river in Mexico rather than the United States is a common concern. On the drive to Laredo we stopped to stretch our legs in Roma, which has a mostly empty downtown full of abandoned wells and scary-looking sheds. On the Mexican side of the river, in Ciudad Miguel Aleman, a large group was picnicking on the riverbank, swimming, fishing and listening to music. There was no one on the American side, except a Border Patrol agent in an elevated perch, staring at the party on the other side.
Wednesday
THE Department of Homeland Security (DHS) is also being sued by the Texas Border Coalition, a group of mayors and other bigwigs from both sides of the border. Its head is Chad Foster, the mayor of Eagle Pass, about 125 quiet miles north-west of Laredo. He is an enormous man with a grey moustache and a cowboy hat. He smokes continuously and his office is full of empty cans of caffeine-free soda. In photos displayed on the wall, he’s cornering Al Gore and Vicente Fox, hands spread wide, to tell them about something. He forces me to take an extra-large T-shirt featuring a snarling bald eagle bursting over a fence frosted with barbed wire. “LET THE EAGLE PASS,” it says.
The coalition’s complaint concentrates on legal matters—that the DHS did not properly negotiate with landowners for access to their property; that rich landowners (and George Bush donors) are enjoying preferential treatment, and so on. But Mr Foster’s antipathy for the fence is more sweeping. Like most border locals, he sees Mexico as a neighbour rather than an adversary. He crosses into Piedras Negras every day—to have lunch, to buy his cholesterol medicine or to run some other errand. Half of the retail business at the local Texas shopping mall comes from Mexico, and he reckons 80% of downtown’s sales are to Mexicans. He argues that a fence rarely sends a good message to a neighbour. Indeed, it wasn’t so long ago when the United States was clamouring for Mikhail Gorbachev to topple such walls. At any rate, what is the point, he wonders: “To keep out housekeepers and yardmen?”
He is particularly irritated by his dealings with the DHS. They initially approached the town council with tempting plans to expand the small road that runs along the southern edge of the municipal golf course, and to clear the city's riverbank of fast-growing corrizo cane. Mr Foster was won over at first. “Those suckers are always running over our sprinkler heads,” he says of the cane. But when DHS officials came back with plans to build a “decorative fence,” he grew sceptical. “It’s hard to trust those boys,” he concludes.
Mr Foster has to be at a funeral by noon, but he bundles me into his SUV for a tour. Eagle Pass and Piedras Negras are relaxed border communities; no soldiers patrol the streets and I can return to the United States with little hassle (I left my passport at the hotel). He shows me the thick stands of cane running down to the river. “There could be a 500-pound elephant on fire down there and you’re not going to see it.” He asks whether I know that Piedras Negras is the home of the nacho. He insists that I visit El Moderno, the site of the invention, and then go to Ciudad Acuña, across the border from Del Rio, to sample some disgusting nachos. “I want you know the difference,” he says. We turn a corner and see something unusual: a gang of middle-aged Americans. “Now there are some happy tourists, in fear for their lives,” Mr Foster observes.
Border residents understandably feel like they are getting the run-around from the DHS. I sometimes feel the same way, although I think this has more to do with bureaucratic back-and-forth than anything else. In any case, complaints about the fence are mostly directed at Washington. Locals tend to support the local Border Patrol operations, and say they would prefer more agents than a fence. (One small point of friction in Brownsville is that the local police are having trouble recruiting, because starting salaries are higher for the Border Patrol.)
For their part, Border Patrol agents are frustrated, too. One agent complains that there are a lot of misconceptions about his work. He says that no one seems to grasp that the Border Patrol is meant “to stop a terroristic threat that is out there,” although they sometimes encounter undocumented aliens. Alan Langford of the Del Rio sector says that border locals usually support the fence after they learn that it is meant merely to discourage illegal crossings into downtown areas, where people can blend easily with the crowds. “We don’t want to perform law-enforcement activities in public areas because it puts the public at risk,” he explains. In his sector, there will only be a few miles of fence, around the two cities (Del Rio and Eagle Pass).
Del Rio is where the feel of the border changes from South Texas to West Texas. After work, I decide to do some sightseeing. My companion and I stop by a museum dedicated to frontier life. It features three inert prairie dogs in a pen, and a room-sized nativity scene. The pieces were carved by a local artist with an erratic sense of scale. Some of the pilgrims are leading camels by leashes like dogs.
Our drive to Lake Amistad for a swim is blocked by an enormous puddle—a mile across and knee-deep. The puddle is not connected to the lake. At the Amistad Fishing Lodge the waitress tells us that her boyfriend loves to fish in the puddle, and her kids go swimming there. Somebody at the lodge has kindly torn off the side of the pool table, so players can retrieve the balls for free.
The radio is full of Christian talk shows. A man describes how he came home one night and his wife was crying in the bedroom, saying she didn’t deserve such a good husband. He told her in no uncertain terms that she only had two choices: she could stay married to him, or she could stay married to him unhappily.
We go to Blockbuster to rent “No Country for Old Men”, the Oscar-winning thriller based on a novel by Cormac McCarthy. Parts of the film are set in Del Rio. I ask the video-store clerk whether Del Rio is so exciting in real life (ie, full of blood and found riches). Alas, no. He admits that on his days off he often ends up hanging out at the Blockbuster anyway. He is joining the Army in August. Things may get a bit more exciting then.
American carmakers
That shrinking feeling
High petrol prices land Detroit’s Big Three in even deeper trouble
THE share price of General Motors (GM), America’s biggest carmaker, fell to $10.57 on Monday June 30th, valuing the giant firm at little more than $6 billion. In 1954, the last time GM’s share price was this low, the Cadillac Eldorado had yet to grow fins and the Volkswagen Beetle was still a novelty.
GM’s woes are shared by the other two members of Detroit’s Big Three. Ford has abandoned all hope of returning to profit as promised in 2009 and appears to be bracing itself for an even bigger loss in 2008 than last year’s $2.7 billion. And on June 26th Chrysler had to deny rumours that it was preparing to file for bankruptcy.
It was not meant to be like this. At the beginning of the year both Ford and GM were expecting the credit crisis to knock sales in the first half of the year, but they were still cautiously optimistic that they would soon reap the rewards of their expensive and painful turnaround plans. Along with Chrysler, they had just secured a big package of concessions from unions that went a long way to closing the production-cost gap with the lean, non-union North America factories operated by Asian and European rivals.
Independent reports by J.D. Power and Harbour showed that Detroit was also fast catching up with the Japanese on quality and productivity. But the carmakers have been completely taken by surprise by the meltdown in the housing market and, above all, by the soaring cost of fuel. Falling house prices have persuaded many people to postpone buying new cars, and petrol at over $4 a gallon is radically changing the types of cars that buyers want.
Detroit is still stuck with model ranges heavily biased towards the big, thirsty sport-utility vehicles (SUVs) and pick-up trucks that raked in the profits when petrol cost half of today’s price, so this is wreaking havoc.
The Big Three were certain that America’s love affair gas-guzzling trucks would never end—so much so that both Ford and Chrysler pinned their hopes of recovery on new versions of their bestselling pick-ups, the F-150 and Dodge Ram respectively. But that conviction has been shattered in a matter of weeks. Figures released this week show that sales of cars and light trucks in America in June fell by 18% compared with a year earlier.
The hit taken by Detroit was even worse. Despite flinging costly rebates at the market, GM’s sales were down by 18%, and Ford’s by 28%. Chrysler dropped by a stunning 36%, pushing its market share below 10% for the first time in decades.
Unless there is a sudden reversal in the price of oil, Japanese and Korean brands will make big gains in market share both this year and next. Although GM and Ford make some fuel-efficient cars, dealers complain that supply is limited and that customers anyway tend to opt for Japanese or Korean brands when downsizing. GM, Ford and Chrysler are all trying to reduce the speed at which they are burning cash, and to accelerate the arrival of more fuel-efficient models.
So just how bad are things for the Big Three? This is hardly the first time that their survival has been questioned, of course. But two aspects of the current crisis are new. Carmakers’ finance arms used to bring in cash even during cyclical downswings in the vehicle market. That is not the case now. Not only have they been infected by the contagion from the home-mortgage market, but the value of SUVs and pick-ups has collapsed so catastrophically that they are losing big money on vehicles returned after lease.
It also seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete. The problem is that the smaller, more efficient cars that buyers now want, and which will come on stream in a year or two, are inherently far less profitable for both manufacturers and dealers.
GM and Ford can at least take some comfort from their well-run foreign operations, which are benefiting from growing demand in China, Russia and Brazil. But Chrysler has no such cushion. Worse, it is planning to replace only half its fleet in the four years after the 2009 model year (compared with Honda’s 72% replacement and Nissan’s 80%). John Murphy of Merrill Lynch believes this is “an active decision by the new owners to rationalise the product portfolio in advance of a break-up or sale.” It may not be long before the Big Three become the Not-So-Big Two.
Commentary by Michael Lewis
July 2 (Bloomberg) -- The first thing you need to know about recessions is that they don't signal the end of anything on Wall Street.
They're more like a red flag during a Formula One race: The cars coast gently around the track until the wreckage is cleared whereupon they all roar off as if the accident never happened. The difference is that, on Wall Street, it's possible to make the disaster work for you.
You can inch your car quietly forward so, when the race recommences, you're its surprise leader.
To win any recession, however, you need to understand its rules. The good news is that there are only three really important ones. The bad news is that it's not enough to commit them to memory. You must take them to heart, and allow them to guide your every step.
Rule No. 1: Betray your employer before your employer betrays you.
Chances are, if you work on Wall Street, you work for some giant corporation. Citigroup Inc., say, or Merrill Lynch & Co. The sheer size of these firms may convince you that they are, essentially, secure, that there is no better place to ride out a storm than among the tens of thousands of fellow employees.
This is a mistake.
No Safety in Numbers
There's seldom any safety in numbers, and the more parlous the situation, the more dangerous it is to be in it with a lot of other people. London during an outbreak of the bubonic plague, the Superdome during Hurricane Katrina, the New Jersey suburbs: People are always clustering together precisely where and when they should not.
In World War I, hordes of men charged directly into machine- gun fire, no doubt reassured that they weren't alone.
No, if you want to win the recession, you need to find a hole and crawl inside it, until the shooting stops. This hole is called a HEDGE FUND.
Look around. Note how many of the really shrewd people have recently decided to abandon the big firms for which they have happily worked for many years, and sneak off to some small corner of the financial universe.
Last week, the two guys who ran the distressed-debt desk at Citigroup just disappeared inside their own firm. The team doing the same thing at Bear Stearns Cos. vanished inside Tudor Investment Corp. Even the guy who kept Goldman Sachs Group Inc. out of the subprime mess fled, and raised money for his own fund.
I know what you're thinking: What if no hedge fund wants me? What if I set up my own hedge fund and investors won't give me their money? Which brings me to . . .
Rule No. 2: Remember what you are selling.
No matter what you've told yourself in good times, to justify the huge paychecks you have received, you aren't selling actual money-making expertise. For decades, brokers and money managers as a group have underperformed the market. Yet ordinary investors continue to solicit their advice and pay them for their services. Why?
Greed, contrary to popular belief, isn't what keeps this strange wheel spinning. Greed eventually gropes its way to self- interest. In good times, the dominant psychological impulse can be mistaken for greed but what's really going on is that a lot of people are worried everyone else is getting rich and they aren't.
At the bottom of the Wall Street money machine isn't greed but anxiety.
Pure Gold
In bad times, this deep truth reveals itself more clearly, for the anxiety now gets expressed as fear. But there is as much money to be made from it as ever. The TV news projecting oil at $200 a barrel, the stock market collapsing, banks repossessing millions of houses, hedge-fund managers stealing their customers' money and pretending to jump off bridges: This stuff is pure gold, if you know how to work the mine.
Sadly, most Wall Street people don't. They instinctively avoid controversy. They dislike contemplating the events that inspire terror in potential investors. They think their job is to calm investors. To pretend everything is fine, even if it's not.
This is the instinct you must fight: A calm investor is one who might think twice before investing in your hedge fund.
You need to learn to talk to investors in new ways. To frighten them so terribly that they feel compelled to pay someone to hold their sweaty hands. If you aren't too obvious about your motives, that someone could very likely be you. Which brings us to . . .
Rule No. 3: Hide your motives. Or, specifically, minimize the appearance of financial interest.
Don't tell anyone how well you're doing for yourself, for example, not even women you have just met. Recessions blow in with them a general backlash against worldly pleasures and material obsessions.
You must reckon with this shift in public values, for it will occur even on Wall Street, and threaten to expose your ambition as freakish. A lot of people you thought you knew are about to rediscover what's important in life: wife, kids, the love of one's fellow man. But you are not.
Don't worry: it's temporary. This is still America.
But people are going to be watching you closely for any sign that you fail to grasp the relative unimportance of money. Mollify them. Acquire some painless habits, for instance, to suggest that you, too, have found meaning in something other than your success.
Sell the Maybach and buy a Prius. Have the gardener plant tomatoes in your yard -- but make sure he knows to put them in the front yard, where they can be seen.
The goal isn't to get people to like you. That would be too much to ask. The position to which you aspire, recession champion, is inherently unsympathetic. You are the man on the lifeboat with his own private stash of food and water. The goal is merely to get people to tolerate you, and dissuade them from organizing themselves against you.
Do this well enough and by the time they realize what you've done the next boom will have begun, and they'll treat you as their hero.
July 1 (Bloomberg) -- Republican John McCain met tonight with Colombian President Alvaro Uribe to emphasize his support for free trade and the South American nation's fight against drug trafficking.
``I think we've achieved a remarkable level of success even though we have a long way to go,'' McCain said of Uribe's efforts, assisted by the U.S., against the drug trade and rebel groups challenging the government.
The two men held their meeting at the Colombian leader's home in Cartagena, the first stop on the Republican presidential candidate's trip to Latin America. McCain travels tomorrow to Mexico City to talk with Mexico's President Felipe Calderon.
While McCain said the visits aren't political, the issues involved -- trade, security and immigration -- fit in the theme's of the Arizona senator's presidential campaign. Uribe sought to bring some diplomacy to the event, saying that he viewed recent comments about Colombia by McCain's Democratic rival, Barack Obama, ``to be positive.''
The effect of trade on U.S. jobs is a top issue in industrial states such as Pennsylvania, Ohio and Michigan, which also are battlegrounds for McCain and Obama in the presidential campaign. The three states each have lost more than a quarter of their manufacturing jobs in the past eight years and labor groups, many of which are supporting Obama, are blaming free trade accords for the decline.
Opportunity and Risk
``McCain does have the opportunity to take the optimistic, pro-trade mantra,'' said Ed Gresser, a trade official in the Clinton administration and now an analyst at the Progressive Policy Institute, a research group in Washington affiliated with the Democratic Leadership Council that supports trade. Still, making those arguments in Mexico and Canada means ``he risks being seen as taking the side of foreigners.''
McCain has stuck by his support for free trade, while Obama said during his primary race against New York Senator Hillary Clinton that he would press Canada and Mexico, two of the biggest U.S. trading partners, to rework portions of the North American Free Trade Agreement. Obama also has urged Congress to hold off approval of pending accords with Colombia and South Korea.
Trade is an unusual point of contention in presidential politics, said Carla Hills, the U.S. trade representative in President George H.W. Bush's administration.
Waning Consensus
``This is the first time we've had trade in play as a divisive issue, because for 60 years we've had bipartisan agreement'' that trade benefited the U.S., Hills said in a speech in Washington.
That consensus is waning. Fifty-one percent of Americans say trade is a threat to the economy, the first time a majority of voters feared foreign competition, according to a poll by CNN/Opinion Research Corporation released today. In a 2000 CNN poll, 35 percent said free trade was harmful.
McCain said he supports passage of the free trade accord between Colombia and the U.S., which has been hung up by the Democratic majority in Congress.
``Colombia is the largest market in South American for U.S. agricultural products,'' McCain said.
Link to Security
The Arizona senator also is framing the trade debate as a national security issue and highlights the need to boost the economies of U.S. trading partners as a way to help the economy, control illegal immigration and curb drug trafficking.
In the case of Colombia, McCain applauded Uribe's efforts against the Marxist-inspired Revolutionary Armed Forces of Colombia, or FARC, which has been waging a four-decade battle against the Colombian government.
The Colombia and Mexico visits mark McCain's second foray outside the U.S. during his presidential campaign. He made a pitch for Nafta on a trip to Ottawa last month.
During the primaries, Obama, 46, an Illinois senator, said Nafta should be renegotiated to enhance labor and environmental protections under the threat of a U.S. withdrawal. He has since softened that stance, telling Fortune magazine in a June 18 interview that he favors ``opening up a dialogue'' with Canada and Mexico.
McCain's support of trade will help Obama, said Lori Wallach, president of Global Trade Watch, a group which opposes free-trade agreements.
``It's one thing to have that view, it's another thing to wave it around like a pair of red underwear,'' Wallach said, calling trade a ``wedge issue'' that may push factory workers toward Obama.
July 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet, who may raise interest rates tomorrow, said there's a risk of inflation ``exploding'' if central banks don't act decisively.
``We central banks have a big responsibility,'' Trichet told Germany's Die Zeit newspaper. ``If we're not decisive, there's a risk of inflation exploding. If we act in a decisive way, we can master the situation.'' The ECB confirmed the comments, which were made on June 23 for an article to appear tomorrow.
Trichet on June 5 said the bank may raise its key rate by a quarter-point to 4.25 percent at its July 3 meeting to contain inflation even as economic growth slows. Since then, soaring food and energy prices pushed euro-area inflation to 4 percent, twice the ECB's limit. Policy makers are concerned that workers will demand wage increases to compensate for the higher cost of living, entrenching faster inflation.
``Trichet's comments reflect the ECB's position that it will counter any wage-inflation spiral emanating from current inflation rates,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``The ECB's thinking is that even though higher rates may hurt growth in the short term, the longer-term economic fallout would be much worse if it doesn't act now.''
The euro and yields on Eonia forward contracts rose after Trichet's remarks were published, as investors raised bets on higher ECB interest rates. They expect the ECB to increase its key rate to 4.5 percent by December, and some expect a further move by March, the contracts show.
Producer Prices
Adding to the ECB's concerns, European producer prices jumped a record 7.1 percent in May from a year earlier, the European Union statistics office in Luxembourg said today.
Still, politicians are concerned that higher interest rates will deepen Europe's economic downturn.
European companies are grappling with the euro's 16 percent appreciation against the dollar in the past year, which makes their exports less competitive, and record oil prices above $140 a barrel, which are sapping purchasing power.
Manufacturing and services industries contracted in June.
French President Nicolas Sarkozy told France 3 television yesterday that the ECB ``should ask itself the question about economic growth in Europe and not only inflation.''
France stepped up its campaign today, with an official saying a rate increase would put growth at risk without reducing inflation or the oil price.
German Finance Minister Peer Steinbrueck said today the ECB should consider the effects on economic growth of an increase in rates. Inflation itself will damp economic growth, he said.
Higher interest rates ``mean credit will become more expensive, damping investment growth and consumer spending,'' said Dieter Hundt, president of Germany's BDA employers federation. ``It will act as a brake on economic growth.''
July 2 (Bloomberg) -- Orders placed with U.S. factories rose for a third month in May as the oil-price surge kept refineries busy, offsetting stagnating demand for equipment and machinery.
Bookings increased 0.6 percent, more than forecast, after a revised 1.3 percent gain the prior month, the Commerce Department said today in Washington. Fuel and chemicals orders prevented a decline in the total figure.
Growth in the energy industry, along with record exports, may keep manufacturing from a deeper downturn even as consumer spending slows amid the contraction in credit and the housing slump. A separate report today signaled the economy may have lost jobs in June for a sixth month.
Manufacturing ``continues to slow but it's not the major concern for the economy,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto. ``The export side is holding up.''
Treasuries advanced, sending yields on benchmark 10-year notes to 3.97 percent at 11:00 a.m. in New York, from 4 percent late yesterday. The Standard & Poor's 500 Stock Index was up 0.4 percent at 1,289.52 amid speculation banks have raised enough capital to weather credit losses.
Investors may be looking to tomorrow's government report on the job market in June for the week's clearest indication of the economy's direction. Economists anticipate the figures will show payrolls dropped by 60,000 last month after a 49,000 decline in May, according to the median forecast in a Bloomberg News survey.
Cutting Jobs
ADP Employer Services today reported that companies cut 79,000 workers in June. The figures don't include government jobs, unlike tomorrow's Labor Department report.
``The job market seems to be deteriorating,'' Robert Brusca, president of Fact & Opinion Economics in New York, said in an interview with Bloomberg Television. ``We're at risk of seeing a number perhaps as big as 100,000'' jobs lost last month, he said.
Factory orders were forecast to rise 0.5 percent, after a previously reported 1.1 percent gain the prior month, according to the median estimate of 68 economists surveyed by Bloomberg News.
Some companies are benefiting from the jump in fuel prices, helping to sustain orders. Cameron International Corp., the second-largest U.S. maker of oilfield equipment by market value, said last week it got a contract worth about $100 million to supply undersea equipment to Brazil's Petrobras Brasileiro SA.
Cars, Planes
Excluding demand for transportation equipment such as cars and airplanes, which tends to be volatile, orders rose 0.4 percent.
Bookings for non-durable goods, including food, petroleum and chemicals, jumped 1.2 percent after a 3.5 percent April gain. Orders for petroleum and coal products increased 4 percent.
Demand for durable goods, which make up just over half of the total, were unchanged after decreasing in the previous two months.
Factory inventories increased 0.5 percent, and manufacturers had enough goods on hand to last 1.23 months at the current sales pace, up from 1.22 months in April.
A report yesterday showed manufacturing unexpectedly grew in June, even as a measure of raw-material costs jumped to a 29-year high. The Institute for Supply Management's factory index rose to 50.2 from 49.6 in May. It was the first reading above 50, the dividing line between expansion and contraction, since January.
Demand Abroad
The gain in the ISM index was paced by increases in measures of inventories and supplier deliveries. Orders from overseas grew, even as overall bookings slowed for a seventh month.
Factory bookings for capital goods excluding defense and aircraft, a proxy for future business investment, dropped 0.4 percent in May, the report from Commerce showed. Shipments of such goods, which the government uses to calculate gross domestic product, increased 0.5 percent.
Outside of the energy industry, some companies are trimming investments on growing concern that consumer spending will falter as gasoline prices soar, home values drop and the economy loses jobs.
``Capital spending is likely to soften,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. ``While export demand is strong, everything else is crumbling around us. In terms of the labor market, the data just seems to get worse, which makes sense in terms of the cost pressures that companies are under.''
For now, the government's tax-rebate checks have boosted purchases of furniture, clothing and electronics, helping to keep the economy growing.
The rebates haven't been a boon for automakers. General Motors Corp., Toyota Motor Corp. and Ford Motor Co., the biggest auto retailers in the U.S., yesterday said June sales plunged as fuel prices above $4 a gallon drove consumers away from gas- guzzling trucks.
Dearborn, Michigan-based Ford plans to cut North American production and reduce North American salaried employee costs this year.
July 2 (Bloomberg) -- President George W. Bush said he is committed to pursuing a diplomatic solution to the confrontation over Iran's nuclear program, though ``all options'' remain in place to prevent Iran from developing an atomic weapon.
``I have always said that all options are on the table, but the first option for the United States is to solve this problem diplomatically,'' Bush said today at the White House.
The head of the U.S. military, Joint Chiefs of Staff Chairman Admiral Mike Mullen, said at the Pentagon that Iran is ``still on the path to get nuclear weapons'' and remains a ``destabilizing factor'' in the Middle East.
Tensions have been rising in the region amid speculation that Israel may be prepared to attack Iran to prevent it from building a nuclear bomb. Iran's oil minister warned today that his country would react ``fiercely'' to any attack.
Bush, asked about reports that Israel may strike against Iran, said that he has ``made it very clear to all parties that the first option ought to be to solve this problem diplomatically.''
At a Pentagon briefing just after Bush spoke, Mullen declined to discuss his talks with Israel about Iran.
Mullen said he continues to favor using economic and diplomatic pressure on Iran to bring about a change in its behavior.
Spread Thin
Military action against Iran would be ``extremely stressful'' for a U.S. military already engaged in Iraq and Afghanistan, and would also have unpredictable consequences throughout the Middle East, he said.
``Just about every move in that part of the world is a high- risk move,'' Mullen said.
Iran's Foreign Minister Manouchehr Mottaki said a ``new trend'' has begun in negotiations with the West over its nuclear program, according to the official Islamic Republic News Agency.
European governments joined the U.S., Russia and China last month in offering a package of economic and technology incentives in exchange for Iran suspending enrichment of uranium, which can be used to fuel a nuclear power reactor or build a weapon.
The proposal supports the construction of a light-water reactor and a guarantee of fuel supply. It also offers to improve Iran's access international markets, support its inclusion in the World Trade Organization as well as the modernization of its agricultural and telecommunication sectors.
July 2 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson called for regulatory changes that would allow financial firms to fail without threatening broader market stability.
The Treasury chief also proposed steps providing for the president to approve of any use of taxpayer funds to aid a financial company. In a speech in London today, Paulson identified a legal gap that leaves unspecified how to deal with failures of companies that don't take deposits, such as investment banks.
Paulson's proposals aim to tighten supervisors' oversight of lenders and dealers while at the same time discourage companies from depending on a government rescue if their bets go wrong. His speech comes a week before a congressional hearing to debate a regulatory overhaul in the wake of the credit crisis that caused the near-bankruptcy of Bear Stearns Cos.
``We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,'' Paulson said in the speech at Chatham House, an international affairs research organization.
The Treasury chief noted while there is a resolution mechanism for commercial banks, there is no such process for securities firms. Federal Deposit Insurance Corp. Chairman Sheila Bair has also urged that an agency be given power to take over and liquidate investment banks in an orderly manner. The FDIC has that power over lenders whose deposits it insures.
White House Input
``We will need to give our regulators additional emergency authority to limit temporary disruptions,'' Paulson said. ``Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch.''
Paulson participated in the discussions that led to the Fed's assistance to Bear Stearns. His remarks today indicate he favors a formal process for the administration's consent to use taxpayer funds.
``That's a big signal,'' Arthur Levitt, former chairman of the Securities and Exchange Commission, said in a Bloomberg Television interview. Telling Wall Street that government aid would be subject to presidential approval ``is pretty powerful medicine,'' he said.
Levitt, a senior adviser to Carlyle Group in Washington, is a board member of Bloomberg LP, the parent of Bloomberg News.
Bear Stearns
The Fed invoked emergency powers as lender of last resort to give Bear Stearns a temporary loan in March and then to agree to take on $30 billion of the company's assets to secure its takeover by JPMorgan Chase & Co.
Some central bankers and former officials have said those actions, and the Fed's opening of direct loans to primary U.S. government bond dealers, created the danger of spurring more reckless lending by providing a backstop.
``Two concerns underpin expectations of regulatory intervention to prevent a failure,'' Paulson said. ``They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so -- and that requires that we reduce the likelihood that it is so.''
The Treasury chief stressed that officials' first task ``clearly'' is ensuring market stability. Analysts see little chance of a regulatory overhaul being enacted by Congress this year, before a new administration takes office in January.
Paulson reiterated that the U.S. economy is in ``a rough period,'' and that home foreclosures will ``remain elevated'' as housing prices keep falling. Housing poses a ``significant downside risk,'' he said.
`Trio of Headwinds'
``The U.S. economy is facing a trio of headwinds: high energy prices, capital markets turmoil, and a continuing housing correction,'' he said. In Europe as well, ``there are signs of a slowdown,'' the Treasury secretary said.
Regulators and legislators are struggling with how to alleviate the yearlong credit crisis that has caused about $400 billion of writedowns and credit losses worldwide.
Paulson said the threshold for invoking emergency authority to limit turmoil ``should be very high, such as a bankruptcy filing'' to reinforce ``discipline'' among investors and dealers.
``For market discipline to be effective, it is imperative that market participants not have the expectation that lending from the Fed, or any other government support, is readily available,'' Paulson said.
Fed officials are debating whether to extend their Primary Dealer Credit Facility, which allows securities firms to borrow from the central bank at the same rate as commercial banks. The Fed said in March the PDCF would last for ``at least'' six months.
Fed, SEC Talks
The Fed and SEC are working on a ``memorandum of understanding'' to share information on investment banks to address issues raised by the PDCF. The SEC has a voluntary agreement with a group of investment banks through which it gets their capital and liquidity positions.
Paulson said that the Bear Stearns episode demonstrated the need for the Fed and SEC to cooperate and that the memorandum of understanding ``should be helpful and inform future decisions as our Congress considers how to modernize and improve our regulatory structure.''
The Senate Banking Committee's top Democrat and Republican last week demanded a halt to implementing any memorandum before Congress can weigh in.
Paulson and Fed Chairman Ben S. Bernanke are scheduled to testify July 10 to the House Financial Services Committee on financial markets and regulation.
House Hearing
Massachusetts Representative Barney Frank, who chairs the panel, said in a statement yesterday that it will explore investment banks' access to Fed loans, proposals to protect the financial system and ``the adequacy of current powers of the Federal Reserve.''
The Treasury chief in today's remarks also reprises his proposal for a broader market supervisor role for the Fed, which he first laid out in his ``blueprint'' for changes in March.
The central bank should expand to become a ``market stability regulator'' and needs the authority to get information from firms, ``whether it is a commercial bank, an investment bank, a hedge fund, or another type of financial institution,'' Paulson said.
No comments:
Post a Comment