The car industry
Pass the plate
If Detroit’s disintegrating carmakers are bailed out, Europe’s will be next in line
IT IS not just in Washington, DC, that a fierce debate is being conducted about whether to provide state aid to the beleaguered car industry. On Tuesday November 18th, just as the bosses of General Motors (GM), Ford and Chrysler were lining up with their begging bowls before the Senate banking committee, the directors of the European Investment Bank, the European Union’s lending arm, were considering whether to give Europe’s carmakers €40 billion ($51 billion) in soft loans. The previous day, the German chancellor, Angela Merkel, had met executives of GM’s European subsidiary, Opel, to discuss guaranteeing a €1 billion liquidity line in the “worst case” of its parent company in America going bankrupt.
Despite the appearance of similarity on both sides of the Atlantic, however, there are big differences. For one thing, the plight of the Detroit Three is much more urgent. GM’s boss, Rick Wagoner, told the senators that the economy faced “catastrophic collapse” if bridging loans were not quickly made available. He gave warning that by the end of the year, GM might not have enough money to pay its bills. Ford’s cash position is stronger—company insiders reckon that it might just be able to scrape through on its own resources—but its chief executive, Alan Mulally, was not on Capitol Hill just for the ride. He fears that if either Chrysler or GM (particularly the latter because it is so much bigger) were to fail, the impact on the parts suppliers on which all three firms depend could bring down Ford as well.
The Detroit Three can be reasonably confident of getting some help—eventually. Next year a sympathetic President Barack Obama, and big Democratic majorities in both houses of the new Congress, should ensure that. But will that be too late? On Thursday the Senate will prepare to vote on a bill to allow funds from the $700-billion package, set up to rescue the financial system, to be channelled to the carmakers. But Republican opposition is strong and President George Bush could veto the bill were it to pass.
The condition of Europe’s carmakers is hardly healthy, but unlike their Detroit counterparts they are still some way from the critical list. According to the latest forecast from J.D. Power, a market-research firm, the western European market will shrink by 7.9% this year, compared with a 16% drop in America. But things are getting grimmer by the day. J.D. Power expects a further 10.5% contraction in Europe in 2009. Renault, which is cutting 6,000 jobs in Europe, thinks the market could shrink by 20%.
But as in America, there is disagreement both within the industry and among politicians about whether special aid is needed and, if so, what form it should take. Already there has been a chorus of dissent over the possibility that Opel might be singled out for help. And if aid is provided, what strings should be attached? The European Commission, which has been fighting a battle with the carmakers over the introduction of tough carbon-dioxide emission rules in 2012, is certain to want some linkage between the granting of soft loans and assurances that the industry will redouble its efforts to produce more fuel-efficient vehicles (an echo of the $25 billion package approved by Congress in September, which has yet to disburse any funds).
The German firms, who make the biggest, fastest cars, and who are therefore having to spend most to reduce their emissions, are in favour of such a subsidy. But the French and Italians, who specialise in producing economical cars, say they are quite capable of complying with the new rules without any help from the taxpayer—and do not see why the Germans should benefit from their own profligacy. They would prefer Europewide “scrapping” incentives to encourage owners of older cars to buy less polluting new ones.
Even within the commission there are differences. “I’d welcome it if everything was done to prevent an important and traditional car producer in Europe from dropping out of the competition for reasons it is not responsible for,” says the industry commissioner, Günter Verheugen. But Neelie Kroes, the competition commissioner, rejects any comparison between the car industry and the financial sector, and has warned member countries against offering their carmakers unfair subsidies.
Much depends on what the Americans decide to do. One option for Europe, assuming the Detroit Three get their money, would be to complain to the World Trade Organisation. But Ford and GM are too important for Europe’s car industry to make that probable. The betting is that Europe’s carmakers will get a helping hand too—even if they do not really need it.
Commentary by Mark Gilbert
Nov. 20 (Bloomberg) -- I sat in the window of a cafe this month in Annapolis, Maryland, a sailing town near Washington, counting parked cars. “Honda, Honda, Nissan, Toyota, Honda, Lexus (made by Toyota), Mazda, and a battered 1970s Cadillac.”
No wonder the U.S. carmakers are in meltdown and begging to be plugged in to the Treasury’s life-support machines.
Don’t be misled, though -- the something that is rotten in the auto industry has nothing to do with the credit crunch, and everything to do with years of mismanagement, shoddy products and bad choices.
Consider the credit-rating histories of General Motors Corp. and Ford Motor Co. For both companies, the rot started all the way back in August 2001, when Standard & Poor’s put the A grades they had enjoyed for a decade on review for downgrade. In October of that year, they each suffered a two-level cut to BBB+ that left them just three moves away from junk status.
So seven years ago, the car companies were already on the slide, after years of their Japanese rivals stealing market share with improved production methods and better reliability. That was well before the words “credit crunch” had become as ubiquitous as “would you like large fries with that?” or “the new Bond film isn’t as good as the previous one.”
80 Percent Loss
Further cuts followed, with S&P finally putting investors out of their misery by dropping Ford and General Motors to junk in May 2005. By then, GM’s $3 billion of 8.375 percent bonds sold two years earlier and repayable in 2033 had already declined by 26 percent; bondholders now are staring at a loss of more than 80 percent of their initial investment.
So when GM Chief Executive Officer Rick Wagoner said this week that allowing U.S. carmakers to fail would trigger a “catastrophic collapse” in the economy, he really should be typing up his own resignation letter. Calls for investment bankers to forgo their bonuses are both understandable and justifiable in the current climate; what about the $14.4 million Wagoner pocketed in total compensation for 2007, according to Bloomberg figures?
Moreover, the dire warnings used to persuade U.S. politicians that they should give the auto industry a blank check similar to the one Treasury Secretary Henry Paulson has signed for the finance guys smack of extortion.
“Such a level of economic devastation would far exceed the government support that our industry needs,” Wagoner said this week. “This is about much more than just Detroit. It’s about saving the U.S. economy.”
Pirates of Detroit
In other words, give us what we want or suffer the consequences. That sure sounds like blackmail to my ears, except even Somali oil-tanker pirates have so far stopped short of trying to pilfer $25 billion from their victims.
So, what to do? Nobody, least of all President-elect Barack Obama, wants to see the 250,000 people who work directly for the big three U.S. automakers tossed on the scrapheap, or the other 4 million workers whose job security is at risk somewhere along the supply chain from the drawing boards of Detroit to the car showrooms of America.
There seems to be a groundswell of support building for the concept of retraining and retooling auto workers away from churning out four-wheeled gas guzzlers to put them instead at the vanguard of the fight against climate change.
“Wouldn’t the benefits be greater if the U.S. government spent $25 billion to $75 billion -- the current dollars proposed to bail out the auto industry -- to train engineers, support infrastructure and work in the much-neglected alternative energy space?” wrote Tom Sowanick, who helps manage $20 billion as chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.
I Spy iCar
New York Times columnist Thomas Friedman suggested earlier this month that Apple Inc. CEO Steve Jobs should be persuaded to sign up for “national service” and run a car company for a year, long enough to invent the iCar.
I think Friedman is on to something. Sure, the iCar would be available in any color as long as it’s white (with a black model to be introduced as soon as all the early adopters have a pearlescent model in the driveway), and the windshield would be scratched to opacity within weeks. It would probably run on fresh air, though, and the packaging would be to die for.
First off, the U.S. government would need to absorb all those legacy pension and health-care costs that the automakers have used as an excuse for years to dodge getting their collective act together. Splitting the welfare issue from the business travails would deliver some much-needed clarity to the true financial position of the carmakers.
Then, turn the entire industry over to people who might make a difference. Give GM to Jobs, let Microsoft Corp. founder Bill Gates run Ford and allow billionaire Warren Buffett to try his hand at Chrysler. In five years, I bet that car counting in Annapolis would deliver a very different result.
Nov. 20 (Bloomberg) -- U.S. lawmakers deadlocked on a plan to bail out the Big Three automakers, leaving General Motors Corp. facing the prospect it could run out of cash before a new Congress can come to the rescue next year.
Democratic congressional leaders disagreed with Republicans and President George W. Bush's administration over how to provide $25 billion in aid to GM, Ford Motor Co. and Chrysler LLC. Only two days remain in a lame-duck session to resurrect a compromise, though Senate Majority Leader Harry Reid said today Congress might return in December to finish its work.
``The desire is we complete all of our actions until we come back on Jan. 6, but that may not be possible,'' the Nevada Democrat said. ``It may be necessary that we come back after Thanksgiving.''
Reid earlier suggested the situation was dire and refused to set aside time today to debate a compromise proposed by Senator Kit Bond, a Missouri Republican. Reid said Bond's plan hasn't been put in writing and the House of Representatives is about to adjourn.
Bond and fellow Republican George Voinovich of Ohio insisted they weren't giving up on their proposal to speed up and broaden access to $25 billion already approved for fuel- efficient vehicle development that was a compromise.
``We've made great progress,'' Bond said. ``We are down to the point now where wording challenges are about the only remaining things to deal with.''
Plunging Shares
GM fell 68 cents, or 24 percent, to $2.11 at 10:11 a.m. in New York Stock Exchange composite trading. The shares plunged 89 percent this year before today. Ford slid 19 cents, or 15 percent, to $1.07.
GM's 8.375 percent bond due in July 2033 fell 3.8 cents to 15 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 55.45 percent.
A Democratic plan to help the automakers with funds from the recently approved $700 billion bank-rescue package stalled in the face of Republican opposition and a Bush veto threat. It may be revived next year after President-elect Barack Obama takes office in January and Democrats install a strengthened majority in both houses.
GM Chief Executive Officer Richard Wagoner said automakers would like action before Obama takes over because a global credit crunch that has slammed sales in the U.S. is spreading to global auto markets.
GM, the biggest U.S. automaker, said Nov. 7 it may run short of the $11 billion minimum cash it needs to pay its bills each month by the end of this year and will fall ``significantly'' short of that level by the middle of next year.
Cash Augmentation
The Detroit automaker burned through $6.9 billion in cash in the third quarter and had $16.2 billion on Sept. 30. Wagoner said yesterday he expects the automaker to slow its cash use to the $3.6 billion a quarter rate of the first half of this year.
``We're continuing to do everything we can to augment our cash position,'' Wagoner said in an interview yesterday after eight hours of testimony split between the U.S. House and Senate over two days.
``We've been stretched to do stuff that we thought was very difficult and painful to do already this year,'' he said. ``People are thinking every day of new ideas.''
Wagoner, Ford CEO Alan Mulally and Chrysler CEO Robert Nardelli left the Capitol after two days of appeals for help were rejected.
The companies are seeking aid as industry-wide sales have plummeted to a 17-year low. GM this month said it lost $4.2 billion in the third quarter and almost $73 billion since the end of 2004.
One Chance for Aid
Senate Republican leader Mitch McConnell of Kentucky urged lawmakers to let automakers shift the previously approved loans intended to promote fuel efficiency for day-to-day operations instead.
``It is the only proposal now being considered that has a chance of actually becoming law,'' he said.
White House spokeswoman Dana Perino endorsed the Bond- Voinovich plan yesterday. ``If the Congress fails to act, the most logical interpretation would be that they don't agree that an additional $25 billion needs to be given to the auto industry,'' she said.
Reid responded that the White House has authority to funnel the financial-rescue money to car companies without congressional action.
``No one should be overly concerned if we are unable to reach agreement,'' Reid said in a statement. ``It will still be up to the White House and the Treasury Department to take the steps that I believe are necessary.''
Environmental Initiatives
``There will be a great deal of resistance in the House'' to redirecting the fuel-efficiency loans without previously approved environmental safeguards, said House Financial Services Chairman Barney Frank, a Massachusetts Democrat.
Wagoner wouldn't rule out shifting the previously approved funds to keep his company afloat. ``It could work,'' he said.
Representatives including Democrats Gary Ackerman of New York and Bradley Sherman of California criticized the auto chiefs for taking private jets to Washington to plead their case.
Jets and Salaries
``Couldn't you all have downgraded to first class?'' Ackerman said. Added Sherman, ``I don't know how I go back to my constituents and say the auto industry has changed.'' The auto chiefs didn't talk about their jet use in response.
Representative Peter Roskam, an Illinois Republican, challenged Wagoner and Mulally to forgo pay for a year, saying he understood Nardelli was agreeable to the idea.
Wagoner said he had ``no position'' on that. Mulally said, ``I think I'm OK where I am.''
The GM CEO got $14.4 million in compensation in 2007, including a salary of $1.56 million. Mulally received $21.7 million for 2007, including $2 million in salary.
Wagoner said he recognizes the government will play a greater role in telling the automakers how to run their business in the future, if aid is approved.
``Certainly at minimum they are going to want to look at your future plans and how are you delivering against those future plans as steward for the taxpayers,'' he said.
``In a certain way, being able to lay out the business issues as we see them, in some sort of setting where confidential data can be shared, I think people would understand our business and maybe that in the end would be helpful.''
The Canadian divisions of all three automakers have asked for loans or loan guarantees from that country's government, the Globe and Mail reported. Chrysler is seeking C$1 billion ($797 million) in aid, the newspaper said, citing people familiar with the discussions.
`Back at the Trough'
U.S. federal aid for the Big Three would remove much of the urgency for tough restructuring decisions, said Representative Michele Bachmann, a Minnesota Republican.
``It's easy to predict that you will be back at the taxpayers' trough in no time at the rate that money is being burned in Detroit,'' she said.
Carmakers are cutting production to cope with declining demand, including a 33 percent reduction in North American output by Ford this quarter. GM said today it's suspending production of cars and trucks in Thailand for a month and cutting 8 percent of the workforce there because of falling demand in Asia.
Wagoner said the trip to Washington taught him that Detroit's plight isn't translating well outside the Midwest.
``What I learned, I think we get out and tell our story pretty well, and then something like this happens and you say `Well geesh' it's like nobody knows what we did,'' Wagoner said in the interview. ``Well, then, it has to start with us. We have to do a better job, a more regular job, of keeping people update, listening to their concerns, trying to respond to them.''
Before calling it quits for the year, the Senate plans to approve a seven-week extension of unemployment insurance benefits that would cost around $6 billion.
Nov. 20 (Bloomberg) -- Treasury yields declined to record lows, with two-year notes dropping below 1 percent for the first time, as global stocks slumped and a deepening recession drove investors to the safest assets.
Yields on two- and five-year notes and 30-year bonds dropped to the least since the Treasury began regular issuance of the securities. Ten-year note yields touched the lowest since 2003 after yesterday’s release of the minutes of last month’s Federal Reserve meeting showed policy makers expect the economy to contract through the middle of 2009 and more interest-rate cuts may be needed to counter deflation.
“Fear is dominating the market place,” said Andrew Richman, who overseas $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal asset management division. “People are seeing their net worth evaporate.”
Investors turned to government debt as recessions in the U.S., Europe and Japan hurt corporate earnings and drove prices of shares, commodities and real estate lower. Stocks declined worldwide, with the MSCI World Index losing 4.6 percent, and the Standard & Poor’s 500 Index falling 1.7 percent to 786.48.
The 10-year yield dropped 17 basis points to 3.16 percent at 10:38 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security due November 2018 rose 1 14/32, or $14.44 per $1,000 face amount, to 105 1/32. The note’s yield touched 3.12 percent, the lowest level since June 2003. The yield on the two-year note fell 9 basis points to 0.97 percent.
Longer Maturities
The 30-year yield fell 19 basis points to 3.72 percent, the lowest level since regular sales started in 1977. Yields on five-year notes declined to 1.92 percent, not seen since 1954, according to data compiled by Bloomberg and the Fed.
Treasuries are also attracting investors on speculation the Fed will cut interest rates next month. Two-year notes are seen as among the most secure assets and are also sensitive to changes in borrowing costs because of their short maturity.
Two-year notes returned 6.5 percent in 2008, compared with 7.5 percent last year, according to indexes compiled by Merrill Lynch & Co. The yield declined from 3.11 percent on June 13, the highest level this year.
Demand for government debt increased as the Fed cut its target rate for overnight lending between banks by 4.25 percentage points in the past 14 months to prop up the economy, the world’s biggest. Reports this month showed retail sales fell the most on record in October and the number of Americans collecting unemployment benefits was the highest in 25 years.
Fed Expectations
Rates on three-month bills were little changed at 0.06 percent. They touched 0.02 percent on Sept. 17, the lowest since the start of World War II.
Some Fed policy makers said they were prepared to cut interest rates further as “more aggressive easing should reduce the odds of a deflationary outcome,” according to minutes of the Oct. 28-29 meeting released yesterday.
Futures on the Chicago Board of Trade show a 62 percent chance the central bank will reduce its 1 percent target rate by 50 basis points at its Dec. 16 meeting. The rest of the bets are for a 75-basis-point reduction.
Fed officials lowered their economic-growth estimates to zero to 0.3 percent for 2008, from 1 percent to 1.6 percent previously, the median forecast of Fed governors and district- bank presidents showed. The predictions for GDP next year ranged from a contraction of 0.2 percent to growth of 1.1 percent. The jobless rate is projected to be 7.1 percent to 7.6 percent.
Derivative Distortion
“Bond yields, we feel, are somewhat distorted by what’s happening in the derivatives market,” said Chris Ahrens, an interest-rate strategist at UBS Securities LLC in Greenwich, Connecticut, one of 17 primary dealers that trade with the Fed.
Derivatives contracts tied to the value of the yen have helped drive down 10- and 30-year interest-rate swap spreads as the Japanese currency rallies against the dollar, Ahrens said. The yen has gained 12 percent since September as investors purchase the currency to repay loans made in Japan in order to unwind investments in higher-yielding assets.
The price to exchange, or swap, floating for fixed-rate payments for 30 years fell below the yield on similar maturity Treasuries by the most ever as dealers hedged against risk related to derivatives, Ahrens said. The yield on the 30-year bond was as much as 51 basis points higher than the 30-year swap rate. The swap rate has remained below the long bond’s yield since Nov. 5.
The gap between 10-year swaps and the 10-year note yield reached as low as 6 basis points, the narrowest since at least 1988, when Bloomberg data began tracking the instruments.
Paulson’s Decision
Yields have hit record lows since Treasury Secretary Henry Paulson said on Nov. 12 he would abandon plans to use the Troubled Asset Relief Program to buy mortgage assets from banks. The London interbank offered rate has spiked 11 basis points, the first gain in 24 days of trading. Before Paulson’s announcement Libor, which banks charge each other for three- month loans in dollars had fallen for 23 straight days.
“Changing the terms of the TARP as suddenly as he did undermined investor confidence,” said Richard Schlanger, a bond fund manager in Boston at Pioneer Investments, which oversees $44 billion. “It’s a frightening situation.”
Investors erased more than $33 trillion from global stock markets this year as the U.S., Europe and Japan slipped into recession.
Longer-maturity bonds, which are more sensitive to inflation expectations, rallied on speculation that the economic slump may trigger deflation, or a prolonged decline in prices. Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, a Labor Department report showed yesterday.
Breakeven Rates
The difference in yield between two-year and 10-year notes narrowed a fifth day to 2.16 percentage points.
Breakeven rates, which show the difference in yields between inflation-linked and nominal bonds, suggest traders are betting the U.S. economy may face deflation over the next two years. The two-year U.S. breakeven rate was minus 4.09 percentage points.
“You have the cloak of a declining inflationary environment,” said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment- banking arm of Canada’s biggest lender. “People are denying it, but we are mirroring the whole Japanese situation and if that’s the case interest rates are going to go a lot lower.”
The difference between the yields on two-year government debt in the U.S. and Japan has narrowed to 41 basis points from 2.33 percentage points at the start of the year. Japanese two- year notes have yielded 0.36 percent on average since 2000.
Nov. 20 (Bloomberg) -- The index of leading U.S. economic indicators fell in October for the third time in four months as stocks and consumer confidence plunged, signaling a deepening recession.
The Conference Board's gauge dropped 0.8 percent, more than forecast, after rising 0.1 percent in September, the New York- based group said today. The index points to the direction of the economy over the next three to six months.
Consumers and companies are cutting back as financial markets remain fragile, job losses mount and housing and manufacturing sink deeper into a slump. President-elect Barack Obama and Democrats in Congress are under pressure to push through another economic stimulus plan and give more aid to automakers.
``The economic contraction appears to be worsening,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The stock markets are plunging, people are retrenching and manufacturing activity is virtually falling off a cliff. The increase in layoffs can only worsen the economic downturn in the near term.''
Philadelphia Fed
Another report showed manufacturing in the Philadelphia region shrank in November at the fastest pace in 18 years. The Federal Reserve Bank of Philadelphia's general economic index was minus 39.3 this month, weaker than forecast and the lowest reading since October 1990. Negative readings signal contraction.
The leading indicators index was forecast to decline 0.6 percent, according to the median of 56 economists in a Bloomberg News survey, after an originally reported gain of 0.3 percent in September. Estimates ranged from declines of 0.2 percent to 1.2 percent.
Fed policy makers ``generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009 and agreed that the downside risks to growth had increased,'' according to minutes of their Oct. 28-29 meeting released yesterday.
Seven of the 10 indicators that make up the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times.
The Conference Board estimates the remaining three -- new orders for consumer goods, bookings for capital goods and the money supply adjusted for inflation.
Plunging Stocks
Six of the 10 indicators in today's report dragged the index down, led by plunging stock prices, which subtracted 0.89 percentage point. The Standard & Poor's 500 index dropped 20 percent last month from September.
First-time claims for jobless benefits subtracted 0.02 percentage point from the leading index. Earlier today, a Labor Department report showed initial jobless claims last week surged to 542,000, the highest level since 1992, and the total number of people staying on benefit rolls in the prior week rose to the most since December 1982.
The confidence component took away 0.29 point. The Reuters/University of Michigan's index of consumer confidence fell in October by the most on record, and the gauge of expectations for six months from now, which economists consider a proxy for future spending, also declined.
Homebuilding Downturn
Housing subtracted 0.35 percentage point. The pace of housing starts and building permits, a sign of future construction, both plunged to record lows in October, indicating the homebuilding downturn may extend into a fourth year.
Lowe's Cos., the second-largest home-improvement retailer, reduced its full-year profit forecast following a slowdown in remodeling projects.
``We expect continued, broad-based external pressures on our industry,'' Chief Executive Officer Robert Niblock said in a Nov. 17 statement. ``We saw a decline in sales trends in the last week of October that continued into November as the overall economic outlook deteriorated.''
Supplier deliveries and bookings for capital equipment also subtracted from the index.
Money supply adjusted for inflation, which has the biggest weighting in the index, added 0.71 percentage point. The contribution to the index from money supply is the largest in seven years, the Conference Board said. The Fed and Treasury have injected billions of dollars into the financial system to unclog credit.
New orders for consumer goods and interest-rate spreads also added to the index.
The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent, after decreasing 0.7 percent the prior month. The index tracks payrolls, incomes, sales and production.
The gauge of lagging indicators rose 0.1 percent following a 0.3 percent gain in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.
Obama 'to choose security chief'
 Arizona Governor Janet Napolitano campaigned for Mr Obama |
US President-elect Barack Obama is set to fill key roles in homeland security, commerce and foreign policy as his new team takes shape, US media reports say.
Arizona Governor Janet Napolitano is tipped to be homeland security chief, Democratic sources said.
Penny Pritzker, who chaired the finance team for Mr Obama's presidential campaign, could be commerce secretary.
And Bill Clinton has reportedly agreed to vetting of his affairs ahead of his wife becoming secretary of state.
Mr Obama's transition team has confirmed a number of other key advisers and top administration posts, while sources have been discussing the unconfirmed appointments.
Hillary Clinton, Mr Obama's defeated rival for the Democratic presidential nomination, is reported to be considering the secretary of state job, sources have said.
According to Reuters, former President Clinton has offered to allow an ethics review of future business and charitable activities to eliminate any conflict of interest if his wife accepts the senior position.
"He is definitely helping. He is not an obstacle at all," a Democrat source said.
Financial experience
Ms Napolitano was an early supporter and campaigner for Mr Obama's presidential bid.
She would head the homeland security department, created after the terror attacks in the US on 11 September, 2001.
Ms Pritzker is a billionaire and part of the Chicago family which founded the Hyatt hotel chain.
In other moves, Senior Democrat Tom Daschle is expected to be formally named as Health and Human Services Secretary, overseeing proposed reforms to the US healthcare system.
And Eric Holder is reported to be Mr Obama's choice to serve as attorney-general.
Key posts that were announced by Mr Obama's transition team on Wednesday include David Axelrod as senior adviser to the president, and Lisa Brown as staff secretary.Recession fears hit stock markets
 Concerns are increasing over the scale of the slowdown |
World shares have fallen amid concerns that the world economy will enter a protracted downturn.
The US Dow Jones index Industrial Average fell 2.3% in early trade while the wider S&P 500 Index shed 3%.
London's FTSE 100, the Paris-based Cac and Frankfurt's Dax were all down more than 3% in afternoon trade. Earlier, Asian shares had fallen sharply.
Concerns over a sharp slowdown in factory activity in the US added to concerns over the economy.
An official from the Philadelphia Federal Reserve said factory activity in the US Mid-Atlantic region had fallen to its lowest level in 18 years in November, underlining the scale of the contraction.
 |  People are looking for any kind of positive and there are just no positives out there  Miles Remington, BNP Paribas Securities |
On Wednesday, the Dow Jones index had fallen 5% to below the 8,000 mark after the US central bank cut its economic growth forecasts for 2009.
In Asia, Japan's Nikkei index ended 6.8% lower and Hong Kong's main index fell more than 4%.
Mounting problems
The deepening global recession is being felt in a number of ways:
- Mining shares have been hit hard on fears that demand for steel and other raw materials will be hit as the economy slows. Steel giant Arcelor-Mittal lost 8% and Vedanta Resources lost 8.5%
- Oil shares were among the main fallers with BP, Royal Dutch Shell and Total all at least 5% lower as sweet crude oil fell below $50 a barrel.
- Japan's exports to Asia dropped in October for the first time in six years
- Job losses are mounting worldwide, with aerospace firm Rolls Royce, AstraZeneca and French carmaker Peugeot Citroen announcing a total of 6,100 cuts
- China has warned its employment outlook is "grim", amid worries that economic problems could lead to social unrest
- Switzerland has cut its key interest rate to 1% in a surprise move.
- The IMF has approved a $2.1bn (£1.4bn) loan for Iceland. Turkey is set to agree to a precautionary stand-by deal with the IMF soon
- Retail sales fell and public sector borrowing rose in the UK.
Depressed outlook
The BBC's Duncan Bartlett in Tokyo says several East Asian countries - including Japan, Singapore and Hong Kong - are already in recession, and the thought that the US may be about to join them has been enough to send shares tumbling across the region.
Bad news from the US has worried Japanese firms like Toyota and Nintendo which usually depend on American consumers for much of their profit, our correspondent adds.
"We've gone past the poor sentiment stage," Miles Remington, head of Asian sales trading at BNP Paribas Securities in Hong Kong, told the Associated Press news agency.
"People are looking for any kind of positive and there are just no positives out there. Everyone seems to be united in the depressed global outlook. Whether it's commodities or equities, everything seems to be on a downturn."
On Wednesday, the US Federal Reserve said the country's gross domestic product - the value of all goods and services - could be flat or grow only marginally this year, and might shrink in 2009.
It said positive economic growth was only likely to return in 2010 and predicted further interest rate cuts might be necessary.
Jobarama: Obama's "Investment"
With all of the talk of how charismatic Barack Obama is, or of his oratory ability—and especially given his recent presidential victory—it is time to engage in a deeper economic critique of Obama's actual policies. Once we see the true effects of his policies and the incentives they create, we will see that his leadership skills and abilities make him more of a threat to freedom than if he were less articulate.
In this article we will start with a small part of Obama's program to "create" jobs, with the aim of tackling poverty. We find the following claim on Obama's website:
Barack Obama will expand access to jobs. Obama and Biden will invest $1 billion over five years in transitional jobs and career pathway programs that implement proven methods of helping low-income Americans succeed in the workforce.
First, there is the use of the word "investment"—in true government Orwellian fashion—as a euphemism for government spending. Investment signifies an accumulation of savings through lower present consumption, which will then be used to achieve (potential) profitable returns in the future. Obama does not have $1 billion of his own money (even including campaign contributions) that he will be investing. Isn't it bizarre how the more money politicians say they are "investing," the more excited people get? Do people not realize that it is their money politicians are referring to? It is as if a thief approached you and, instead of demanding half of your money, said, "Since I really do care about you and your future, give me 90% of your money." Wouldn't it be better if Obama could say, "We are going to invest $10 and creates thousands of new jobs"? Talk about a return on investment.
Second, there is no non-arbitrary way to determine whether a government program makes a profit or a loss. Indeed, government typically does not "talk" in those terms. If a private company is making losses for whatever reason, it must change and innovate in order to make a profit or it will continually make losses and go out of business. But with the government, if a program is labeled as failing, it receives more money—just think of FEMA, the current bank crisis, or, no doubt, Obama's future jobs program.
In contrast, when private companies fail it is not a proof of market failure; on the contrary, it is proof the market is working. It is eliminating failure; in sharp contrast, the government promotes failure: if you want more of something, subsidize it. Government's solution to government failure is consistent with Mises's theory of intervention: government meddling seems to require more government involvement (and more money). And there is nothing as permanent as a temporary government program.
Continuing, we read the following from Obama's program:
Obama and Biden will create a transitional jobs program to place people with extreme difficulties getting and keeping good jobs into temporary, subsidized wage-paying jobs to gain necessary job skills before applying for unsubsidized jobs in the private and public sectors.
Those who are being coerced into subsidizing these jobs should expect more and continued taxation. Obama claims these jobs will be provided by both the private and public sectors. We can assume that politicians want to ensure and, more likely, reassure their voters, that this program is working. After all, it's a $1 billion investment, right? Well, if private companies aren't hiring these workers, obviously, what will probably happen will be more government (public) jobs. As for incentives, if someone is guaranteed a "subsidized wage-paying job," albeit a government one, then they will be less likely to search for an unsubsidized, less-secure job. The obvious effect of this would be fewer private-sector, productive, wealth-creating jobs, and more public-sector, unproductive, waste-creating jobs.
Government investment through taxation means taxpayers must lower their current levels of consumption and investment. As Murray Rothbard points out,
When capital investment takes place in the free market, it deprives no one of consumption goods; for those save who voluntarily choose investment over some present consumption. No one is required to sacrifice present consumption who does not wish to do so. As a result, the standard of living of everyone rises continually and smoothly as investment increases. But a Soviet or other system of compulsory investment lowers the standard of living of almost everyone, certainly in the near future.
Standards of living will decrease as there will be a shift from private production and exchange to political demagoguery, as well as taxes levied on the more efficient to subsidize the less efficient, but privileged, group. As with most government programs, this creates a caste conflict where one man or group benefits at the expense of another man or group. Thus we see government as the true originator of conflict in a society; whereas the market creates mutual harmony, the government engages in exploitation to achieve its ends.
While Austrian economists do not necessarily promote economic growth, it is recognized that true growth can only come through an increase in savings and investment by individuals in the free market, determined by how much they want to consume in the future compared to the present. On the other hand, government "investment" leads to either malinvestment or does not turn out to be an investment at all. An increase in government spending leads to an increase in (government) consumption and a decrease in (private) saving and investment. Thus we see Obama's jobs program will distort the market by shifting workers and resources from the private sector to the public sector, toward government ends rather than consumers'.
![[AD: Man, Economy & State with Power and Market by Rothbard]](http://www.mises.org/store/Assets/ProductImages/B325.jpg)
Jobs cannot be created by government fiat. While it is true that neither governments nor entrepreneurs have any way of perfectly forecasting the innovations that will take place in the future, there is, however, one enormous and fundamental difference: entrepreneurs are putting themselves at risk—not taxpayers. An entrepreneur can only originate funds from consumers and investors, i.e., individuals with an interest in the entrepreneur's success who anticipate a profit. Government, however, can extract funds by taxation and obtain them seemingly at whim. Therefore, the profit-and-loss test functions as a market mechanism to properly allocate funds. Without the requirement of obtaining goods through voluntary exchange, government can neither calculate nor allocate funds rationally.
Without a free price system and profit-and-loss criteria, says Rothbard,
[T]he government can only blunder along, blindly "investing" without being able to invest properly in the right fields, the right products, or the right places. A beautiful subway will be built, but no wheels will be available for the trains; a giant dam, but no copper for transmission lines, etc. These sudden surpluses and shortages, so characteristic of government planning, are the result of massive malinvestment by the government.
Obama's jobs program will lower the standard of living of nearly everyone in the near future. The solution to any of Obama's policies would be to eliminate all current and future government "investments."
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