A short list
The world's best banks
A short list
As the dust starts to settle, which banks deserve the most plaudits?
TRYING to work out which banks are the world’s best is a bit like awarding the prize for prettiest war-torn village. It is a title that carries little kudos. It is also likely to prompt further shelling. Winners of industry awards in the past three years include Ken Lewis, the chief executive of Bank of America, for banker of the year (2008); Société Générale for its risk management; and Angelo Mozilo of Countrywide, a failed mortgage lender, for a “lifetime of achievement”.
Still, the question is becoming more pertinent. After months of indiscriminate fear, widespread losses and government hand-holding, the banking industry is gradually stabilising. Money markets are steadily calming. American banks that got a clean bill of health in this month’s stress tests are queuing up to repay government money. A first wave of escapees is likely to include Goldman Sachs, Morgan Stanley and JPMorgan Chase. Those banks that emerge from this crisis with reputations and franchises strengthened will find it increasingly easy to raise funds, win clients, attract employees and buy assets.
Plenty of institutions have come through the crisis relatively unscathed. The Chinese banks now dominate rankings by market capitalisation. Standard Chartered, an emerging-markets lender, seems to be steering a deft course through the downturn in the developing world. Rabobank, a wonderfully dull co-operative bank in the Netherlands, is the only bank that can still boast a AAA rating from Standard & Poor’s. Bank of New York Mellon, a large custodian, has won lots of new business from belatedly risk-averse clients. But to win the shiniest medals, you need to have come under fire. In the heat of battle, which banks have come off best?
Working out the answer is trickier than it looks. Independence from the government is one marker of success, yet America’s largest banks were given little choice but to take government capital in October. In Europe some avoided state cash by treating existing shareholders badly: witness the money that Barclays hurriedly raised from Middle Eastern investors last year. And lowish credit-default-swap spreads on banks such as Deutsche Bank and Credit Suisse partly reflect the assurance of government help if needed.
Share prices offer another perspective. Every bank investor has been hammered in the past two years, of course, but some have done much better than others. Investors in Citigroup and Royal Bank of Scotland have been all but wiped out. Even the best performing big banks have lost a third of their value in that period. Over a longer time frame, from the start of the bubble to the present, only a handful of the big firms have delivered capital gains for their investors. They include Goldman Sachs, Credit Suisse, BNP Paribas of France and Banco Santander of Spain.
But share prices are also imperfect gauges of bank performance. During the boom investors rewarded growth, whether it was sustainable or not. Banks that avoided the stampede into credit in the go-go years grumble, with some justice, that they were punished for their conservatism. Continuing volatility in share prices partly reflects deep uncertainty over banks’ future earnings power.
The league table of industry write-downs and credit losses is another indicator. There is red ink everywhere but some have spilled much more than expected. HSBC has lost $42.2 billion to date, most of it thanks to its disastrous foray into America’s subprime-mortgage market. The bank is otherwise well run, with a conservative approach to funding that has served it well, but it has lost more to date than the likes of Royal Bank of Scotland, now largely in the hands of the state, and JPMorgan Chase, which has far more exposure to both America and investment banking. That is hard to forgive.
Success can also be judged by how well banks have positioned themselves for the future. Just surviving has been smart. The likes of Deutsche and Credit Suisse have not needed to do huge deals to produce bumper earnings in the first quarter. But many banks have splashed out during the crisis, with strikingly varied results. Bank of America’s purchase of Merrill Lynch and Lloyds TSB’s takeover of HBOS have been horror stories. Wells Fargo has done better with its purchase of Wachovia, but decent longer-term prospects cannot obscure the fact that a generous stress-test process still required it to raise more capital. BNP’s tortuous capture of Fortis gives it the euro area’s biggest deposit-taking franchise. But the dealmaking baubles go to Barclays for its cut-price acquisition of Lehman’s North American business; to JPMorgan Chase for its swoops on Bear Stearns and Washington Mutual; and to Santander for emerging from the ABN AMRO transaction, which killed off RBS and Fortis, with a big presence in Brazil at a fair price.
However the pack is shuffled, a few names keep resurfacing—in America, Goldman Sachs and JPMorgan Chase; and in Europe, Credit Suisse, Deutsche, BNP, Barclays and Santander. They can be whittled down further. In Europe, concerns over what lies on the balance-sheets of Deutsche and Barclays are ebbing but are not gone. The British bank’s willingness to consider a sale of BGI, its asset-management arm, suggests worries over capital. Both banks still have lots of legacy assets, many of them tucked in the banking book.
Santander should rightfully take its bow alongside its regulators, who closed off the capital benefits of building up big off-balance-sheet positions and required Spanish banks to put aside provisions during the upswing. BNP has played its hand very well, but its business mix (a stable home market and a focus on equity derivatives) helped massively by keeping it away from the worst blow-ups.
In America, Goldman still has legions of admirers. It has posted losses of less than $8 billion to date, a performance not nearly as bad as those of its direct peers. Its focus on risk management is a template for others to follow. But its renewed swagger should not conceal the fact that it needed to convert into a bank-holding company in order to survive the market storm—nor the questions that hang over its future earnings in a re-regulated industry.
That leaves Credit Suisse and JPMorgan Chase to take the grand prizes. Credit Suisse has had its share of mishaps during the crisis but it was quick to scale down its balance-sheet, has plotted a credible strategy for its investment bank and pulled well ahead of UBS, its main rival in wealth management. As for JPMorgan Chase, it has kept a tight rein on risk, managed capital well and acquired sensibly. None of this is much comfort for weary Swiss and American taxpayers, of course. Well-run or not, both banks present the problem of being far too important to fail. And that’s to say nothing of the curse of awards.
Seeking closure
American national security
Seeking closure
Barack Obama and Dick Cheney disagree about how best to ensure America's national security
THE contrast was stark: on the one hand Barack Obama, young, idealistic, wet-behind the ears, and on the other Dick Cheney, the former vice-president and the voice of experience, in his best growling form. Both gave speeches on Thursday May 21st: Mr Obama at the National Archives, home of the American constitution, and Mr Cheney at the American Enterprise Institute, the favourite nest of the now-rather-quiet neoconservatives. Mr Obama's voice boomed as it echoed around the walls that house America's revered founding documents, a wheezy Mr Cheney sipped from a water bottle.
Between them, both men represent the two poles of the national-security debate that is raging in Washington. Mr Obama has pledged to shut the prison camp at Guantánamo Bay, in Cuba, by January 2010, but even his own party disagrees with him. Democrats in Congress have rebelled and removed money for closing the prison camp, and possibly building another, from war-spending bills that are going through Congress. They will not be happy with the president’s proposal until he produces a thought-out plan that can convince them that wild-eyed jihadists are not about to be released into their neighbourhoods. Mr Obama made his speech to try to persuade them that he does, indeed, have such a plan.
Having admitted that the camp was “quite simply, a mess”, Mr Obama went through the categories of prisoners and how he intended to deal with them. The most dangerous of the 240 detainees would be sent to “super-max” federal prisons—from which, he reminded his audience, no one has ever escaped. Their trials would be held in federal court, where terrorists have already been tried and sentenced. Military commissions were “appropriate” for those who had violated the laws of war, and he had not changed tack on them; he had always approved of them, he said, in a reformed shape. Detainees who were suitable for transfer abroad would be shifted there (though, as Mr Cheney pointed out, other countries are not lining up to take them). Those who had been ordered released would be released. As for those who could not be prosecuted but were still a threat, he had begun to “reshape” standards and construct a “legitimate legal framework” to deal with them. Details were lacking.
The great bulk of Mr Obama’s lawyerly speech, however—which repeated well-worn themes from his campaign and seemed unnecessarily lengthy—was devoted to the theme of principles. Unless America abided by its fundamental values, its people would never truly be safe. Guantánamo had “set back our moral authority”, and had become instead “a rallying cry for our enemies”. In the same way, “enhanced interrogation techniques”—as both he and Mr Cheney fastidiously referred to torture—had not advanced America’s principles, but undermined them. That was why he had released the Bush administration’s torture memorandums, to show the world what America was no longer prepared to do. Ending water-boarding (simulated drowning) and closing Guantánamo were further steps down the path of legality and morality.
Fine, unexceptionable words, delivered with the usual eloquence. But Mr Obama looked like a man whose closest brush with terror had been watching “Independence Day”. Mr Cheney, by contrast, had been there. He recalled the moment on September 11th 2001 when he had been bundled from his White House office into the presidential bunker. It had not made him a different man, he said, but it had focused all his thoughts on the safety of the nation. Another attack might come at any time. So, mindful of that, the Bush administration had invoked Article two of the constitution: “all necessary and appropriate force” could be used to protect the American people. Mr Cheney, too, can bring on the Founding Fathers when he needs to.
Included in that appropriate force, Mr Cheney continued, were wiretapping and the extraction of information from terrorist suspects. It was “lawful, skilful” work, he said. The liberals’ bête noire, water-boarding, had been used on just three notable terrorists, including Kahlid Sheikh Mohammed, the self-confessed mastermind behind the September 11th plot and beheading of a journalist, Daniel Pearl, who, when captured, said he wanted to speak to his lawyer in New York. The interrogation techniques had been reviewed by lawyers, and the line between toughness and torture carefully followed. To reveal these techniques by releasing the memos had done a “serious injustice” to the officers concerned. In fact, rasped the old bulldog, Mr Obama’s people had whipped up “feigned outrage based on a false narrative”.
The Obama administration had released redacted versions of classified memos that revealed what had been done to extract information, but was silent on the usefulness of that information and the possible atrocities that had been averted. And as for the plan to close Guantánamo, that had been done without proper deliberation; the president might find, “on reflection”, that it was a bad idea to let hardened terrorists go. Mr Cheney was on a roll.
Time still remains for Congress to add Guantánamo funds to the spending bill, if it wants to. The president’s moral argument remains unimpeachable. But his vague and virtuous hopefulness rang a little hollow beside the straight talk of a man who lived through the worst terrorist attack in American history, and did what seemed justified—to some senior Democrats, as well as Republicans—at the time.
Leading Index Gains as Recession Eases
May 21 (Bloomberg) -- The index of U.S. leading economic indicators rose more than forecast and a manufacturing gauge improved in signs the deepest recession in five decades could end later this year.
The Conference Board’s leading gauge increased 1 percent in April, the biggest gain since November 2005, the New York-based group said today. The index points to the direction of the economy over the next three to six months. A separate report showed manufacturing in the Philadelphia area shrank in May at the slowest pace in eight months.
A recent rebound in stock prices and improving consumer confidence are among components of the leading index that are stoking speculation the economy will begin to grow again in the next six months. Still, with unemployment at a 25-year high and projected to keep climbing into 2010, and lenders restricting credit, the recovery may be muted.
“This recession is losing its bite,” said Tim Quinlan, an economist at Wachovia Corp. in Charlotte, North Carolina, who accurately forecast the leading index. “It’ll be a gradual, slow recovery. We’ve got an awful job market and factories are still shrinking, though at a slower pace.”
Stocks and Treasuries fell after the reports. The Standard & Poor’s 500 Index closed down 1.7 percent at 888.33 in New York trading. Yields on benchmark 10-year notes rose to 3.37 percent at 4:21 p.m. in New York from 3.19 percent late yesterday.
Recession Easing
For the first time since the recession started in December 2007, the change in the leading index over the last six months, on an annualized basis, surpassed the year-over-year measure as both improved. That also happened before the end of the previous two recessions.
The factory industry’s contraction in the Philadelphia region slowed as shipments and employment improved, the Federal Reserve Bank of Philadelphia said in its report. Meanwhile, more Americans than forecast filed claims for unemployment insurance last week, and the total number of workers receiving benefits rose to a record, signs the job market continues to weaken.
The leading index was forecast to rise 0.8 percent, according to the median of 57 economists in a Bloomberg News survey, after an originally reported drop of 0.3 percent in March. Estimates ranged from a decline of 0.2 percent to a gain of 1.4 percent.
Seven of the 10 indicators in today’s report increased, with the biggest boost provided by the Standard & Poor’s index, which gained 12 percent in April from the prior month’s average.
Consumer Sentiment
Another contribution came from the Reuters/University of Michigan index of consumer expectations, a proxy for future spending, which rose in April by the most in more than two years. A preliminary report showed the gauge also rising in May.
Seven of the 10 indicators for 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 Philadelphia Fed’s general economic index climbed to minus 22.6 this month from minus 24.4 in April, the bank said today. Negative numbers signal contraction.
While the manufacturing slump is stabilizing after companies reduced inventories in the first quarter at the fastest pace on record, the global downturn will keep paring demand for American-made goods. Production cutbacks at General Motors Corp. and Chrysler LLC will ripple through the auto industry, meaning the factory slowdown and soft labor market may persist for months to come.
Slower Contraction
“The economy is contracting and manufacturing is contracting, it’s just contracting at a slower pace,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. Ricchiuto forecast the index would be minus 22.
Initial jobless claims fell by 12,000 to 631,000 in the week ended May 16, from a revised 643,000 the prior week that was higher than initially estimated, the Labor Department said today in Washington. The total number of people collecting benefits rose to 6.66 million, a record reading for a 16th straight week, and a sign companies are still not hiring.
Job losses are likely to continue after Chrysler filed for bankruptcy and because General Motors may follow suit and terminate 1,100 U.S. dealers.
Still, in a statement following their April meeting, Fed policy makers cited improved financial conditions, stronger business and household sentiment, and expectations of an increase in industrial production to replace inventories, as reasons why the pace of contraction will probably ease.
Fed Projections
Policy makers projected the economic slump this year would be deeper than they forecast in January and estimated a slower rebound next year, according to meeting minutes issued yesterday. Some officials said the central bank may need to boost asset purchases to further lower borrowing costs and secure a stronger recovery.
Some companies are gaining confidence any further decline in demand will not be as dramatic. LSI Corp. Chief Executive Officer Abhi Talwalkar said calling the bottom now would be “too bold of a statement,” even as sales in the chip industry were improving.
Still, “I do believe we won’t experience another freefall like we did in the last quarter and a half,” Talwalkar said in a May 18 interview.
: Stocks, Dollar, Treasuries Fall; Gold Rises
May 21 (Bloomberg) -- Stocks and Treasuries fell, and the dollar dropped to a four-month low on speculation the U.S. government’s credit worthiness is deteriorating.
U.S. stocks declined for a third day, extending a global slump, after jobless claims topped economists’ forecasts and Standard & Poor’s said the U.K. may lose its AAA credit rating.
“The markets are beginning to anticipate the possibility of” a downgrade to the U.S.’s top AAA credit rating, and it will “eventually” be lost, said Bill Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, in a Bloomberg Television interview. “It’s certainly nothing that’s going to happen overnight.”
The S&P 500, which has rebounded 31 percent from a 12-year low on March 9, slid 1.7 percent to 888.33 at 4:07 p.m. in New York as nine of 10 industry groups declined. The Dow Jones Industrial Average dropped 129.91 points, or 1.5 percent, to 8,292.13. Europe’s Stoxx 600 Index tumbled 2 percent, while the MSCI Asia Pacific Index lost 0.5 percent.
Initial jobless claims fell by 12,000 to 631,000 in the week ended May 16 from a revised 643,000 the prior week that was higher than initially estimated, the Labor Department said in Washington. Economists surveyed by Bloomberg had forecast claims would drop to 625,000, according to the median of 42 estimates. The total number of workers receiving benefits rose to a record, a sign that the job market continues to weaken even as the economic slump eases.
Alcoa, Schlumberger
Alcoa Inc., Schlumberger Ltd. and Deere & Co. slid at least 4.1 percent on concern a lingering recession will reduce demand for materials, energy and machinery. Regions Financial Corp. tumbled 16 percent after selling shares at a discount to boost capital. The U.K.’s FTSE 100 Index plunged 2.8 percent and gilts slid after S&P lowered its outlook on Britain to “negative” from “stable” as government finances deteriorate.
The dollar declined to the lowest level against the euro since January and dropped versus the yen as an increase in Treasury yields and gold prices indicated inflation may accelerate while the U.S. budget deficit widens.
The spread between yields on 10-year notes and Treasury Inflation Protected Securities, reflecting the outlook among traders for consumer prices, reached 1.73 percentage points, the highest level since September. Sterling erased its decline versus the dollar on speculation a credit downgrade from Standard & Poor’s wasn’t imminent and two other rating companies affirmed the U.K.’s “stable” outlook.
Dollar Slides
The dollar slid 0.9 percent to $1.3901 per euro at 4:02 p.m. in New York, from $1.3780 yesterday. It touched $1.3923, the weakest level since Jan. 5. The dollar fell 0.6 percent to 94.31 yen from 94.88 and reached 93.97, the lowest since March 19. The euro increased 0.3 percent to 131.93 yen from 130.77.
Treasuries dropped after the Federal Reserve bought a smaller percentage of debt than some expected at today’s purchase operation and traders shifted focus to the three note sales next week.
Yields on 10-year notes rose the most since May 7 as the Treasury announced it would auction $101 billion in two-, five- and seven-year notes next week. The central bank bought $7.398 billion, or 16 percent, of the $45.694 billion in U.S. debt due in 2013 to 2016 offered by dealers for consideration. A gauge of inflation reached the highest level since September.
The yield on the 10-year note rose 15 basis points, or 0.15 percentage point, to 3.35 percent at 2:50 p.m. in New York, according to BGCantor Market Data. The 3.125 percent security due May 2019 fell 1 7/32, or $2.19 per $1,000 face amount, to 98 3/32.
Treasury Spread
The difference between two- and 10-year Treasuries rose 0.15 percentage point to 2.50 percentage points today, the steepest the so-called yield curve has been since Nov. 14.
Gold rose to the highest price since March as the slump in global equity markets increased the appeal of precious metals as an alternative investment. Silver touched the highest since February.
Gold futures for June delivery gained $13.80, or 1.5 percent, to $951.20 an ounce on the New York Mercantile Exchange’s Comex division. Earlier, the price reached $951.80, the highest for a most-active contract since March 23. Bullion for immediate delivery in London jumped $16.19, or 1.7 percent, to $954.84 at 7:23 p.m.
Silver futures for July delivery climbed 16.5 cents, or 1.2 percent, to $14.445 an ounce in New York, after earlier touching $14.51, the highest since Feb. 24. The metal surged 28 percent this year, while gold is up 7.6 percent.
Oil Falls
Crude oil dropped from a six-month high after the Federal Reserve cut its forecast for the economy of the U.S., the world’s biggest energy-consuming country.
U.S. stocks erased gains in the final hour of trading yesterday after minutes from the Federal Reserve’s April meeting predicted a deeper recession.
Minutes of the Fed’s Open Market Committee meeting last month showed that policy makers see “significant downside risks” to the economic outlook. The price decrease accelerated after U.S. jobless claims topped forecasts. Fuel demand in the past four weeks fell 7.6 percent from a year earlier, the Energy Department said yesterday.
Crude oil for July delivery declined 99 cents, or 1.6 percent, to settle at $61.05 a barrel at 2:42 p.m. on the New York Mercantile Exchange, the first drop this week. Prices are up 37 percent this year.
China's Rocket to Modernity
China's Rocket to Modernity
Why "socialism with Chinese characteristics" looks a lot like capitalism
Steve ChapmanSHANGHAI—You know those time-lapse videos of sunflowers sprouting, zipping straight up, and bursting into bloom in the space of a few seconds? While flipping the TV channels in my hotel room, I saw a Chinese-language ad featuring a new variation: an entire city of skyscrapers popping out of the ground and rising heavenward at a miraculous speed.
Maybe that ad was created with modern technology. Or maybe it was just a real-time video of what has happened here in Shanghai. It has transformed itself from a decaying industrial city to a gleaming, futuristic metropolis in the historical equivalent of the blink of an eye.
The gaudiest results of the metamorphosis lie in the area east of the Huangpu River. That area, known as Pudong, is the home of the Shanghai Stock Exchange, a magnetic levitation train that goes 250 mph, and, a year from now, Expo 2010—what we used to call a world's fair. Its annual economic output of $38 billion surpasses not only that of most cities but most countries. Yet fewer than 20 years ago, it was a sleepy farm region dotted with rice paddies, offering a lovely home for frogs.
Given its proximity to one of China's biggest cities, what has happened may sound natural and inevitable in retrospect. It wasn't. As long ago as the 1950s, I'm told, Shanghai's first communist mayor, Chen Yi, used to lament that such nice real estate couldn't be developed because it was on the wrong side of the river.
What kept the area backward was the economic system he served: communism. What freed its potential was removing the shackles imposed when Mao Tse-tung and his party gained power in 1949.
Since its inception, the Chinese government has carried out some gigantic economic experiments, most of them catastrophic. In the 1950s, Mao launched a crash program in industrialization that devastated the economy and caused some 15 million people to starve to death.
In the 1960s, he initiated the Cultural Revolution, which encouraged violent rampages by young ideological fanatics and banished anyone with an education, above-average skills, or managerial experience into the countryside to shovel manure. Results: more economic destruction and millions more dead.
But in 1979, the government decided to try a different approach: creating special zones where normal markets would be permitted to operate. They called it "socialism with Chinese characteristics," but it looked an awful lot like capitalism. The one in Pudong was created in 1990.
This time, disaster failed to ensue. On the contrary, the broad reversal succeeded beyond Ayn Rand's wildest dreams.
In the ensuing three decades, the Chinese economy has tripled in size—and then tripled again. The World Bank says that in 1981, 65 percent of Chinese were poor. Today the figure is 4 percent.
In less than 30 years, China's economic miracle has raised half a billion people—one out of every 10 people on the planet—out of poverty. Nothing in human history comes close to that achievement.
This year, like every other country, China is feeling the effects of the global recession. So its economy will probably expand by only 6 or 7 percent this year—which would represent eye-popping growth almost anywhere else.
Economic progress, of course, has side effects, and lately those have gotten China plenty of attention—for producing clouds of greenhouse-gas emissions, putting pressure on oil supplies, exporting like mad, and becoming the U.S. government's biggest creditor. China as an economic powerhouse gives some Westerners nightmares.
But next to mass chaos, poverty, and famine, those problems look pretty manageable, if not mythical. And it would be the height of perversity to conclude that the rest of the world suffers because 1.3 billion Chinese are now free to make constructive use of their energy and talent.
Not all of them have seen the benefits of that opportunity. But it is safe to bet that few of them would trade the economic experiment going on today for the harebrained exercises that preceded it.
Over the last few decades, China has demonstrated definitively how to generate either want or wealth. Zhang Min, a senior official of the Chinese People's Institute of Foreign Affairs, worked Pudong's rice fields as a boy and marvels at what it has become.
What accounts for the change, I ask. He recalls what was said by a Chinese leader: "Same earth. Same sky. Same people. Different policy."
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Negative Interest Rates
Why Not Negative Interest Rates?
John Makin’s April Economic Outlook observed that with the theoretically right monetary policy for present economic circumstances, the fed funds rate would be significantly negative. However, we run up against the famous “zero bound” thesis for interest rates—that it is impossible for them to be below zero.
This is frequently stated, but is it true? Why could we not have negative nominal interest rates to combat a potential deflation? This natural question arises and gets debated from time to time over the years among financial and monetary thinkers. In recent weeks, Greg Mankiw (“It May Be Time for the Fed to Go Negative”) and Willem Buiter (“Negative Interest Rates: When Are They Coming to a Central Bank Near You?”) have raised it again. Says Buiter, “I agree with Greg Mankiw that it is time for central banks to stop pretending that zero is the floor for nominal interest rates.”
In fact, there are some historical examples of negative interest rates.
“From early August to mid-November of 2003, negative interest rates occurred on certain U.S. Treasury repurchase agreements,” according to economists Michael Fleming and Kenneth Garbade. “This episode refutes the popular assumption that interest rates cannot go below zero,” they say.
Daniel Thornton reported in 1999 in a St. Louis Federal Reserve note that “several foreign-owned banks in Japan have paid negative nominal interest rates on yen deposits.”
One of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40.
In 1972, the Swiss central bank imposed negative interest rates on Swiss franc deposits by foreigners. This was to reduce the flow of money into Swiss francs, which was driving up the foreign exchange value of the currency against the central bank’s desires. The charge was up to 10 percent per quarter, or 40 percent per annum—negative interest rates with a vengeance! They were again imposed, for the same reason, from 1977 to 1979.
Further back, Sidney Homer’s classic, A History of Interest Rates, reports that Treasury bill rates were sometimes negative in 1940 and 1941. “Treasury bill yields were sometimes quoted at 0.001% and occasionally sold at negative yields,” Homer wrote, “because they were exempt from the personal property taxes of some states.” In other words, the personal property tax created effective negative yields on other assets, allowing actual negative yields on Treasury bills.
It might be argued that these instances are special cases. Suppose we wish to discourage the holding of cash or Treasury bills in general, and to encourage investors to spend or invest instead—could it be done by creating negative interest rates more broadly?
The classic argument is that the possibility of simply switching to paper currency, which by definition circulates at par (a zero interest rate), is what makes a generalized negative interest rate on deposits or securities impossible. As Buiter says about creating negative interest rates, “Currency is the only problem.” We will return to the problem of currency in a moment.
But let’s begin with Treasury bills. Imagine a financial panic, when everybody wants to own Treasury bills, no matter what the yield. Now along comes the Fed, with its infinitely expandable balance sheet, and bids for 90-day bills until their price reaches 100.5, for example, or 101. Their interest rate is now about negative 2 percent or 4 percent.
A negative interest rate on excess reserves would result in a disincentive to hold Fed deposits, which would increase the banks’ incentive for the funds to be put out in the interbank market or the commercial paper market or in loans instead.
How would banks respond? There would be no point in buying Treasury bills if they could simply hold excess reserves at the Fed instead. This is the banking equivalent of putting banknotes in the mattress: “Many banks prefer to hoard cash,” is a recent analyst’s comment. Indeed, one of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40: from $21 billion to $860 billion.
But it would be straightforward for the Fed to put a negative interest rate on these excess reserves, just as the Swiss did on foreign deposits. The resulting disincentive to hold Fed deposits would increase the banks’ incentive for the funds to be put out in the interbank market or the commercial paper market or in loans instead—yes, that’s the idea.
Could the banks in turn put negative interest rates on customers’ deposits with them? They might not have to if they were doing something with the money besides holding risk-free assets, but in principle they could. Something similar is done by charging fees on demand deposits.
It looks like the depository system could conceptually include negative interest rates. But how about if everybody just took out currency instead? Would this not defeat the whole idea? Such discussions always arrive at this objection.
This leads to various more or less cumbersome and impractical schemes for imposing costs on holding currency to take away its advantage in a world of negative interest rates on deposits. A classic one is to require tax stamps to be put on banknotes periodically. But are these necessary for the negative interest rate idea?
It is easy to imagine converting deposits to cash for very little cost and risk if we are thinking about relatively small amounts and personal transactions. But dealing with very large amounts of cash in commercial transactions entails very large costs and risks. Would negative interest rates induce a company with 200,000 employees, for example, to stop its automatic payroll deposit system and start passing out envelopes full of cash instead? Would the Social Security Administration start mailing its pensioners similar envelopes? Obviously not. And the Fed could put hefty charges on banks taking more than a standard level of currency from it.
Moreover, there is simply not nearly enough existing currency to replace all deposits. Even if the government did not go as far as abolishing currency (one suggestion), it could refuse to increase the supply. What then? Some hoarding of currency would result, reducing the available supply further, and then currency would presumably go to a premium against deposits. You could still make all the payments you need to, but you could either bear your negative interest rate by holding deposit cash, or have to pay a premium if you insisted on banknote cash. Or you might buy gold. Or you might spend it or make some investments in bonds or stocks or a house—again, that’s the idea.
The increasing dependence on electronic payments makes a massive move to currency less feasible and thus negative interest rates more plausible.
Would anybody rationally pay $1.02 for $1.00 in cash? They do today, if they take cash as a non-customer from an ATM. The average ATM surcharge fee is about $2. For a $100 withdrawal, that is equivalent to a price of $1.02. Alternately thought of, if a $200 withdrawal were cash for one month, the average fee would be equivalent to a negative 12% interest rate.
In general, the increasing dependence on electronic payments makes a massive move to currency less feasible and thus negative interest rates more plausible.
Still, one can imagine the unhappy customers being informed they could not withdraw currency from a human teller at par. And one can consider what the political reaction to such effects of negative interest rates might be.
In sum, could negative interest rates “come to a central bank near you”? It may seem unlikely, but it is not impossible.
Alex J. Pollock is a resident fellow at the American Enterprise Institute.
A market solution
A market solution to secure banks’ future
By William Poole
How long will the US economy live with a banking system in which some institutions are too big to fail ? Not long, we should all hope, because large banks today, under federal protection, can raise short-term funds more cheaply than their smaller competitors, which are allowed to fail.
“Too big to fail” is an unstable system. Politically inspired constraints on large banks leave them not knowing what will come next out of Washington, while there is no way of knowing whether any given bank is just small enough to be let go or will be bailed out if it gets into trouble.
But here we are, more than a year after the rescue of Bear Stearns, without a plan for the future except for vague – and, as far as I can tell, totally empty – statements coming out of Washington about tighter regulation. What exactly does Washington have in mind?
Here is a proposal, not at all original but deserving of serious public discussion. As a condition of enjoying the benefits of a bank charter, every bank must issue 10-year subordinated notes equal to 10 per cent of its total liabilities. The specification can be adjusted, but this one serves to illustrate the proposal. The subordinated debt would be unsecured; holders would stand last in line among all creditors in the event that a bank had to be shut down. The sub debt requirement would be in addition to existing requirements for equity capital.
Genuine reform requires that four minimal requirements be met, and the sub debt proposal qualifies. First, banks need more capital to protect the federal deposit insurance fund. Second, there must be more market discipline: each bank would be forced to roll over maturing sub debt equal to 1 per cent of its liabilities each year. Third, financial stability requires that a bank not be subject to runs. Sub debt cannot run, because of the 10-year maturity.
Fourth, and critically important, some creditors and not just equity owners must be at risk, which is clearly the case with sub debt. Sub debt provides much more market discipline than equity, because a bank in trouble with a weak share price is not forced to do anything. Maturing sub debt, however, does discipline the bank and if the bank cannot roll over the debt, it must shrink by 10 per cent to live within its remaining outstanding sub debt. This system is stable because any bank can contract by 10 per cent within a year by letting loans run off and/or by selling other assets. It is highly desirable that contraction be managed by the bank itself and not by regulators.
We cannot depend on regulatory agencies to prevent a recurrence of financial crisis. Ahead of the crisis, regulators, myself included, did not understand the risk of subprime mortgage paper in bank portfolios. Nor did the senior management and directors of the most sophisticated financial firms in the world. This is not the first time regulators and firms have failed to assess risk adequately. Large international banks accumulated Latin American loans in the 1970s; when Mexico defaulted in 1982 and other defaults followed, a financial crisis was narrowly averted.
Long-maturity bonds create much more market discipline than do short-term obligations. Holders of three-month certificates of deposit, for example, assume that they can always exit quickly by letting the CDs mature. It is for this reason that bond spreads over Treasuries of comparable maturity are systematically higher for longer maturities than for shorter maturities.
Banks hate the idea of a substantial sub debt requirement, because sub debt will be expensive. But bankers should think carefully about their opposition. Would they rather face market discipline from sub debt or much heavier Washington regulation, including opaque and changing rules? Given the scale of our financial crisis and taxpayer losses, intrusive regulation will be the norm for years to come. Do bankers really want to face unpredictable constraints such as they have seen on executive compensation?
I challenge leaders of our large banks to support a market-based reform such as the one I have outlined. A return to the status quo ante, with banks enjoying the benefits of “too big to fail”, does not seem likely. Regulators will not dare risk a repeat performance. Bankers who think that their political influence will control the regulatory process are in for a rude surprise.
The writer is a senior fellow at the Cato Institute and distinguished scholar in residence at the University of Delaware. He retired as president and chief executive of the Federal Reserve Bank of St Louis in March 2008
Despite Bad Economy
Despite Bad Economy No Drastic Shift in US Values
By David Paul KuhnThere has been no dramatic shift in Americans' view of Wall Street, big business or the role of government despite the worst economic collapse since the Great Depression, according to a wide-ranging Pew Research Center study of American values released Thursday.
"Whether by choice or circumstance, Barack Obama is pursuing a fundamentally different path than his predecessor in terms of economic, domestic and foreign policy. Yet there is no commensurate sea-change in public values," the Pew report concludes.
The 160-page non-partisan study, regularly conducted since 1987, is the most comprehensive look at Americans' outlook since Obama's inauguration.
The study offered new evidence that the Great Recession has not greatly altered Americans' view on the role of government or spurred a dramatic rise in populism.
Americans also remain optimistic despite the hard economic times. True to character, more Americans still believe they are "haves" than "have-nots."
The study also found that the unpopularity of the war in Iraq as well as ongoing military deployments abroad have not caused the U.S. public to turn toward isolationism.
In the political realm, one of the great unknowns in Obama's presidency is whether he will be able to enact an enduring Democratic majority. Obama's presidency has thus far failed to catalyze a large shift leftward on issues like the role of government or moved the public's identification toward the Democratic Party and liberalism.
Republicans scarcely have reason to sigh in relief. The study adds more to the tome of bad news for the Republican Party, recording lows unseen since the years following Watergate. The GOP is dejected and depressed. It sits at rock bottom, considering a range of issues from public image to morale to the GOP's anemic ranks.
However the bulk of those who left the GOP in recent years have not become Democrats, rather independents. In fact, reflecting a long-tracked trend in American politics, the portion of voters indentifying as independent has continued to rise and now matches the highpoint of the modern era.
As the middle of the electorate enlarges, the outlook of the two major parties has only become more polarized. Hyper partisanship is a more potent force today than at any other time since the advent of polling in American politics, even within the context of the rapid rise in partisanship over the past quarter century.
Below is a detailed look at four of the more salient trends in Pew's study of Americans' values.
No Populist Tide From Great Recession
The hallmark of populism is an us-versus-them worldview. That populist outlook has not taken hold over the public. Only 35 percent of Americans believe the country is divided between haves and have-nots, a 9-percentage point decline from two years ago.
More Americans still believe they are part of the haves than have-nots--48 to 36 percent respectively, with no significant change in the last few years. This finding comes in the face of the stock market collapse; 2008 marked the steepest dive in the Dow Jones Industrial Average since 1931.
Most Americans also still reject that "success in life is pretty much determined by forces outside our control."
The poll was taken with the memory of the worst days of the stock market crash still fresh in the national mind but after the market had somewhat recovered since mid March, roughly to where it was when Obama took office. The poll, which can be read in full here, was conducted March 31 to April 6 and April 14 to the 21; it included 3,013 randomly interviewed Americans and has a 2-point margin of error.
The poll did ping a populist streak in American public opinion, but populism has not surged upward since the market collapse. Fully three fourths of Americans say, "there is too much power concentrated in the hands of a few big companies." More than six in 10 of those polled believe businesses' profits are too large. But Pew finds these opinions are generally unchanged in recent years.
Large swaths of Americans do hold a negative view of Wall Street. When asked if Wall Street "often hurts the economy more than helps it," 49 percent agreed while 37 percent disagreed. (This is the first year Pew has asked the question.) Still, more than six in 10 Americans believe Wall Street makes an "important contribution" to the economy.
Americans are similarly conflicted on regulation. They believe that a free market economy generally needs government regulation but a slim majority, 54 percent, believes regulation often "does more harm than good," including 41 percent of Democrats. That marks only a slight decline since 2007. Support for the role of regulation was mildly stronger in 2002, following the WorldCom and Enron scandals, than today.
One of the more striking findings of the Pew study is the continued relevance of Calvin Coolidge's statement that "the chief business of the American people is business." Coolidge's remark captured the contrast between the roaring twenties and the downward spiral of the thirties.
Even today, 76 percent of Americans say the "strength of this country today is mostly based on the success of American business." This is exactly where the public was in 1987 and generally throughout the 1990s.
There has been a significant, though not large, change between the early Obama presidency and the Clinton era on some issues, which marks the modern contrast between boom times and bust.
Consider this statement, "corporations generally strike a fair balance between making profits and serving the public interest." Today, 58 percent of Americans disagree. That's where the public was in the Bush era, both in the 2007 and the 2003 study.
But in the bull market of 1999, 50 percent of Americans disagreed that companies strike the right balance between profits and public good. That signifies an 8-point shift in a decade, significant but not immense.
A slim majority of Americans, 53 percent, in fact say they are "pretty well satisfied with the way things are going" for them financially. That's the lowest percentage expressing this opinion since 1987, an 8-point drop compared to 2007. But again, considering the hit taken by most Americans stock portfolios, that a majority of Americans still hold this view is perhaps more striking.
Ever-More Hyper Partisan Public
The distance between the two major tribes of American politics has never been greater. Pew has consistently asked 48 questions on Americans values since 1987. The average difference of opinion over the scope of these questions has steadily risen, from 9 points as recently as 1997 to 16 points today.
The rise in hyper partisanship was visible within weeks of Obama taking office, on presidential approval in particular. The partisan gap has raised more eyebrows because of Obama's pledge throughout the 2008 campaign to bridge the very same divide.
The greatest partisan gap on policy views, 39 points, is over the issue of health care. That may prove a harbinger of coming partisan rancor. Obama pledges to push healthcare reform through Congress later this year.
When Americans were asked if they are "concerned about the government becoming too involved in health care," 68 percent of Republicans said yes while only 29 percent of Democrats agreed.
Views of government regulation echo the same trend.
The crisis has only hardened Republicans' view of regulating the free market. Three fourths of Republicans believe government regulation does more harm than good, compared to 57 percent two years ago.
The Great Recession has had the opposite effect on Democrats. Democrats held roughly the same view as Republicans on regulation in 2007. Today, only 41 percent of Democrats believe regulation does more harm than good.
This gap on regulation is even larger when considered through the polemic lens of political debates. Call it the George Will-Paul Krugman effect. Fully 81 percent of conservative Republicans believe regulation does more harm than good while only 29 percent of liberal Democrats agree. In 2007, liberal Democrats and conservative Republicans held the same view.
Views on the role of government have long served as a strong indicator of partisanship. Tellingly, Republicans are thinking like 1994, Pew data finds, the highpoint in Americans small-government ethos. One might say Democrats are thinking like 1964-- the height of the Great Society. Based on Pew's research, Democrats are as positive about the role of government as they have been since the study began.
Other issues that betray the largest partisan divide include the environment, national security and affirmative action.
Republicans Bad Shape
Democrats hold about a 20-point advantage in public approval, with 40 percent of Americans holding a favorable view of Republicans and 59 percent holding a favorable view of Democrats.
Republicans are not pleased either. In 2004, two-thirds of Republicans believed their party was doing an "excellent or good job" standing up for its traditional positions on the size of government, cutting taxes and supporting traditional social values. Today, only one-quarter of Republicans said the same. By contrast, 61 percent of Democrats give their party high marks, a rise from 43 percent in 2007.
Republicans' ranks are as thin as they have been in the last quarter century, according to Pew's tracking. Democrats have gained a 9-point edge in party identification in the past five years. That's a large shift but not historical. Between 1956 and 1961 Democrats changed the party-ID margin 13 points to their favor and between 1983 and 1985 Republicans changed the margin 17 points to their favor, according to Gallup Poll tracking.
By Pew's measure, Democrats' advantage in partisan affiliation has actually ebbed between December 2008 and April 2009, from 39 to 33 percent. Over the same period Republicans have slipped from 26 to 22 percent.
But as Pew notes, one factor distinguishing today's party-ID gap from past transitions in partisan identification is that unlike Republicans in the mid 1980s or Democratic gains by 1961, the GOP's losses have not translated into Democratic gains. Thirty-five percent of adults indentify as Democrats, similar to last year.
Most former Republicans, Pew found, indentify as independents. This trend is seen in the makeup of the middle. Half of independents view themselves as moderates, but today, conservative independents outnumber liberal independents by a 2:1 ratio.
Republican ranks have thinned but conservative ranks have remained constant, a trend also seen in exit polls last year. Pew finds no significant shift in the past decade on either partisan flank; 37 percent of Americans indentify as conservative compared to 19 percent who identify as liberal.
But as Republican numbers dwindle they have not become a far more conservative bloc. Two-thirds of Republicans describe themselves as conservative, up only 3 points since 2004.
Still, Pew's study offers yet another indicator of the GOP's regional problems. Pew finds that Democrats now outnumber Republicans by an almost 2:1 ratio in the Northeast. As recently as the early 1990s, this northeastern gap hardly existed.
Rise of Independents
In so partisan an era, is it any surprise that the ranks of independents continue to swell?
Pew finds that 36 percent of Americans describe themselves as independent, matching the 1992 peak when third-party candidate Ross Perot stormed onto the political stage.
Independents have moved rightward on economic issues in particular over the past two years, not a good sign for an ambitious president looking to reverse Ronald Reagan's small government philosophy. This trend is likely in part related to the movement of Republicans to the independent label.
Independents now hold a more conservative view on big business and some roles of government. For example, Pew notes, in the past two decades both independents and Republicans have become more skeptical of expanding the social safety net. They also agree with Republicans in their opposition to affirmative action.
But independents are left leaning on cultural issues like religion and homosexuality. They lean slightly toward Democrats on foreign policy and national security issues as well. Yet even this latter trend is not clear-cut.
For example, a slim majority of Americans believe that the best way to ensure peace is through military strength. Independents precisely mimic the overall trend on peace through strength, with 53 percent agreeing. Independents break with Republicans by 22 points and Democrats by 10 points. But Democrats fall below the 50-percent bar for public support, while independents rise above.
The steadiness of the American outlook may be the most notable trend of the study. One example is the “peace through strength” question. That outlook was 9-points stronger in 2002, following the September 11 attacks, but generally a slim majority have supported an aggressive military posture on the world stage for the past two decades.
The same pattern is found on the United States role in the world. Nine in ten Americans also agree that “it’s best for our country to be active in world affairs,” a view unchanged since 1987.
In Depth: 8 Things Americans Believe in 2009
Austrian Recipe vs. Keynesian Fantasy
Austrian Recipe vs. Keynesian Fantasy
The current crisis has revealed the Keynesian roots of mainstream economics. The only debate has been the type and size of bailouts and stimulus packages. For example, Nobel laureate Joseph Stiglitz of Columbia University thinks nationalization is preferable to the Geithner-Summers toxic-asset-relief plan. The Keynesian fantasy is really a monomania because ultimately it is a fixation on a single panacea — more government spending. Meanwhile, the Austrians have the opposite set of policy guidelines and have heroically held to their recipe of liquidation.
The high degree of unanimity among mainstream economists in support of the bailouts and stimulus packages came into sharp relief at the recent convention of the American Economic Association. In addition to this unanimity, mainstream economists have become more influential and powerful than ever before. For example, Paul Krugman, the most recent Nobel laureate in economics and columnist for the New York Times, supports the stimulus packages to combat the recession. No matter how many new plans are offered, his only complaint is that it is not enough. Krugman's former colleague at Princeton University, Ben Bernanke, who is now in charge of the Federal Reserve, believes that if he can fix the problems in the "financial economy" he can prevent problems spreading to the "real economy." Larry Summers, former economist and president of Harvard University is now President Obama's director of the National Economic Council and presumably the coordinator of plans to address the economic crisis. It is interesting to note that Summers is the son of two academic economists and is the nephew of Nobel laureates, Paul Samuelson and Kenneth Arrow. He is also considered a mentor of Secretary of the Treasury Timothy Geithner, who worked under Summers in the Treasury department during the Clinton administration.
All this suggests to me that this crisis is a "market test" for mainstream economics. Never before have so many academic economists held such primary roles in the economic policy of the federal government. If we include the two outsiders, Stiglitz and Krugman, with the two powerful insiders, Bernanke and Summers, we get a good sample of the elite mainstream economics. Given that Congress has voted on very few of the many measures to address the economic crisis, this economic team, including Secretary Geithner, is presumably responsible for designing the bulk of the responses to the crisis.
Their responses amount to Keynesian economics on steroids. In the last quarter of 2007, there were the typical interest rate cuts by the Federal Reserve. Then, in January 2008, the first of the unprecedented moves came from Bernanke when the Fed began auctioning off reserves at the discount window. This was followed by one unprecedented response after another, bailouts, stimulus, and government guarantees, such as increasing FDIC insurance coverage on bank deposits and extending it to money-market mutual funds, but it all amounts to trillions of dollars of more government spending. Obama did not really bring "change"; he only increased the magnitude and speed of the policy responses.
Bailouts, stimulus packages and guarantees should be seen as a kind of backdoor protectionism. Washington is protecting Wall Street; it's protecting the banks; it's protecting the auto companies; and it's protecting "jobs" in general. Foreigners have already raised concerns about this bailout-style protectionism and the potential of a global trade war. Of course, if you make this point to one of the elite economists in Washington, they would scoff and deny the charge. Why? Because every economist — even mainstream economists — knows that protectionism will just make the problems worse. The Smoot-Hawley Tariff made the Great Depression much worse, and such increased protectionism can lead to trade wars.
The Austrian recipe for economic crisis is very simple and requires little action on the part of government. It only seems "hard" because of the presumption that the Keynesian approach could possibly be less painful. However, if you understand that the Austrian recipe is correct — that it would produce quicker and better results, and that the Keynesian approach is a recipe for disaster — then it is the obvious course to take.
Here are the passive ingredients of the Austrian recipe:
- Allow liquidation of bankrupt firms and debt (no bailouts)
- Allow prices to fall (no monetary inflation)
- Do not prop up employment (no stimulus)
- Give no assurances against failure (no nationalizations of GSEs or expanding FDIC coverage)
- Do not subsidize unemployment (no extending of unemployment insurance)
- Do not discourage "hoarding," i.e., saving
This recipe will produce the quickest possible recovery and minimize the magnitude of economic pain. The active side of the Austrian policy response would be to reduce the size of government, budget, taxes, and regulations.
It should be pretty obvious that the Austrians and mainstream/Keynesians have polar opposite views when it comes to solving the current economic crisis. To see how it might turn out, let us take a look back in American economic history.
The Next Super Cycle?
Mainstream economics identifies turns in the business cycle with the National Bureau of Economic Research's dating of American business cycles. In the table of cycle dating, the center column is the length of contractions in months. It appears to suggest that contractions are becoming shorter in duration while expansions have become longer in duration. However, there are many significant problems with NBER's cycle dating.
One problem to note is that the NBER dating obscures what I call "super cycles," which should not be confused with Kondratiev or Elliot Wave cycles. The first of these super cycles is the Progressive Era when a host of radical changes were made to the Constitution, government, and the economy. This super cycle encompasses the five cycles from 1907 to 1921. The second super cycle was the Great Depression from 1929 through World War II and the third super cycle was the Great Stagflation of the 1970s, which lasted from 1970 to 1982.
Another problem is how best to measure the economy over the business cycle. NBER looks at many factors in its dating of peaks, troughs, and recessions, but it largely boils down to GDP. One problem with this approach is that over time government spending has increased relative to the private sector, rising from just a few percent to a large minority of all spending in the economy. Federal government spending is less susceptible to cutbacks during recessions due to government's power to run budget deficits, tax, and inflate. The large amounts of government spending automatically makes more recent cycles seem less severe than older cycles when measured in terms of GDP.
However, government spending does not have its value tested with consumers in the market, and much of the spending is actually bad for the economy. Government could pay people to dig ditches and other people to fill the same ditches, and it would increase GDP, but no one argues this is the path to prosperity. Austrians would argue that such ditch digging and filling are actually better for the economy than what government actually does with our money.
Murray Rothbard addressed the problem of measuring a big government economy with the concept of private product remaining (with producers), or PPR, which basically takes GDP and subtracts from it twice the amount of government spending. Government spending is subtracted once to obtain gross private product and it is subtracted again to account for all the resources that government has siphoned off from the private sector. For example, applying PPR to the stagflation super cycle of the 1970s, we find that PPR (adjusted for inflation) increased from $600 billion in 1969 to merely $729 billion in 1982. That means there was anemic average economic growth of less than 1.4% per year during this period.
Rothbard then accounts for the increase in population by looking at the number of producer-breadwinners in the private sector (not government employees). Using calculations provided by Robert Batemarco, Real PPR per productive worker actually fell from $9,134 in 1969 to just $8,708 in 1982. What first appears to be four short contractions in the NBER dating system turned out to be an economic nightmare for the average American. On top of lower real incomes, when adjusted for inflation, the value of stocks fell by more than 50% during this period.
The three super cycles of the 20th century therefore coincided with the rise of the Progressives, the New Dealers, and the Keynesians.
In contrast, if we look at normal recessions, where the country is not at war, is on the gold standard, and where Keynesian policy is not dominant, we find a much different story. For example, the recessions of 1953–1954, 1957–1958, and 1960–1961 were short in duration, shallow in depth, and followed by robust growth. In terms of real GDP, economic growth briefly turned negative by one percent in the first and third recessions and by 2.5% in the second recession, which was the briefest of the three. If we look at the three recessions in terms of real PPR (per producer) we find that the first recession did not produce an annual decrease, but an increase of 2.7% in 1954, and more than a 5% increase in 1955. The second recession shows an annual drop of 2% in 1958 and a 6% increase in 1959. The final recession shows an annual drop of 2% in 1960, an increase of 2% in 1961, and an increase of 4.5% in the year following the recession.
The housing bubble peaked in July 2005. Private investment, a leading indicator of the economy, peaked at the end of 2006. As worsening conditions in the home building industry spread, the economy stumbled in late 2006 and again in late 2007 before falling into clear depression in 2008. The size and scope of the Keynesian policy remedies employed since late 2007 have been unprecedented. With the renaissance of Keynesian economics we can only conclude that the preconditions for a new super cycle have been established, and that if the policies are not reversed we face many years of depressed economic conditions.
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