Commentary by Caroline Baum
-- Back when Bob Rubin and Larry Summers were running Treasury and financial crises were confined to developing countries, international-government types would opine about revamping the “global financial architecture.”
One attempt at architectural redesign and integration was Basel II, a standardized system for assessing banks’ capital adequacy based on underlying risks. Banks deftly circumvented the regulation by shifting risky assets off the balance sheet.
Next?
The Obama administration’s architects went back to the drawing board and last week produced a blueprint for regulating financial institutions. One controversial aspect of the plan is the creation of a systemic risk regulator, the Federal Reserve, with the power to oversee any financial firm, not just a bank holding company, “whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed.”
In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.
It gets worse. Instead of eliminating the doctrine of “too big to fail,” which encourages risky behavior because of perceived government backing, the Obama plan defines, institutionalizes and expands on it.
“All systemically important companies will be subject to enhanced regulation,” says Peter Wallison, senior fellow at the American Enterprise Institute, a conservative Washington think tank. “What could that possibly mean? It means they are too big to fail.”
Charter Club Members
Previously the determination of who was and wasn’t TBTF was in the eye of the beholder: It had to be inferred.
This past year, the federal government took the guesswork out by designating Fannie Mae and Freddie Mac, 19 of the biggest banks, two car companies and one insurance company acting like a hedge fund as charter members.
“We need to get rid of too big to fail,” says Allan Meltzer, professor of political economy at Carnegie Mellon University in Pittsburgh. “It perpetuates a system where bankers make profits and the public takes losses. We want to put responsibility back on bankers.”
Bigness wouldn’t be the only prerequisite for failure exemption. The 88-page White Paper released last week expands the standard to include too leveraged and too interconnected without ever quantifying “too,” Wallison says.
Incorrect Diagnosis
Institutions that are perceived as TBTF can borrow at lower interest rates, using their funding advantage to muscle out smaller lenders. No wonder small banks are voicing reservations about the plan, which has the potential “to destroy competition in every corner of the economy where you identify too big to fail,” Wallison says.
Some economists criticized Obama’s “New Foundation: Rebuilding Financial Supervision and Regulation” for being built on shaky ground. The administration’s analysis of the roots of the crisis reads “as if the problems were caused by unregulated firms,” writes Arnold Kling, a member of the financial markets working group at George Mason University’s Mercatus Center, in a June 17 blog post. “The holders of credit risk were regulated institutions, especially Fannie Mae, Freddie Mac and the banks. They took on excessive risks right under the noses of the regulators.”
Proper diagnosis is key to implementing a treatment plan. Without it, the effort to re-regulate the financial system will be a politicized effort that will cause more harm than good.
Politicized Princesses
Speaking of Fannie Mae and Freddie Mac, Meltzer says the other main problem with the Obama plan is its failure to deal with the two government-sponsored (now owned) enterprises.
“We should take Fannie and Freddie and close them down, make Congress put the subsidies on the budget and eliminate their function,” he says.
If Congress wants to subsidize low-income housing, fine. Write that subsidy into the budget so it’s transparent.
In addition to the proposal for a systemic risk regulator, the plan would eliminate the Office of Thrift Supervision, create an agency to protect consumers from abusive lending practices, regulate over-the-counter derivatives and curtail the Fed’s emergency lending powers.
Loan originators and securitizers would be required to retain 5 percent of their pooled assets, creating a modest incentive to perform due diligence.
“I’d make the retention 20 percent,” says Bush administration Treasury Secretary Paul O’Neill, who would mandate a 20 percent down payment on every mortgage, a relic from another era. “Why not ensure that housing finance never gets us into trouble again,” especially since it was lax mortgage underwriting standards that brought the U.S. and world economy to its knees?
White Paper Discolored
Answer: Because it’s politically unpopular.
Already politicians are appealing to Fannie and Freddie to relax standards on mortgages for new condominiums, according to yesterday’s Wall Street Journal. House Financial Services Committee Chairman Barney Frank, Democrat of Massachusetts and long-time enabler of the GSEs, wrote to the chief executives of both companies asking them to lighten up on recently tightened terms, the Journal says.
You can see where this is going, and Congress hasn’t even had a chance to get its fingerprints on the White Paper.
Commentary by Margaret Carlson
June 25 (Bloomberg) -- So it turns out that after five days of playing “Where in the world is Mark Sanford?” we -- and his mystified wife -- learned that the 2012 Republican presidential aspirant and popular two-term governor of South Carolina wasn’t communing with nature in the mountains but with a longtime friend in South America.
Upon returning yesterday, he told a reporter that he couldn’t understand all the fuss, as if everyone known for fiscal restraint (he must have paid full fare!) fills the car with camping gear (and packs his passport) only to drive to the Atlanta airport to wander off to Argentina like a latter-day Che Guevera tooling around on a motorcycle and keeping a diary.
If that were the case, he might be turning the whole thing into an award-winning film. There was a strong hint that wasn’t going to happen by about Day Three of his disappearance, when his wife told reporters, “I have not heard from my husband. I am taking care of my children.” The father of four missed Father’s Day, she said, because he needed “space.”
Quickly the initial explanation -- he needed a break alone after an exhaustive legislative session -- became inoperable. In a meandering press conference, Sanford apologized to everyone he had hurt -- people of faith like him; his four boys, his wife. He choked up when he apologized to a former aide, Tom Davis, who had been with him so long that he’d slept in the basement on the kids’ dinosaur sheets.
Long-Suffering Wives
We’ve seen many of these press conferences by now, usually with a long-suffering wife in a supporting role, as one politician after another owns up to adultery. Around the office, many of my colleagues were snickering at Sanford’s stream-of- consciousness explanation of how he’d come to this pass. I was riveted.
For all the politicians who have had to respond to shouted questions, we don’t often see a man thinking about what he’s done, reflecting out loud about “the odyssey that we’re all on in life with regard to the heart.”
Sanford was honest, he talked from that wrenching place of having fallen in love, fallen short of his vows and hoping somehow to salvage something of his life.
However genuine his explanation, he nonetheless joins the growing list of public officials who have lost their stature if not their jobs because of scandals: former New York Governor Eliot Spitzer; former North Carolina Senator John Edwards; former Idaho Senator Larry Craig, the toe-tapping non-gay caught in a compromising stance in a men’s restroom; Louisiana Senator David Vitter, associated with the D.C. Madam, and, most recently, Nevada Senator John Ensign.
‘Indescribable Pain’
Ensign’s press conference was the opposite of Sanford’s. It was all pre-empting the cuckolded husband who wrote a letter to Fox News describing the “indescribable pain and emotional suffering” Ensign had caused, leaving his “family in shambles.”
With the sprayed hair and manner of a croupier at a Las Vegas casino, Ensign admitted to an affair with the wife of his top aide, who was also his wife’s best friend. The couple and their son were on Ensign’s payroll until the affair ended when they were all fired.
Sanford is religious but not preachy. Ensign is a Republican out of the ramrod-straight Promise Keepers school of “godly” men building “strong marriages through biblical values.” Although Ensign lost his spot in the GOP leadership, he was embraced by his colleagues when he returned, as usually happens in the Senate in a “there but for the grace of God go I” solidarity. His favorability rating plummeted in his home state, but that being Nevada, people expect him to survive.
Comic Gold
Sanford will certainly fall out of the circle of light that surrounds any potential 2012 candidate. Just the word “Argentina” is comic gold, from taking two to tango to Evita. If his wife doesn’t forgive him, we won’t.
In the middle of his unexplained absence, the best Sanford’s staff could come up with was that he was hiking on the Appalachian Trail. If only he were.
Before Sanford is cast out, consider a poll last month that showed that more than half of voters in New York would like to have back former governor Spitzer as the legislature is locked out of the capitol in Albany and the state dissolves into political chaos.
Often a man who cheats on his wife cheats in his life. But Sanford didn’t look like such a man yesterday. He may be worth a second look before voters tell him to take a hike, for real this time.
By Yalman Onaran
June 25 (Bloomberg) -- The salad was made with the first green shoots from the White House garden. The main course was roast beef. The topic of conversation in the second-story Family Dining Room on a warm evening in April: President Barack Obama’s economic policies.
Obama sat at the head of the table, administration insiders arrayed along one side to his right. To his left, facing a French marble fireplace, were some of his harshest critics: Nobel laureates Joseph Stiglitz and Paul Krugman, Harvard University professor Kenneth Rogoff and former Federal Reserve Vice Chairman Alan Blinder.
One chair on the insiders’ side was empty, according to attendees. It was reserved for Paul Volcker, the 81-year-old former chairman of the Fed, who was an adviser to Obama during the campaign and now heads the President’s Economic Recovery Advisory Board, or PERAB. He was stuck at the White House gate, trying to convince guards that he was expected for dinner. His plane from New York had been delayed by a storm, and his security clearance to enter the building that day had expired.
That Volcker’s seat was on the same side of the table as Treasury Secretary Timothy Geithner’s and National Economic Council (NEC) Director Lawrence Summers’s was a clear sign he’s one of the president’s most valued advisers. That he was stuck outside suggested his role is ambiguous. While he doesn’t have a full-time job, isn’t paid for his advice and lives in New York, the 6-foot-7-inch (2.01-meter) Volcker is hard to ignore.
‘Semi-Insider’
Volcker, who eventually made his way to the dinner table the evening of April 27, earned a reputation for standing up to Wall Street in the 1980s when, as Fed chairman, he brought inflation down to 1 percent from 15 percent by pushing the fed funds rate up to 20 percent. Now, he’s urging radical regulatory reforms that would limit how big banks can get, separate deposit taking from trading at financial institutions and force all derivatives trading onto public exchanges. His proposals go beyond what Geithner, Summers and other members of the Obama administration have advocated.
“Volcker has a semi-insider, semi-outsider role in the administration,” says Blinder, now an economics professor at Princeton University in Princeton, New Jersey. “If he has the president’s ear, the regulatory regime will come out tougher and more comprehensive. That’s a good thing at this point, because I worry more about not doing enough to patch up the regulatory system than doing too much.”
Obama’s Ear
The former Fed chairman, who declined to comment for this article, certainly had Obama’s ear when he backed the candidate in January 2008 -- after more than two decades sitting on the political sidelines. He did so, he said at the time, because of concerns about where the U.S. was headed.
“I’ve been reluctant to engage in political campaigns,” Volcker said in his endorsement statement. “However, it’s not the current turmoil in markets or the economic uncertainties that have impelled my decision. Rather, it’s the breadth and depth of challenges that face our nation at home and abroad. Those challenges demand a new leadership and a fresh approach.”
During the campaign and after the election, Volcker was among the two dozen people Obama turned to for advice about the financial crisis, says Penny Pritzker, the billionaire chairman and founder of Chicago-based Pritzker Realty Group LLC, who was in charge of fundraising for Obama and now sits on Volcker’s board.
“He brought this incredible wealth of knowledge and extraordinary experience to the table,” she says.
Elbowed Aside
Volcker helped Obama with a speech he delivered at Cooper Union in New York in March 2008, says Austan Goolsbee, a senior economic adviser to the president and the man who first reached out to Volcker on Obama’s behalf in the summer of 2007. The former Fed chairman sat behind the candidate as he assailed the deregulation of the 1990s, putting some of the blame for the financial crisis on the failure to formulate new rules while dismantling old ones. The future president called for a regulatory framework to meet the needs of the 21st century.
After the inauguration and Geithner’s confirmation, Volcker was elbowed aside, White House insiders say. His economic recovery board took weeks to get off the ground -- a delay people close to Volcker say he blames on Summers. And Volcker’s access to the president was limited.
Goolsbee denies Summers was obstructing Volcker. Summers’s spokesman Matthew Vogel says the NEC director “wanted to ensure that the president had access to the best possible advice from Volcker and others.”
Regulatory Reforms
Things began to change in April. The advisory board’s six subcommittees now hold twice-weekly conference calls. The full group -- which includes General Electric Co. Chief Executive Officer Jeffrey Immelt and Robert Wolf, head of UBS AG’s Americas unit -- held its first meeting at the White House on May 20, with Obama in attendance. Volcker is invited to meetings of the Financial Regulatory Working Group, which includes key staff from the Treasury and the NEC, and he joins sessions by phone if he can’t attend in person. He has sent more than 10 memos to Obama outlining his views and has met with the president more than a dozen times since March, people familiar with the group say.
Volcker’s influence can be seen in the proposals for regulatory change offered by Obama on June 17. While there’s no mention of separating banking and proprietary risk taking, the administration is proposing to set higher capital requirements for trading positions and equity investments. Volcker also pushed for better coordination among banking regulators, an idea that was adopted in the Obama blueprint.
“There were many experts who contributed to this framework, but Volcker was one of the most important and insightful,” says Goolsbee, 39.
Summers, Geithner
Goolsbee, a professor of economics at the University of Chicago, where Obama once taught constitutional law, says he talks to Volcker several times a week to solicit his opinions on a wide range of topics and relays those views to the president during daily economic briefings and at other meetings.
If Volcker is at one end of the spectrum arguing for tougher financial rules, Summers and Geithner are at the other. Summers pushed for deregulation while Treasury secretary under President Bill Clinton, advocating the repeal of the Glass- Steagall Act, which had separated investment and commercial banking for more than 60 years. Geithner was president of the Federal Reserve Bank of New York during a period when banks ratcheted up their leverage.
Both men are proteges of Robert Rubin, a former Clinton Treasury secretary who served on Citigroup Inc.’s board from 1999 until this year and has been criticized for allowing the bank to pile up $544 billion of derivatives and securities before it became the recipient of more government assistance than any other bank. Rubin declined to comment.
What Volcker Wants
The reform proposals presented by the Obama administration, crafted largely by Summers and Geithner, fall short of what Volcker wants. The derivatives regulation calls for a central clearinghouse to handle trades rather than an exchange, which would provide more information to investors.
Geithner, 47, and Summers, 54, have also put forward a mechanism for dismantling large banks that fail. It doesn’t include rules for preventing them from getting too big, as Volcker urged. Many of the reforms need approval from Congress, which will likely make changes and where Volcker’s influence will continue to be felt.
“While Summers and Geithner worry about not antagonizing the banks, Volcker is the only one who can say loudly what needs to be done,” says Timur Gok, who teaches finance at Northern Illinois University in DeKalb, Illinois. “The Summers-Geithner stamp is clear in this framework because it’s not very radical. We’ll see whether Volcker’s views are heeded more in Congress.”
Confronting Power
Volcker, who grew up in Teaneck, New Jersey, during the Great Depression, has never shied away from confronting powerful interests.
As Fed chairman during the Latin American debt crisis in the 1980s, he arm-twisted the largest U.S. banks to restructure their loans, says Gerald Corrigan, head of the New York Fed at the time. Volcker brought the chief executives of the 25 largest banks to the Fed and told them nobody could leave until an agreement on the debt issues was reached, Corrigan says.
When Continental Illinois National Bank & Trust Co. failed in 1984, Volcker forced other banks to contribute $500 million to the government’s emergency package to backstop the deposits, according to Secrets of the Temple, a 1987 book about the Fed written by William Greider.
Walter Wriston, who was chairman and CEO of Citicorp at the time and resisted contributing to the bailout, called Volcker a “big nanny” for his overzealous regulatory approach.
‘Utter Conviction’
“There were some testy moments in those meetings,” says Corrigan, 68, now a managing director at Goldman Sachs Group Inc. “He did a lot of things, in all his different roles serving the public, knowing that he’d be criticized. He has never flinched. He doesn’t flinch because he’s a man of utter conviction and absolute integrity.”
Volcker’s character was forged in Teaneck, where his father, a civil engineer who became town manager, wore his double-breasted suits until they frayed and his three sisters made their own clothes. When Volcker was a teenager, his father had him fired from a town job as a sledding safety monitor to avoid the appearance of a conflict of interest, according to Paul Volcker: The Making of a Financial Legend, a 2004 biography by Joseph Treaster.
Macy’s Handkerchiefs
The frugality was handed down. When he was Fed chairman in the 1980s, Volcker lived in a one-bedroom apartment in Washington, shunned chauffeured limousines and bought his suits at Goodwill stores. He did his laundry at his daughter’s house in the suburbs and returned to New York on weekends to be with his wife, Barbara, who suffered from diabetes and rheumatoid arthritis.
Even now, his tastes are modest. When he ran out of handkerchiefs on a trip to Washington this spring, his daughter, Janice Volcker Zima, says she took him to Macy’s, where he bought the cheapest brand he could find -- at three for $11.
His one indulgence: fly-fishing. He’s hooked on Atlantic salmon, which he has pursued in Russia, north of the Arctic Circle, and in Canada’s Nova Scotia and New Brunswick provinces.
“The biggest skill in fly-fishing is patience, which is a rather important trait for a central banker too,” says Corrigan, a fishing buddy.
Princeton, Harvard
What makes Volcker loom large, more than his height, is the breadth of his six-decade career. He was at the Treasury in 1973 when the Bretton Woods system that governed financial relations among nations collapsed. He led the Fed in a fight against the worst postwar bout of inflation. He dug into Swiss bank accounts in the late 1990s to find the money owed to thousands of Holocaust victims. He tried to save Arthur Andersen LLP from collapsing with a restructuring plan in 2002. He exposed corruption in the United Nations oil-for-food program in 2005.
“He was brilliant, eminently logical, and steadfastly devoted to his work,” says David Rockefeller, 94, who hired the Princeton graduate to work as an economist at Chase Manhattan Bank in 1957 after a stint in the research department of the New York Fed.
Volcker, who also received a master’s degree in political economy and government from Harvard University in Cambridge, Massachusetts, left Chase to become the director of financial analysis at the Treasury Department in 1962. He rose to deputy undersecretary the following year during the administration of Lyndon Johnson, returned to Chase in 1965 and, when Richard Nixon became president, rejoined Treasury as undersecretary for international monetary affairs.
Bretton Woods
When the U.S. abandoned the gold standard in 1971 after the dollar came under attack amid inflationary pressure, Volcker became the point man at Treasury to help devise an alternative to Bretton Woods, which pegged currencies to gold and the U.S. dollar. The plan he negotiated with other global powers during meetings in Europe and Asia in 1973 established a floating currency regime. That meant central banks wouldn’t be required to buy or sell their currencies to maintain a fixed rate and that their exchange value would be determined by market forces.
Two years later, Volcker was recruited to run the Federal Reserve Bank of New York by Fed Chairman Arthur Burns. When inflation, fueled by the soaring price of oil, surged to 11 percent in 1979 and Fed Chairman G. William Miller was named Treasury secretary, President Jimmy Carter turned to Volcker. His first choice, Rockefeller, then chairman of Chase Manhattan Corp., declined the job, telling the president that Volcker was the only person who could tackle inflation. Others were saying the same thing, according to Treaster’s biography.
Fighting Inflation
In October 1979, two months after his appointment was confirmed by the Senate, Volcker convened a secret Saturday meeting of Fed governors -- some told their offices they were going fishing for the weekend -- where he convinced them to switch the agency’s focus to tightening the money supply instead of setting short-term rates. When the Fed restricted the money available to banks, interest rates surged, throwing the economy into a recession.
Volcker knew the medicine had to be painful to work, says Fred Schultz, vice chairman of the Fed at the time. There were demonstrations every day in front of the Fed building in Washington by groups ranging from homebuilders to car dealers. Volcker received car keys in the mail, symbolizing vehicles not sold as the economy sputtered. Gross domestic product fell almost 8 percent in one quarter. Yet the remedy worked: By 1986, inflation fell to its lowest level in two decades.
“People didn’t believe the Fed would stay the course,” says Schultz, 80, who is retired and lives in Jacksonville, Florida. “Congress was pressing us all the time to ease our harsh stance. It was hard to stick with it, but Paul was determined, and we did stick with it.”
Replaced by Greenspan
Even now, Volcker’s inflation-fighting tactics stir anger.
“Volcker’s attack on the inflation issue was much too harsh and led to a huge amount of damage inside and outside the U.S.,” says James Galbraith, an economist at the University of Texas at Austin. “It wasn’t necessary to put the entire world through a decade of recession. It was one way out, but not the best way.”
President Ronald Reagan, who reappointed Volcker in 1983, decided not to give him a third term in 1987 after he resisted lowering interest rates even as inflation almost vanished.
He was replaced with Alan Greenspan, who brought down interest rates and presided over two decades of almost unbroken economic growth until the 2007 collapse of a housing bubble led to the worst financial crisis since the Great Depression. The slump, blamed mostly on easy availability of credit that fueled consumer and corporate debt, has cast a shadow over Greenspan’s accomplishments.
‘Formula for Disaster’
“When you help set up one of the greatest crashes in the history of civilization, people will hold you responsible,” Galbraith says. “Greenspan was dreadful on regulatory questions, and that we know now is a formula for disaster. Volcker’s star has been rising due to his regulatory stance.”
Although never attacking Greenspan by name, Volcker has criticized the easy-money policies of the period.
“We bent over backwards to ease money for reasons I didn’t understand,” he said during an interview last October with Charlie Rose.
Returning to New York after his Fed stint, Volcker became a partner at James D. Wolfensohn Inc., a New York boutique investment bank founded by James Wolfensohn. When Wolfensohn left to run the World Bank in 1995, Volcker became CEO. He stepped down the following year when the firm was sold to Bankers Trust New York Co.
‘Lose His Marbles’
Volcker also spent more time caring for his wife, who died of complications from diabetes in 1998. Toward the end, when she couldn’t walk anymore, he would push her wheelchair to restaurants in New York, says Robert Kavesh, an economics professor at New York University who has known him for six decades.
“He had no life for so long, just taking care of her,” says his daughter, 53, a nurse who lives near Washington. “I’m surprised he didn’t lose his marbles.”
Kavesh says Volcker was just as patient teaching his son, James, born with cerebral palsy, how to play Wiffle ball. James, 51, lives in Brookline, Massachusetts, and works as a grants manager at a hospital.
In the decade after his wife’s death, Volcker took on a number of ad hoc assignments, from reclaiming Holocaust victims’ bank accounts to investigating the UN’s business ties with a company led by then Secretary-General Kofi Annan’s son. Arthur Levitt, a former chairman of the Securities and Exchange Commission, says people turned to Volcker for such controversial tasks because they could trust his integrity.
“He’s always had a sense of balance without any political agenda,” says Levitt, a board member of Bloomberg LP, the parent of Bloomberg News.
Derivatives Trading
Now, as Obama’s inside outsider, he’s trying to maintain his balance amid conflicting political agendas. In February, he complained to administration officials and friends about being kept away from policy discussions. While he’s happier now, he’s still worried that he won’t have enough impact on the regulatory reforms he cares about most, the friends say.
In May, Geithner announced plans to regulate derivatives trading, which would require most of it to move through a clearinghouse and, in theory, reduce the risk that a trader’s collapse could send shock waves through the market. While the proposal includes many of the suggestions Volcker laid out in a Jan. 15 report by the Group of 30 that he helped write, it doesn’t go all the way. Volcker chairs the board of the G-30, which includes former central bank chiefs and economic officials from around the world.
Volcker’s Suspicions
The Geithner plan allows contracts that can’t be standardized to be traded outside the central clearinghouse. Volcker wants to discourage that by imposing capital requirements on trading parties, people familiar with his thinking say. He also wants derivatives to be traded on exchanges, where investors can see prices for themselves, which would bring down profits for the dealers who act as intermediaries.
Geithner’s plan leaves the door open for more-onerous capital demands and a bigger role for exchanges. Wall Street banks, including JPMorgan Chase & Co. and Goldman Sachs, sent a letter to the New York Fed on June 2 supporting a clearinghouse.
Volcker has long been suspicious of financial products that most people can’t understand. One of his four grandchildren, Colin Zima, heard about it a lot when he studied financial engineering.
“He would constantly joke about me studying to be a crook,” says Zima, 25, who worked at UBS for a year before taking a job in 2007 as a statistician at Google Inc. in San Francisco.
The new job made his grandfather happier, he says.
‘Speculative Fever’
The former Fed chairman started worrying about derivatives and structured debt such as mortgage-backed bonds in the early 2000s, his grandson says. In a 2000 interview with the New York Times, Volcker said he couldn’t make sense of the financial innovation going on.
“You obviously have a kind of speculative fever,” he told the paper. “It’s a kind of casino. It’s all the rage, trading certificates that have no intrinsic value.”
In 2005, Volcker was worried about the housing bubble, the U.S.’s growing trade deficit and banks’ increased risk taking.
“Under the placid surface, there are disturbing trends,” Volcker wrote in the Washington Post. “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”
Overstretched Fed
The Obama administration initially wanted to give the Fed a larger role, people close to the discussions say. Volcker was opposed, arguing that too much weight on the institution could threaten its independence in setting monetary policy.
“Do we want to make the Federal Reserve the chief regulator too?” Volcker asked during a Bloomberg TV interview on April 29. “Maybe that’s going a little too far.”
The administration has since shifted away from having a single regulator, instead giving the Fed a partial role in monitoring systemic risk, along with a council of regulators.
Volcker’s concern about an overstretched Fed has shaped the views of key congressmen, aides on Capitol Hill say. House Financial Services Committee Chairman Barney Frank echoed Volcker’s views on regulatory oversight on May 28, saying he opposed a single regulator.
“My own preference is for a dual-track regulation,” Frank said, referring to two separate channels of regulation that would focus on the health of the banks and the need to monitor for systemic risk as suggested by Volcker’s G-30 report.
‘Political Games’
The PERAB is taking a broad look at financial reforms, including whether banks that take deposits should be barred from engaging in high-risk trading, according to some members. While Volcker has strong views on that -- he thinks commercial banks should be prohibited from owning hedge funds or private equity units, people familiar with his thinking say -- he’s listening to others in the group.
“We’re an advisory board, so we can present different viewpoints at the end to the president,” says board member Wolf.
The biggest obstacle to Volcker’s reform agenda is Summers, Volcker’s friends say. While the president’s top economic adviser has softened his anti-regulatory stance from his days as Clinton’s Treasury secretary, it will be difficult for him to accept some of Volcker’s proposals, they say.
That hasn’t fazed Volcker.
“If he’s of a different view, I’m sure he’ll recognize the wisdom of my view sooner or later,” Volcker said in the April interview.
“Don’t rule Volcker out yet,” says Kavesh, his longtime friend. “Paul worked under five presidents before, and he knows how to play the political games. As events unfold, he’ll take on a more direct, stronger role.”
By Courtney Schlisserman and Shobhana Chandra
June 25 (Bloomberg) -- The number of Americans filing claims for unemployment benefits unexpectedly rose last week, a reminder that companies will keep cutting staff even as the economy stabilizes.
Initial jobless claims rose by 15,000 to 627,000 in the week ended June 20, from a revised 612,000 the week before, the Labor Department said today in Washington. A report from the Commerce Department showed gross domestic product shrank at a 5.5 percent annual pace in the first three months of the year.
Recent data show some areas of the economy, such as housing and manufacturing, are seeing a smaller pace of decline, consistent with the Federal Reserve’s projection that the slump is “slowing.” Even so, companies are unlikely to hire until there are sustained gains in demand, meaning a recovery remains dependent on the effectiveness of government stimulus efforts.
“We’re in the prelude to the end of the recession,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, who accurately forecast the drop in GDP. “The stimulus will build steam, but it’ll be a pretty tepid recovery.” The loss of jobs “is one factor holding back consumer spending,” he said.
Stocks gained as higher oil prices triggered a rally in energy shares. The Standard & Poor’s 500 index was up 0.8 percent to 908.31 at 10:33 a.m. in New York. Treasury securities were little changed.
Unexpected Jump
Economists forecast claims would fall to 600,000, according to the median of 41 estimates in a Bloomberg News survey, from a previously reported 608,000 a week earlier.
The number of people collecting unemployment insurance increased by 29,000 in the prior week, to 6.74 million.
The four-week moving average of initial claims, a less volatile measure, rose to 617,250 from 616,750.
The jobless rate among people eligible for benefits held at 5 percent in the week ended June 13. The June 13 data coincides with the week Labor conducts its monthly payrolls survey, which the department is due to report on July 2.
Thirty-six states and territories reported a decrease in new claims for the week ended June 13, while 17 had an increase. Some states that don’t ordinarily report layoffs related to the end of the school year saw larger than expected job losses in education services, Labor said, declining to be specific.
Economy Shrinks
The contraction in first-quarter GDP, which was less than the 5.7 percent drop estimated last month, capped the worst six- month performance in half a century, the revised figures from Commerce showed. The world’s largest economy shrank at a 6.3 percent annual rate from October to December.
The biggest slump in business investment and inventories since records began in 1947 and the worst contraction in homebuilding since 1980 paced the decline last quarter.
The housing recession, now in its fourth year, is showing signs of abating. Builders broke ground on more homes than forecast in May, with single-family starts posting a third straight gain, Commerce figures showed earlier this month.
Business investment may also be on the mend. Orders for non-defense capital goods excluding aircraft, a proxy for future spending on new equipment, jumped in May by the most since 2005, Commerce reported yesterday.
Some companies are seeing signs of stabilization. Nucor Corp., the second-largest U.S. steelmaker, may boost plant operating rates to as much as 60 percent of capacity in the third quarter as customers use up inventories, Chief Executive Officer Dan DiMicco said.
Orders Improving
“We have seen distributors begin to order at a level consistent with real demand,” DiMicco said in a Bloomberg television interview yesterday in New York. Still, “we will not be happy, and our competitors will not be happy, until we are north of the 80 percent levels again,” he said.
Fed officials said in a statement at the end of their two- day meeting yesterday said “he pace of economic contraction is slowing.” Consumer spending “remains constrained by ongoing job losses, lower housing wealth and tight credit.”
At the same time, the slack in the economy means “inflation will remain subdued for some time,” they said.
Part of that slack is being created by the bankruptcies of General Motors Corp. and Chrysler LLC. Earl Hesterberg, chief executive officer of Group 1 Automotive Inc., the owner of 99 U.S. and U.K. dealerships, this month said car sales remain weak.
Auto Slump
“We now have eight or nine months of bouncing along the bottom,” Hesterberg said in an interview, referring to the industry. “Really we don’t see much difference from month to month.”
Still, other areas show signs of improvement this quarter. Retail sales rose in May for the first time in three months, government figures showed.
The economy may not yet need a second stimulus after the administration’s $787 billion initiative, which includes tax cuts and spending on infrastructure, President Barack Obama said at a White House news conference this week.
“I think it’s important to see how the economy evolves and how effective the first stimulus is,” the president said.
Gay rights in China
Comrades-in-arms
The long march out of the closet
Sing if you're happy that wayAS A boy of 15 in north-eastern China, Dylan Chen knew he was gay. “I grew up thinking I was the only gay person in all of China,” says Mr Chen, now 25 and living in Shanghai. Small wonder. Homosexuality had been decriminalised in China only two years before. It would be officially classified for several years more as a mental illness. Information and acceptance were both in very short supply.
Life for China’s tens of millions of homosexuals has improved markedly since then, especially in big cities. Gay and lesbian bars, clubs, support groups and websites abound. Chinese gays, who playfully call themselves “comrades”, have plenty of scope for networking. One surprising website caters specifically for gays in China’s army and police force.
But even in cosmopolitan Shanghai tolerance has its limits, as Mr Chen and others learned this month when they planned a series of plays, film screenings, panel discussions and parties called Shanghai Pride Week. The organisers, a group of local and expatriate gays, ran into last-minute trouble as city officials forced the cancellation or relocation of some events. Hannah Miller, an American who has lived in Shanghai for five years and was one of the main organisers, knew better than even to think of staging something as brazen as a parade. She hoped that limiting events to private venues and promotional materials to English would be enough to deter unwanted official attention.
In the end eight events went ahead, attended by some 4,000 people, and Ms Miller judged it all a big success. The Chinese press has begun cautiously to report the events, which Mr Chen sees as a big step forward, and a welcome departure from the usual stories about AIDS or the alienation of Chinese homosexuals.
But attitudes will not change easily, especially away from large cities. Traditional values emphasise conventional family life and the continuation of blood lines. The government, meanwhile, has shown a willingness quietly to tolerate homosexuality, but has failed to do much in the way of providing explicit protection. Tentative legislative proposals to expand gay rights have died swift unnoticed deaths. Always wary of rocking the boat, the government routinely quashes attempts at social-activism and rights promotion. Lawyers and activists advocating gay rights have been harassed, and, though many gay websites are accessible, some are blocked.
Very accessible are places like Eddy’s Bar on Shanghai’s west side. A rarity when it opened in 1995, it is now one of the city’s many gay hotspots. This week, apparently undented by the gay-pride kerfuffle, business was brisk.
Formula One
Mosley submits
An end to Formula One’s civil war?
IT WAS 11am in Paris, but high noon for Formula One racing. On Wednesday June 24th at the grand headquarters of the Fédération Internationale de l’Automobile in the Place de La Concorde in Paris, its aristocratic president, Max Mosley, squared off against the small-framed, big-haired Luca di Montezemolo of Ferrari. Mr Montezemolo was threatening to take the big teams out of Formula One (F1), the world’s leading motor-racing championship, and set up a rival series unless Mr Mosley accepted his demands.
Within two hours Mr Montezemolo had prevailed. Mr Mosley agreed to step down more or less immediately, his decision to impose a £40m ($66m) spending cap on teams participating in the championship was scrapped and the teams won a formal role in the governance of the sport. After several weeks’ talk of the teams driving off, of lawsuits galore and, finally, of compromise, the clash ended in a rout.
For ten years the teams have sought a bigger say in F1. “We’re tired of the present system. We want proper governance that is adhered to,” said John Howett, head of Toyota’s F1 team and vice-chairman of the Formula One Teams’ Association (FOTA), on the eve of the showdown. “It is difficult to continue with Max there.” Mr Mosley’s involvement in a much publicised sex scandal last year had done little to bolster his position.
Teams backed by big carmakers such as Toyota, Mercedes, BMW, Ferrari (part of Fiat) and Renault had grown frustrated at the autocratic way the sport was being governed by Mr Mosley and Bernie Ecclestone, two British racing veterans who have kept a tight grip on the rule-book and purse-strings of F1 for around 30 years. Firms founded by Mr Ecclestone control the sport’s commercial affairs, including the lucrative sale of rights to stage races and to broadcast them. They receive over half the fees paid by broadcasters and the companies or governments that put on the races. The teams want a bigger share of the revenues, although the current arrangement will remain in place until 2012.
Another bone of contention is the decision about where the 17 races in each year’s championship should take place. About half of them are still in Europe, but the season now stretches from Melbourne in March to Abu Dhabi in November, passing through China, Brazil, Japan and Malaysia on the way. The newer venues were added partly to broaden the sport’s appeal but mainly because the promoters concerned have built fancy courses and paid lavishly for the privilege of staging races. Meanwhile France, the spiritual home of motor racing, and America, the most important car market in the world, have been struck off F1’s calendar, to the carmakers’ dismay.
The global recession caused the simmering discontent in the sport to boil over into open revolt. After rising costs forced Honda to drop out of F1 last December, Mr Mosley responded by capping the amount each team could spend at £40m a year, for fear that the smaller teams might disappear from the starting grid. Teams that agreed to the limit would be free to introduce any technical changes they dreamed up to improve their cars. Those that refused the cap would be subject to tough scrutiny and stricter technical rules—an intrusion the carmaking teams in particular resented. They wanted the freedom to spend as much as they liked and to innovate; they are, after all, in the sport to boost their image. So they threatened to set up an alternative championship under the auspices of FOTA.
Previous revolts had crumbled, most recently in 2005. But this week FOTA was confident it had lined up a credible series of races with enough circuits, famous drivers and loyal sponsors to threaten F1’s monopoly. In the event, the contingency plans were not needed. Mr Ecclestone seems to have deserted his old friend after FOTA won the backing of the ultimate authority in F1, the private-equity firm CVC Capital, which bought control of Mr Ecclestone’s sports-rights company a few years ago. Its bankers had been worrying that the sport it had bought might fall apart. In the end, it was Mr Mosley and Mr Ecclestone’s authority that collapsed.
Cap and Trade Doesn't Work
Obama can learn a thing or two from Europe's scheme.
MARTIN LIVERMORE FROM TODAY'S WALL STREET JOURNAL EUROPE
The Obama administration has, as expected, re-engaged the U.S. in the negotiations for a global climate change mitigation regime after the Kyoto protocol expires at the end of 2012. A bill setting greenhouse gas reduction targets is currently progressing through Congress, with strong backing from the president. But apart from the warm feeling that comes with an improvement in America's international image, what is likely to be achieved in real terms, and at what cost?
To get a good idea, U.S. policy makers need only look across the Atlantic. The European Union, keen to show global leadership, introduced the world's first Emissions Trading Scheme (ETS) in January 2005, just before the Kyoto protocol came into force. The principle of this and similar schemes -- including the proposed U.S. cap and trade regime -- is that certain sectors of industry are allocated permits to emit fixed amounts of carbon dioxide, held to be the primary driver of climate change. If they manage to reduce emissions more than planned, companies can sell their excess permits; if they need more, they have to buy them.
Advocates of the system like it because "the polluter pays." Setting aside for the moment the question of whether it is justifiable to call carbon dioxide a pollutant, companies of course do not simply absorb these extra costs. Instead, they pass them on to their customers who are also, by and large, taxpayers. Not only does the taxpayer carry the cost of any cap and trade scheme, but their money also provides profit for a whole new industry: the new carbon trading sector, the middlemen who make the system work.
Unlike normal tradable commodities, carbon dioxide emissions can only be estimated, rather than quantified exactly. And it is only international agreements and national law that give these permits a price at all. The result is a system open to misuse, since all parties -- seller, middleman and buyer -- have an incentive and opportunity to manipulate the estimates. Sellers want to show how much they are reducing their emissions, buyers benefit from lower prices as more units come to market, and traders do good business in a buoyant market.
The biggest abuse began right at the start of the ETS when regulators handed out too many free permits. As a result, utilities companies made windfall profits by simply selling on large numbers of unneeded credits and not passing the savings on to their customers in the form of price cuts. Despite the EU's declared goal to dole out permits based on objective criteria, industry lobbying led to an overallocation. When push comes to shove, governments will always protect their national champions. The German government, for example, negotiated an easing of planned caps on emissions from cars to the advantage of manufacturers of higher-powered cars such as Mercedes-Benz and Porsche.
And this is in a bloc where the environmentalists have far more influence than in America. Translated across the Atlantic, any climate change bill will become the subject of the worst kind of pork-barrel politics riddled with loopholes for key industries before it becomes law.
This is already evident in the attitude of a significant number of Democratic Congressmen. Rather than back the bill, as many had assumed, they are looking for changes to protect powerful interests (and their own votes) in their constituencies. States with strong coal mining sectors are particularly vulnerable to cap and trade legislation, and, in the words of Democratic Representative Dennis Cardoza from California "the EPA under President Obama "doesn't get rural America." His Democratic colleague Tim Holden "I have grave concerns about where the administration is going on climate change."
There is another major problem with cap and trade: its lack of predictability. Prices vary considerably. On June 15, the right to emit a tonne of carbon dioxide cost €12.50. Since the inception of the ETS, this price has varied from below €10 to peaks of more than €30. While these fluctuations may encourage businesses to increase energy efficiency -- for which they will in any case receive a direct financial benefit -- it is of no help for long-term investment decisions to permanently reduce carbon emissions. For this, a significantly higher minimum price is needed, perhaps about $140 per tonne, according to a U.K. government-sponsored report from Cambridge university, due to be published shortly.
Given the system's inherent flaws, it comes as little surprise that the ETS didn't quite work as intended. According to European Commission figures, emissions from the 27 member states rose by 1.9% in the first three years of the regime. Following criticism, the caps for the period to 2012 were reduced for the majority of member states, but only to a little lower than actual emissions in 2005, and the evidence is that the recession is having a much more direct impact on emissions than the trading scheme (incidentally putting a lot of low-priced permits on the market).
Despite the system's questionable results, the costs are considerable. In 2006, individual business and sectors had to pay €24.9 billion for over one billion tones' worth of permits. The WorldWatch Institute estimates that the costs of running a trading system designed to meet the EU's Kyoto obligations at about $5 billion. The estimated costs of a trading system to meet the EU's own and far more demanding commitments of a 20% reduction (against a 1990 baseline) by 2020 are around $80 billion annually.
Substantial changes are planned for the European regime, with emissions caps to be set by a single EU body rather than national governments, more than half of permits to be auctioned, and the aviation sector and possibly shipping to be included. Household consumption and private transport cannot be included in the ETS as set up, although the idea of extending the concept to the allocation of personal carbon allowances is popular with some.
But these are only cosmetic changes to an inherently flawed system. The auctioning of permits may avoid overallocation but instead saddle industry with huge upfront costs. The entire scheme will remain vulnerable to political interference and thus likely fail to reduce carbon emissions. The only certainty is that it will hurt the economy and drive up energy costs.
If passed, the U.S. bill will probably commit to the headline figure of a 17% reduction (from a 2005 baseline) in carbon dioxide emissions by 2020. Before signing any bill which would reduce America's competitiveness for little real impact on emissions, President Obama may want to heed the warning of Europe's experience.
Mr. Livermore is director of Scientific Alliance.
Iran's Democrats Deserve Full Support
Appeasing tyrants has never worked in the past.
GARRY KASPAROV
Regardless of its short-term outcome, the Green Revolution in Iran is already a tremendously important event. Iranian citizens are risking their lives to defend their votes and giving the lie to the idea that democracy cannot sprout in hostile soil without external influence. This is of great relevance to people living in autocracies, especially in Russia, my home country.
The Iranian dictatorship is harvesting the bitter fruit of its own policies of radicalization. For decades it exploited fanatical religious beliefs and hosted mass demonstrations. Now these forces are turning against the regime. Citizens who once chanted "Death to America" now call for the blood of Ayatollah Khamenei.
This is encouraging news, but autocrats learn from each other and from history how to hold onto power. Russia's Prime Minister Vladimir Putin sees not a great reformer in Mikhail Gorbachev but a leader who was too weak to hold the Soviet Union together. Others have learned from China's Tiananmen crackdown the value of brutal force. So it is interesting that in the midst of the upheaval in Iran, Iranian President Mahmoud Ahmadinejad made a trip to the Kremlin.
Mr. Putin has a great deal riding on the outcome in Iran. With the Russian economy teetering, he needs a steep increase in oil prices to stave off the collapse of his government. So he has been working to increase tension in the Middle East and now sees the Iranian crisis as potentially helpful -- if Ahmadinejad comes out on top.
According to industry analysts, Iran could produce up to four million more barrels of oil per day if foreign companies were allowed to modernize the country's oil infrastructure. Rapidly increasing Iran's oil output would likely force oil prices to fall. However, if Ahmadinejad retains power, foreign companies aren't likely to be invited in and Israel may well feel compelled to attack Iran's nuclear sites, which will likely drive up energy prices.
After watching the Iranian regime murder its own people in cold blood, Israeli Prime Minister Benjamin Netanyahu will not be able to tell his people that they won't face an existential threat if Iran acquires nuclear weapons. The Ahmadinejad government has also lost its moral legitimacy and is therefore more likely to support a proxy war against Israel through Hamas and Hezbollah in hopes of uniting its people against a foreign enemy.
For Mr. Putin, the unknown factor in all of this is how the West will respond to what's happening in Iran. It could give him pause if Iran faces penalties of real significance for using lethal force against nonviolent protestors. Surprisingly, European leaders are showing unusual assertiveness in condemning the Iranian regime.
But what has been flagging so far has been leadership from the United States. Only in his second statement, a week into the crisis, did President Barack Obama underscore the importance of nonviolence, though he still declined to support the Iranian protestors. I understand the reluctance to provide Iranian leaders with the opportunity to smear the protestors as American stooges. But can the leader of the Free World find nothing more intimidating than bearing witness when it is clear that the regime doesn't care who is watching?
Sen. Richard Lugar (R., Ind.) and Fareed Zakaria on CNN, among others, have defended Mr. Obama's extreme caution. Mr. Zakaria even compared the president's actions to how George H.W. Bush responded timidly to the impending collapse of the Soviet Union and its hold on Eastern Europe in 1989. Mr. Zakaria explained, "Those regimes could easily crack down on the protestors and the Soviet Union could send in tanks." True. But the Soviet Union used tanks to quash dissent when it could. Dictatorships use force when they can get away with it, not when a U.S. president makes a strong statement.
President Dwight Eisenhower might have learned that lesson in 1956 when he said nothing and the Soviets sent tanks into Budapest anyway. Likewise, in 1968 the Soviets cracked down in Czechoslovakia even though the West said little. Regardless of what Mr. Obama says, the Iranian leaders will use all the force at their disposal to stay in power.
There is no reason to withhold external pressure that can tip the balance inside Tehran. Iranian opposition leader Mir Hossein Mousavi is not an ideal democrat. But should he and his supporters win power they will owe their authority to an abruptly empowered Iranian electorate. It is reasonable to expect that the people will hold a Mousavi government accountable for delivering the freedoms that they are now risking their lives to attain.
Millions of Iranians are fighting to join the Free World. The least we can do is let the valiant people of Iran know loud and clear that they will be welcomed with open arms.
Mr. Kasparov, leader of The Other Russia coalition, is a contributing editor of The Wall Street Journal.
Iran 2.0
The world of wired dissidents will grow.
Mark down the Iranian people as an inconvenient truth.
Those who have become close followers of the Iranian nuclear-weapon program -- now approaching its fifth anniversary of Western wheel-spinning in the Persian sand -- know that the menu of options on the table has been limited.
One was bomb Iran. No need to rehearse the reasons given for not doing that, other than the clear understanding that the West simply won't do it.
Two was sanctions, mainly a gasoline embargo. Again, the main show-stopper is that the Western powers won't do it.
Thus, the default option -- talks. The talks began in September 2003, with the U.S. assenting to a "EU-3" negotiating team of Britain, France and Germany. These all-stars gave Iran until the end of the following month to tell all. Nearly five years later it's still just blah, blah, blah.
Bereft of ideas or will, the great powers have spent four years letting the world slide toward some sort of Armageddon in the Middle East -- either an Iranian nuclear launch or a pre-emptive strike by the Israelis.
Oh, and there was always a fourth option: Support the internal Iranian opposition. The argument against was: It's too small, unreachable, unknowable, will backfire.
As always, history has outmaneuvered the smart alecks in the world's foreign ministries. The Iranian opposition -- large, reachable, knowable, fired up -- has forced itself to the top of a reluctant president's to-do list.
What's really ironic about this is how history in the form of Iran's people got so far out ahead of Barack Obama, the most leading-edge figure in modern politics. A week into images of streets filled with people, blood and democratic aspiration, the world's man of the moment became a trailing indicator, only two days ago getting well behind the Iranian opposition movement. During last fall's campaign, he led a movement that swept all before it on a wave of what is known as Web 2.0.
Web 2.0 has become a metaphor. The communications technologies are important -- cell phones, social networks, messaging protocols -- but its more interesting attribute is that it enhances the role, and power, of individuals.
In the 2008 campaign, Mr. Obama brought onboard tech-savvy aides to build out his Web presence, among them Facebook co-founder Chris Hughes. Essentially what they did was to create innumerable electronic gateways for Obama supporters and volunteers. For example, they assembled 35,000 affinity groups linked by geography or cultural interests.
The people protesting Iran's election results have deployed many of the same tools. Much astonishing footage of the marches and pitched battles has been recorded as cellphone video and uploaded to sites like YouTube and then to cable TV.
However dramatic, all of this is quite normal. Web 2.0's individualizing power is being adopted as a competitive tool by every serious commercial enterprise in the world trading system. Why should we not expect the same tools to be used in a competition between upward-striving peoples and suppressive regimes?
Fighting back, Iran's authorities have jammed, blocked or shut down YouTube, text-messaging traffic, Twitter, cellphones, satellites and Web sites. In turn, supporters of the protests have attempted counter-strikes called "distributed denial-of-service attacks" against the government's Web sites.
This isn't just some fascinating sci-fi techie battle. Technology is unavoidably a major element now in the world of geopolitics. Iran can't grow economically, can't become "normal," without letting its people use Web 2.0. The same goes for Egypt, Syria and other politically significant players. Absent liberal use of Web 2.0, they will drop faster toward failure, which in our time infers a default to acquiring nuclear capability as a crude equalizer and then striking out at the winners.
This is a puzzle. Mr. Obama should task his smarter people -- for instance at the Pentagon's Office of Net Assessment -- to find a path out of the State Department's standard model of our diplomats talking to their fake diplomats. That model made him look foolish this week. Nuance needs an upgrade. He should seek a new model that incorporates the wired dissidents not only because it is the right thing to do. But because it is unavoidable. Intelligent meddling.
Tehran the past week is not a one-off. The world of wired dissidents will grow at the same rate as communications technology. These dissidents and their overlords in Tehran and Beijing are the ones now shaping the rules and boundaries of the information-technology future -- what's allowable and what isn't.
A West led by passive leadership will find its commercial protocols written by mullahs and Chinese bureaucrats. (Though where centralizing Western governments think their interests lie in this competition between Web 2.0 and public authority is an interesting question.)
Some media has been spinning criticism of Mr. Obama's early passivity as "neoconservative opportunism." This is nonsense. The technology of Web 2.0 and beyond means no major power can hide from the forces in motion in Iran's streets today, and somewhere else tomorrow. Those who want to hide are the statist Left and the isolationist Right. This is old America. A new American foreign policy has to deal with the world as it exists. You have been watching it on screens large and small since last week.
Stocks Gain Despite Claims
Gains in the energy and industrial sectors helped major stock indexes advance on Thursday despite a jump in jobless claims.
The Dow Jones Industrial Average, which was on a four-day losing streak coming into Thursday's action, was recently up 40 points at 8340.59.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
Commodity and industrial stocks including Alcoa, Caterpillar and United Technologies were strong.
Participants on both commodity- and stock-trading floors have been spooked lately by the prospect of a more prolonged global recession than previously feared. That sentiment carried into Thursday's session, with many investors staying on the sidelines.
"We're in a catalyst-rich environment right now, and yet investors have a significant lack of conviction," said market analyst Art Hogan, of Jefferies & Co. "There's a significant number waiting for a pullback before they put more money to work."
The Nasdaq Composite Index was up 0.9%. The S&P 500 was up 0.6%, helped by gains in its consumer, energy and industrial categories.
In economic news Thursday, the government reported that number of U.S. workers filing new claims for jobless benefits jumped last week and total claims lasting more than one week rebounded after a sharp drop the previous week. Initial claims for jobless benefits rose 15,000 to 627,000 in the week ended June 20. The number of continuing claims, or those drawn by workers for more than one week in the week ended June 13, climbed 29,000 to 6,738,000, after plunging 126,000 the previous week.
Companies are continuing to make hefty cuts to their payrolls. Kimberly-Clark said Thursday that it plans to cut about 1,600 jobs, primarily from its salaried, non-production work force. Shares of the consumer-products giant fell 0.4%.
The government's final reading on first-quarter gross domestic product showed the economy didn't contract quite as rapidly as previously thought. GDP shrank at a 5.5% annual rate in the first three months of the year, better than the 5.7% reading in the last report.
Treasury prices were mixed ahead of the last big auction of the week, of $27 billion in seven-year notes. The yield on the benchmark 10-year note hovered around 3.66% in recent trading. The dollar was stronger. Commodities prices rose, with crude-oil, copper and gold futures edging higher.
Among stocks to watch, Nike shares fell 4.6% after the sneaker giant reported a 30% decline in its fiscal fourth-quarter earnings and said orders are down 12%. Bed Bath & Beyond shares climbed more than 10% after its earnings topped the expectations of analysts.
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