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Depression in the East points the way for the rest of the world
Larry Elliott, Guardian
Anybody who doubts that the global economy is facing its most serious downturn since the 1930s should take a squint at the latest trade figures from Japan. Exports in January were 46% lower in January than they were a year ago – a phenomenal drop for a country that is so heavily dependent on sales of its industrial products overseas.
Japan has got used to economic setbacks over the past two decades: it has been in and out of recession on a regular basis. But make no mistake, this drop in exports does not mean recession: it means depression.
… Why is this happening? Quite simply, the great engine of globalisation has gone into reverse. During the long boom, the US acted as the consumer of last resort: it sucked in exports from China and Japan. As China industrialised, it needed high-grade investment goods from Germany, and as prosperity spread in the world’s most populous country, there was strong demand for Japanese electronics, cars and consumer gizmos. Now that America has stopped spending, Chinese factories have closed. The knock-on effects of that are being felt in Tokyo and Hamburg.
(25 February 2009)
As It Falters, Eastern Europe Raises Risks
Nelson D. Schwartz, New York Times
Since the fall of the Berlin Wall, the countries of Eastern Europe have emerged as critical allies of the United States in the region, embracing American-style capitalism and borrowing heavily from Western European banks to finance their rise.
Now the bill is coming due.
The development boom that turned Poland, Hungary and other former Soviet satellites into some of Europe’s hottest markets is on the verge of going bust, raising worrisome new risks for the global financial system that may ricochet back to the United States.
Last week, Wall Street plunged after Moody’s Investors Service warned that Western banks that had recently beat a path to Eastern Europe’s doorstep now faced “hard landings,” spooking investors with new fears that the exposure could spread beyond Europe’s shores.
(23 February 2009)
Japan’s crisis deepens as world stops buying
Leo Lewis, London Times
Japanese imports and exports crashed by their biggest margins since 1957 last month as the world stopped buying what the country makes best — cars, semiconductors, electrical machinery and ships.
In addition, said one leading economist, the time has come to throw out once and for all the widely-held idea that Japan is a nation of savers — the economy has changed too far and too fast for that to remain the case and in the face of outright crisis, the savings rate may already have turned negative as households dip into their nest eggs.
Analysts described the startling government figures as evidence of Japan’s “canary in the mine” status — it has become a highly sensitive barometer of the global recession and the January figures showed that the crisis has dramatically extended its geographic reach.
(25 February 2009)
Home Prices Post Biggest Drop in 21 Years
Prashant Gopal, Business Week
The S&P/Case-Shiller U.S. National Home Price Index plunged 18.2% during the final quarter of 2008, the biggest annual decline in the closely watched index’s 21-year history.
Separately, for the month of December alone the Case-Shiller 20-City Composite Index fell 18.5% compared with the previous December, also a record decline. The most severe declines were in Phoenix, Las Vegas, and San Francisco, which all dropped by more than 30% in December compared with December 2007.
But the financial crisis has helped to spread the pain across the nation.
(24 February 2009)
How Bank Bonuses Let Us All Down
Nassim Nicholas Taleb, The Financial Times (UK)
One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street – as John Thain, former Merrill Lynch chief executive, put it – is there to “reward talent”. While I find this notion of “talent” debatable, I fully agree that incentives are the heart of capitalism and free markets – but certainly not that incentive scheme.
In fact, the incentive scheme commonly in place does the exact opposite of what an “incentive” system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically – while bankers strike it rich. Furthermore, it is that incentive scheme that got us in the current mess.
Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a “systemic crisis” or a “black swan” for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.
(25 February 2009)
Also at Common Dreams.
