STOCK MARKET WATCH, Monday September 8

Zapatero will raise minimum pensions 6% in spite of the crisis

Announces fight against unemployment is priority and says he "will not rescue corporations"

The President of the Spanish Government, Jose Luis Rodriguez Zapatero, announced yesterday an increase of 6% in minimum pensions for next year and of 25% for the (four-year) legislature. He presented this measure as symbolic of the response from his Government to the economic crisis. "If we have to make a special effort at the present time, we must start with pensions", he said in Rodiezmo (Leon), during a meeting organized by the Socialist Miners' Federation, with which he traditionally opens the political term.

Minimum pensions, which three million people receive, will rise in 2009 by a percentage similar to that of the last legislature. That percentage was between 28% and 36%, according to the type of benefit, Lucia Abellán reports.

Zapatero guaranteed that, in spite of the crisis, he will maintain his social commitments in the areas of unemployment benefits, pensions and assistance for dependent people, and warned that he will not dedicate himself to rescuing corporations. "I am going to dedicate resources to support workers, to those who lose employment, and to pensioners … But don't ask me for money to save businesses of the kind that have been receiving enormous profits through processes that, in many cases, have not been healthy for the economy".

…

He also announced that, at this stage of crisis, his Government will maintain productive investment that creates jobs, such as in infrastructure, and said that he aims for territorial equilibrium through projects such as high-speed rail in the northwest of Spain. "The country will continue working through the power of investment", he said.

…

Among the objectives that are to be maintained during the current term, he included assistance for young people to pay rent, international aid to poor countries (with the commitment to reach 0.7% of GDP this legislature) and the promotion of renewable energy. In relation to this last point, he ruled out opening new nuclear power stations.

/Original in Spanish... http://www.elpais.com/articulo/espana/Zapatero/subira/pensiones/minimas/pese/crisis/elpepunac/20080908elpepinac_2/Tes

``Some of this is a stopgap to try to prevent the mortgage market from falling apart,'' former Federal Reserve Bank of St. Louis President William Poole said on Bloomberg Radio. The federally chartered, shareholder-owned structure, with risks covered by taxpayers, is ``an unacceptable situation,'' he said, projecting the Treasury may need to cover as much as $300 billion of losses..

Mr. Paulson added a mantra of his own: he privately said he didn’t want to “kick the can down the road” and leave the problems for a future administration and Congress to solve....

As possibilities were debated, Treasury officials eventually concluded that if they had to act, the best choice was a conservatorship...

“They called it ‘sticking the companies in a timeout,’ ” said one person with firsthand knowledge of the conversations. “It protects the safety and soundness of the economy but also gives everyone breathing space.”

The credit crisis is simply migrating through all classes of financial instruments

It started out as a problem in the private mortgage market and its associated securities, has moved through the GSE's (it was less than a year ago that it was Fannie and Freddie that were being touted by some as the rescuers who would bail out the housing market) and will ultimately wind up in the Treasury market now that the government has decided that the taxpayers should pick up the costs. Sovereign debt is the end game of the crisis.

At core it is all stunningly simple. The US government, US corporations and US consumers along with some of their counterparts in some other countries in the western world (the UK being the most obvious example) have lived way beyond their means. The revenues they have generated and the wages they have received have been insufficient to support their spending ambitions so they have had to borrow money from foreign lenders to live in the manner to which they have become accustomed. In a way the unraveling has been accelerated by the greed and stupidity of those at the top of US politics and business who have actively encouraged the process whereby workers earning power was suppressed making it inevitable that sooner or later they would have no choice but to default on their debts and thereby start the inevitable unwind.

The problem with this bail out is that is simply trying to shuffle the debt back to very taxpayers who triggered the crisis because they no longer had the means to meet their obligation. The only way that this move can succeed is by printing more money to meet the interest payments that will fall due on future public debt liabilities. Such an attempt to inflate away the losses is bound to meet strong resistance from foreign debt holder who will see the value of their saving and dividends fall. They are either going to demand a hefty interest rate premium for the additional risk or they are simply not going buy treasuries at all. Both results are likely to floor any hopes for a quick recovery in the world economy.

The rising risks of the American Dream, on a borrowed dime

by Jonathan Shaw

Consumerism is as American as cherry pie. Plasma TVs, iPods, granite countertops: you name it, we’ll buy it. To finance the national pastime, Americans have been borrowing from abroad on an increasingly stunning scale. In 2006, the infusion of foreign cash required to close the gap between American incomes and consumption reached nearly 7 percent of gross domestic product (GDP), leaving the United States with a deficit in its current account (an annual measure of capital flows to and from the rest of the world) of more than $850 billion. In other words, the quantity of goods and services that Americans consumed last year in excess of what we produced was close to the entire annual output of Brazil. “Brazil is the tenth largest economy on the planet,” points out Laura Alfaro, an associate professor of business administration who teaches a class on the current account deficit at Harvard Business School (HBS). “That is what the U.S. is eating up every year—a Brazil or a Mexico.”

Whether this practice is sustainable—and if not, how it might end—are questions that divide scholars and investors alike. We have borrowed so much from abroad—between half a trillion and a trillion dollars a year for the past six or seven years—that in 2006, our investment balance with the rest of the world (what we pay foreign investors on their U.S. assets versus their payments to us on our investments abroad, historically nearly equal) tipped to became an outflow for the first time in more than 50 years. We are a debtor nation swiftly heading deeper into debt.

The global imbalances created by this dynamic of American borrowing and foreign lending appear stable for now, but if they slip suddenly, that could pose serious dangers for middle- and working-class Americans through soaring interest rates, a crash in the housing market, and sharply higher prices for anything no longer made domestically. Harvard economists and political scientists see possible threats to globalization (the opening of markets and trade that has made the economy a world phenomenon): the risk of rising protectionism; the potential for a world recession if market forces unwind the imbalances too quickly; and even the possibility that political considerations could trump shared economic interests, causing nations to use their international financial positions as weapons.

That last idea—that nations can wield power through their accumulation of currency reserves—is rooted in our own history. When President Dwight D. Eisenhower learned in 1956 that Britain, in collusion with France and Israel, had invaded Egypt without U.S. knowledge, he was infuriated. “Many people remember Suez,” notes Jeffrey Frankel, Harpel professor of capital formation and growth at the Kennedy School of Government (KSG), but few recall “the specific way that Eisenhower forced the British to back down.” At the time, there was a run on the pound sterling and he blocked the International Monetary Fund (IMF) from stabilizing the currency. With sterling on the verge of collapse, says Frankel, “Eisenhower told them, ‘We are not going to bail out the pound unless you pull out of Suez.’” Facing bankruptcy, the British withdrew. This incident, notes Frankel, “marked the end of Great Britain’s ability to conduct an independent foreign policy.”

Putting international politics aside for a moment, “When a country gets a capital inflow , generally speaking things are pretty good,” observes Jeffry Frieden, Stanfield professor of international peace. “It allows you to invest more than you save, and consume more than you produce. There is nothing necessarily wrong with that,” he notes. Firms do it all the time, and so do households. They borrow on the expectation that they will be more productive and better able to pay the money back in the future. The United States, for example, was “the world’s biggest debtor for a hundred years,” Frieden notes, “but the money was used to build the railroads and the canals and the factories and to improve the ports and to build our cities. It was used productively, and it worked. The question to ask now is not, ‘Is the country living beyond its means?’ The question is, ‘Is the money going to increase the productive capacity of the economy?’ Because if it just goes to getting everybody another iPod,” he warns, “then unless iPods make people more productive, there is going to be trouble down the road when the debt has to be serviced.”

/continues... http://harvardmagazine.com/2007/07/debtor-nation.html

Page last updated at 11:24 GMT, Monday, 8 September 2008 12:24 UK

The FTSE 100 share index hit 5,440.20 points shortly after 0900BST and has remained at that level since then.

An incident report on the LSE website said connectivity was suspended at 0915BST. "No one can enter or delete orders at this time," the report said.

The London Stock Exchange said connectivity had been re-enabled at approximately 1145BST.

But the market is not yet fully functioning.

Now that connectivity has been re-established, traders can enter or delete share orders, but the trades cannot yet be executed.

As there are no trades going through, there are no accurate share prices.

http://news.bbc.co.uk/1/hi/business/7603981.stm

“This maneuver is 100% consistent with the government grand plan to boil us like frogs in a pot of debt since, in the govie’s estimation, it appears that too many people have suddenly decided not to jump in the cauldron of their own volition.” –Fil Zucchi, on Minyanville.com.

“A strong rally lasts for a while, but it eventually fades and makes a new lower low; each “rescue rally” has been shorter in duration and weaker in intensity than the immediately prior one.” Barry Ritholtz, The Big Picture, commenting on market reactions to the various weekend bailouts/surprises announced since August 2007

“The Treasury said it will appoint two independent asset managers as financial agents of the U.S. government to manage the a government portfolio of MBS with the goal of ‘promoting stabiliity and protecting taxpayers.’ Which means that the U.S. government could become akin to the single largest hedge fund on the planet. Amazing to think, for anyone that has been in the mortgage market.” –Paul Jackson, Housingwire.com

“For housing, this doesn’t change anything. Housing fundamentals remain the same: excess supply (especially distressed supply), tighter lending standards, and prices are still too high compared to incomes and rents. The possible slightly lower mortgage rates are almost inconsequential compared to supply and price issues. And the economy is still in recession that will linger for some time.” — Calculated Risk

“Call Paulson’s announcement a good but still half step in the right direction. The Treasury has sought to reassure the debt markets, but has done so in a way that tries to maintain the fiction of private ownership of FNM and FRE. In so doing, Secretary Paulson only draws greater and greater attention to the contradictions and strains inside both GSEs.” - Christopher Whalen, Institutional Risk Analytics

http://blogs.wsj.com/marketbeat/2008/09/08/bloggers-react-the-bailout/

Regulators have been in touch with Washington Mutual (WM). The Seattle thrift announced Monday that it entered into a memorandum of understanding with the Office of Thrift Supervision “concerning aspects of the bank’s operations, principally in several areas of its risk management and compliance functions, including its Bank Secrecy Act compliance program.”

As part of the arrangement, WaMu has agreed to provide the regulators with “an updated, multi-year business plan and forecast for its earnings, asset quality, capital and business segment performance.”

The agreement is noteworthy because it comes just three months after WaMu assured investors that it hadn’t been subject of any regulatory action and was “not currently in such discussions with any regulatory agency.” WaMu made that claim in June after Cleveland-based National City (NCC) reached an agreement with its regulators over lending and capital issues, raising fears among investors that regulators were taking a harder look at the risk management practices at banks with substantial exposure to souring mortgage loans. A call to WaMu wasn’t immediately returned.

WaMu said the arrangement “will not require the company to raise capital, increase liquidity or make changes to the products and services it provides to customers.” Nonetheless, the company’s stock sat out Monday’s financial sector rally, even as WaMu announced the departure of longtime CEO Kerry Killinger and the hiring of thrift industry veteran Alan Fishman. WaMu shares dropped 13% to $3.70.