Cardinals head to conclave to elect pope for troubled Church (Reuters) Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei) Ryan Plan Revives '12 Election Issues (WSJ) Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade Italy 1-yr debt costs highest since Dec after downgrade (Reuters) CIA Ramps Up Role in Iraq (WSJ) Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG) SEC testing customized punishments (Reuters) Judge Cans Soda Ban (WSJ) Hungary Lawmakers Rebuff EU, U.S. (WSJ) Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong Funding for Lending ‘put on steroids’ (FT) Investigators Narrow Focus in Dreamliner Probe (WSJ) With new group, Obama team seeks answer to Karl Rove (Reuters) Boston Booms as Workers Say No to Suburbs (BBG) Overnight Media Digest WSJ * Illinois settled Securities and Exchange Commission civil-fraud charges that the state misled municipal-bond investors by failing to adequately disclose the risks of its underfunded pension system. * Lawmakers grilling Mary Jo White, President Barack Obama's nominee for chairman of the Securities and Exchange Commission, on Tuesday will have to weigh two seemingly contradictory versions of the attorney. * U.S. aviation safety investigators examining Boeing Co's 787 Dreamliner increasingly are focusing on manufacturing or design problems with the batteries as possible causes of overheating rather than on other parts of the jet's electrical system, the head of the National Transportation Safety Board said on Monday. * Starr International Co, run by the former chief executive of American International Group Inc, won the right to pursue as a class action its case against the U.S. government, alleging that elements of AIG's financial-crisis bailout package were unconstitutional. * A crisis of confidence in the nuclear-power industry has trickled down to Namibia, where uranium accounts for 12 percent of exports. But uranium prices are down 70 percent over the past six years. * General Motors Co is in the process of changing advertising agencies of its Cadillac brand. Advertising and marketing work to support Cadillac, valued at about $250 million, will be moved to longtime Michigan advertising agency Campbell Ewald, according to three people briefed on the matter. * The monopoly powers of Mexico's telephone giant, América Móvil SAB de CV and leading broadcaster Grupo Televisa SAB, are coming under fire with a broad set of new laws that aim to open up the telecommunications and television businesses to competition. * Many small U.S. banks are feeling a financial pinch from the government's efforts to punish executives and directors of banks that collapsed during the height of the financial crisis. * KKR & Co LP is considering teaming with other private equity firms to pursue biotech firm Life Technologies Corp, according to people familiar with the matter, in the latest sign that buyout shops are still willing to form "clubs" if they covet a large target. * VeriFone Systems Inc Chief Executive Douglas Bergeron is stepping down after a dozen years at the helm of the card-payment systems maker. The company said it will hire an executive-search firm to find a successor, with Chairman Richard McGinn serving as CEO on an interim basis. FT Dell Inc has agreed to give Carl Icahn a closer look at its books less than a week after the activist investor joined a growing chorus of opposition to founder Michael Dell's plan to take the world's No. 3 personal computer maker private. Private equity firms are looking to buy the UK property business of Germany's second-biggest lender, Commerzbank AG, in a potential 5 billion pound ($7.45 billion) deal. UK lender LLoyds Banking Group plans to sell 20 percent of its stake in wealth manager St James's Place Alibaba Group has chosen Jonathan Lu, its Chief Data Officer who has more than a decade of experience in executive roles, to lead China's largest e-commerce company as it prepares to launch an initial public offering. Italy's central bank has told some of the country's biggest banks to increase their bad loan provisions by an estimated 21 billion euros ($27.33 billion) amid deepening of a nearly two-year old recession. Billionaire hedge fund manager John Paulson is exploring moving to Puerto Rico from New York to lower his tax bill. Richard Joseph, a former futures trader, was convicted of six counts of insider trading, leaking information from the print room at JPMorgan Cazenove. Joseph placed spread bets with CMC Markets ahead of a series of deals in 2007 and 2008. Mexico is looking to overhaul its telecom industry by introducing sweeping proposals that will increase competition and limit the control of telecoms tycoon Carlos Slim and broadcasting giant Televisa. NYT * For the second time in history, federal regulators have accused an American state of securities fraud, finding that Illinois misled investors about the condition of its public pension system from 2005 to 2009. * A state court judge invalidated New York City's new restrictions on sweetened beverages on Monday, a day before they were set to take effect, saying the rules were "arbitrary and capricious." * Britain, unlike other economic powers, is responding to the financial crisis by creating two new agencies, one to oversee institutions and another to watch for market abuses. * In advance of a summit meeting of European Union leaders on Thursday in Brussels, the president of the European Commission, José Manuel Barroso, called on the bloc's 17 members to stay the course on austerity. * Intrade, the online betting site, announced late on Sunday that it had halted trading and frozen customer accounts after the discovery of potential financial irregularities. * Oppenheimer & Co will pay nearly $3 million to settle accusations by federal and state regulators that it misled investors about the performance of one of its private equity funds, in a case that signals stepped-up scrutiny of the buyout industry and how it values its holdings. * Dell Inc has agreed to open its books to the activist investor Carl Icahn, signaling a possible truce on one front in the battle over the computer maker's proposed $24.4 billion buyout. * In prepared testimony for her nomination hearing, Mary Jo White placed a premium on unearthing financial fraud, as she works to deflect concerns from lawmakers who question her ability to regulate banks she recently defended. * British authorities have opened an investigation into Hewlett-Packard Co's claims that it was duped when it bought the business software maker Autonomy, according to regulatory documents filed on Monday. Canada THE GLOBE AND MAIL * Ottawa and the Northwest Territories have reached a deal to hand the territory province-like power over its land, a move aimed at empowering local leaders to unlock more of their resource riches. * Less than a third of the almost 300,000 members and supporters who signed up to choose the Liberal party's next leader have so far registered to vote, prompting front-runner Justin Trudeau's camp to complain about a host of technical glitches and request a one-week extension on registration. * The federal government is facing questions over the legitimacy of its centerpiece for aboriginal education reform. Manitoba chiefs rejected the Harper government's vision for aboriginal education on Monday, claiming Ottawa is trying to "bypass" first nations chiefs and shirk its treaty responsibilities. Reports in the business section: * Chrysler Canada is jumping back into leasing for the first time since 2008, raising the competitive stakes another notch in an auto market already awash with financing and leasing incentives. * AT&T Inc will begin selling BlackBerry's new BlackBerry Z10 smartphone next week, marking the smartphone's debut in a crucial U.S. market that has largely shunned the company's devices in recent years. * Molson Coors Brewing Co's Canadian arm sold far less Miller Genuine Draft beer in the country over the past three years than the targets called for under its agreement with Miller Brewing Co. That under-performance - spelled out in court filings - is at the crux of a dispute that has erupted between the two companies, as Miller tries to cancel its Canadian licensing agreement with Molson. NATIONAL POST * The federal government, which has come under fire over tougher employment insurance (EI) rules, is sweetening benefits for parents. It says it will allow individuals receiving parental benefits through EI to qualify for sickness benefits as well, starting March 24. * The latest annual report on federal ad spending shows Ottawa shelled out C$78.5 million ($76.5 million) in 2011-12 telling Canadians about everything from the switch to digital TV and the War of 1812, to elder abuse and anti-drug messaging. The Harper government spent C$21 million on major advertising campaigns under its Economic Action Plan brand. * Despite activist claims that the city's homeless are dying due to a lack of shelter space, there is no shelter bed shortage in Toronto, according to an internal report prepared for city council. FINANCIAL POST * After years of growth, economists say the real estate boom is over and predict Canadian housing prices to flatline over the next decade. A TD Economics study, Long-Run Rate of Return for Canadian Home Prices, predicts a "string of lackluster performances" over the next few years. * Alamos Gold Inc is going on the offensive in the takeover battle for Aurizon Mines Ltd, asking a securities regulator to reject both a break fee and poison pill that it believes are highly irregular. * Travel tour operator Transat AT Inc said it has managed to wrest concessions from its flight attendants as the company continues its campaign to be more cost competitive. The bulk of the expected C$9 million in annual savings will come from Transat lowering the amount of flight attendants on its Airbus A330s to 10 from 11, and the move will also support a potential shift to a fleet of Boeing Co's 737s. China SECURITIES TIMES -- Huatai Securities said on Tuesday its board of directors had sanctioned the issuance of no more than 10 billion yuan of corporate bonds on the Shanghai Stock Exchange to supplement operating funds. -- The Shanghai securities regulator said five foreign banks, including Standard Chartered, have applied for licences to distribute mutual fund products in China. CHINA SECURITIES JOURNAL -- The Shanghai stock exchange is looking to invest more in regional stock exchanges to support smaller firms in China, its director general said on Monday. CHINA DAILY -- China's first special envoy for Asian affairs will have a focus on Myanmar, the Foreign Ministry said on Monday. There has been tension between China and its southern neighbour over conflict in Myanmar, close to the Chinese border. -- Roughly one in ten of the 5,000 proposals submitted to China's top political advisory body since March 3 are related to environmental issues, said Lu Fuhe, a top national political advisor. SHANGHAI DAILY -- French firm Carrefour, the world's number two retailer, has implemented a system to allow shoppers to trace the origin of fruit and vegetables in their Chinese stores in Shanghai, a reflection of the recent pressure in China over food safety. CHINA BUSINESS NEWS -- The number of dead pigs found in the Huangpu River, one of Shanghai's key water sources, is now estimated to have increased to 2,800. Fly On The Wall 7:00 AM Market Snapshot ANALYST RESEARCH Upgrades Axiall (AXLL) upgraded to Buy from Neutral at CitigroupDick's Sporting (DKS) upgraded to Outperform from Market Perform at BMO CapitalDick's Sporting (DKS) upgraded to Conviction Buy from Buy at GoldmanIntercontinental Hotels (IHG) upgraded to Neutral from Sell at UBSMosaic (MOS) upgraded to Outperform from Market Perform at BMO CapitalSherwin-Williams (SHW) upgraded to Neutral from Underperform at Credit SuisseVantiv (VNTV) upgraded to Outperform from Market Perform at Raymond JamesVitamin Shoppe (VSI) upgraded to Buy from Neutral at Goldman Downgrades CVS Caremark (CVS) downgraded to Neutral from Buy at GoldmanEverBank Financial (EVER) downgraded to Neutral from Buy at Sterne AgeeRadioShack (RSH) downgraded to Sell from Neutral at GoldmanRed Hat (RHT) downgraded to Neutral from Buy at Citigroup Initiations Fifth & Pacific (FNP) initiated with a Buy at Brean CapitalRush Enterprises (RUSHA) initiated with a Market Perform at BMO CapitalTJX (TJX) initiated with an Overweight at BarclaysWabash (WNC) initiated with an Outperform at BMO CapitalWABCO (WBC) initiated with an Outperform at BMO CapitalXoom (XOOM) initiated with an Outperform at RW BairdXoom (XOOM) initiated with an Overweight at Barclays HOT STOCKS SEC charged Illinois for misleading pension disclosuresTreasury Department sold $489.9M of GM (GM) common stock in FebruaryHP (HPQ) disclosed U.K Serious Fraud Office opened investigation related to AutonomyKKR (KKR) has considered teaming to bid for Life Technologies (LIFE), and Thermo Fisher (TMO) and Danaher (DHR) also weigh bids for Life, valued at $12.5B with debt, DJ reports Diamond Foods (DMND) sees second half sales down more than first halfRio Tinto (RIO) slowed Guinea iron ore investment, to cut staff, Reuters reports Said Guinea iron ore project not frozen, to work with government on funding, Bloomberg reportsHill International (HIL) sees FY13 consulting fee revenue $500M-$520M Cadence Design (CDNS) acquired Tensilica for $380M in cashPall Corp (PLL) signed 30 year agreement to supply Embraer (ERJ) with KC-390 manifoldsMRC Global (MRC), NAWAH entered into alliance to open distribution facility in IraqLakeland Industries (LAKE) reported $11.5M goodwill impairment charge in Brazil EARNINGS Companies that beat consensus earnings expectations last night and today include:Costco (COST), BioScrip (BIOS), Stewart Enterprises (STEI), XenoPort (XNPT), Heckmann (HEK) Companies that missed consensus earnings expectations include:Stage Stores (SSI), FuelCell (FCEL), Chiquita Brands (CQB), Hill International (HIL), Casey's General Stores (CASY), Urban Outfitters (URBN) Companies that matched consensus earnings expectations include:Douglas Dynamics (PLOW), Flow International (FLOW), Manitex (MNTX) NEWSPAPERS/WEBSITES Multinationals (GE, HPQ, CAT, HON) have been increasing their footprint in Asia for years as they have moved from selling into the region to also investing here. But the transformation is gaining critical mass as Western companies' market-share leads in Asia over cash-flush local competitors narrow, forcing Western firms to invest more, tailor their products and transfer top executives to Asia, the Wall Street Journal reports Rising fuel prices have GM (GM) and Chrysler Group (FIATY) taking another look at selling smaller pickup trucks—vehicles that the Detroit Three automakers (F) abandoned in the U.S. amid weak demand. Both see the vehicles helping them to hit higher fuel-economy targets and to regain market share from Toyota (TM), the current top-selling small hauler., the Wall Street Journal reports Two groups of AIG (AIG) shareholders won class-action status from a federal judge on in a $25B lawsuit by former CEO Maurice "Hank" Greenberg over alleged losses caused by the U.S. government's bailout of the insurer, Reuters reports As the jobs market showing signs of healing, economists think they know what's next for monetary policy: the Fed will at some point reduce its monthly bond purchases, and soon after, end them altogether. But perhaps they shouldn't be so sure, Reuters reports Shares of companies that own and operate their truck fleets (WERN, KNX, SWFT, HTLD) are outperforming those that act as brokers for trucking services, driven by stronger U.S. freight activity, Bloomberg reports The Treasury Department, exiting its ownership stake in GM (GM), accelerated its sell- down of the automaker in February, saying it received $489.9M in proceeds from the sale of common shares, Bloomberg reports SYNDICATE Emeritus (ESC) announces 7.97M share secondary offering by holdersGovernment Properties (GOV) 9.95M share Spot Secondary priced at $25.20HeartWare (HTWR) announces public offering of 1.5M shares of common stockLexington Realty (LXP) files to sell 15M shares of common stockSalesforce.com (CRM) announces proposed $1B offering of convertible senior notesSapiens (SPNS) files to sell $40M of common stock, 6M shares for holdersSun Communities (SUI) announces 4.5M share common stock offeringU.S. Silica (SLCA) announces 8.5M share secondary offering by stockholderYandex (YNDX) announces 24.25M Class A ordinary shares offering by holders
Science has determined that people need to know 7.5 things per day, on average, about the world of business. You can't argue with science. Lucky for you, The Huffington Post has an email newsletter, delivered first thing every weekday morning, boiling down the day's biggest business news into the 7.5 things you absolutely need to know. And we're giving it away free, because we love you, and also science. Here you go: Thing One: So Much Cash, So Little Use For It: The good news? Companies are as flush with cash as they have ever been. Now the bad news: They're not going to spend any of it, except to give it back to shareholders. U.S. companies plan to pay a record $300 billion in dividends this year, writes the Wall Street Journal, up from $282 billion a year ago. Companies also announced plans last month to buy back nearly $118 billion in stock, the most for any single month on record, by one measure. All of this cash flowing to investors has a couple of positive effects, besides the obvious make-investors-happy effect: For one thing, it is helping to boost stock prices through the roof, for whatever that is worth. For another thing, it will result in more tax money to the U.S. government, which I hear tell has been experiencing some agita about its budget lately. Dividends are being taxed at higher rates this year -- one effect of this year's "fiscal cliff" caused by all of that budget agita -- so more dividends equals many more tax dollars. Of course, the government's budget woes could be alleviated a good bit if companies would stop hoarding cash overseas, away from the clutches of the IRS. U.S. companies are holding a record $1.9 trillion offshore, according to Bloomberg's count, having shipped another $183 billion overseas in the past year. As one analyst tells the WSJ, all of this cash sloshing about is hardly a great sign. Companies are giving it back to shareholders and stashing it overseas because they can't figure out what else to do with it, as Paul Krugman notes in his New York Times column. Corporate cash may be pushing the Dow to a record high, but it is not being invested in the future, or in people. The job market is still missing more than 3 million of the jobs it lost during the recession. At the current pace of hiring, that hole could take nearly two more years to fill. And then there are wages, which have stagnated even as corporate profits have hit record highs. It's something to keep in mind when reading today's February jobs report. The job market is recovering, but still far from healed. Thing Two: Not-So-Stressful Tests: One group of companies in particular should be forking a bit more cash over to shareholders soon: The banks. The 18 biggest U.S. banks mostly got clean bills of health in the Federal Reserve's latest round of stress tests, meaning they will probably be allowed to raise their dividends and buy back more stock. There are good reasons to question just how stressful the Fed's tests really are, the NYT notes, in terms of their assumptions about losses during another crisis and about how much capital they really need. Thing Three: China: Do What We Say, Not What We Do: China's commerce minister warned Japan, the U.S. and other countries against engaging in "competitive currency depreciation" to boost their growth, the Financial Times writes. "Leave that sort of thing to China," the FT does not add. Actually, to be fair, China has gotten out of the active currency-devaluation game lately as it tries to press gently on its property bubble. Thing Four: What A Draghi: One group not rushing into the currency wars is the European Central Bank, which on Thursday again decided to leave interest rates alone, despite the continent's never-ending recession. Things are going to have to get a lot worse for the ECB to act, ECB chief Mario Draghi declared, expressing confidence that Italy's recent spot of trouble isn't going to turn into another financial-system-eating nightmare. Thing Five: In Case You Need More Proof: The past decade has been among the hottest in the past 11,000 years, according to a new study of the entire stretch of the Holocene period, the WSJ writes. There is a clear spike in temperatures at the very end of the WSJ's compelling 11,000-year temperature chart, strongly suggesting that this is man-made and not a natural temperature fluctuation. Thing Six: Fed Considers Do-Nothing Strategy: Fed officials are considering just hanging on to all of the bonds it has bought during its years-long campaign to boost the economy, letting them mature rather than trying to sell them off and risk roiling the bond market, Reuters reports. The approach makes sense, but it does raise questions about the Fed's ability to withdraw support for the economy quickly, if needed. But won't that be a nice problem to have? Thing Seven: Carl Icahn Will See You In Dell: Not content to make his rival, William Ackman, miserable, activist investor Carl Icahn has turned his attention to struggling computer maker Dell, for some reason. He declared yesterday that Dell had better borrow a bunch of money and pay him and other investors a huge dividend, or else spend years in litigation, the WSJ writes. That should turn things around. Thing Seven And One Half: The Robots Will Blow Out The Candles: On this day in 1817, the New York Stock & Exchange Board was officially formed, by the same people who in 1792 had signed the Buttonwood Agreement to trade stocks under a buttonwood tree in lower Manhattan. In 1863 the name was changed to the New York Stock Exchange, which eventually became the go-to site for photographs and videos of anguished and/or ebullient traders. Today the NYSE is operated by NYSE Euronext after its merger with a European electronic exchange, and the whole company will soon be owned by an Atlanta futures exchange called Intercontinental Exchange. You can still find a few traders there for souvenir photographs, but it has mostly been taken over by computers. Now Arriving By Email: If you'd like this newsletter delivered daily to your email inbox, then please just feed your email address to the thin box over on the right side of this page, wedged narrowly between the ad and all the social-media buttons. OR, if you are logged into a HuffPost account, you could simply click on this link and tick the box labeled "7.5 Things" (and any other kind of news alert you'd like to get). Nothing bad will happen to you if you do, unless you consider getting this newsletter delivered daily to your email inbox a bad thing. Calendar Du Jour: Economic Data: 8:30 a.m. ET: Jobs Report for February Corporate Earnings: Nada. Heard On The Tweets: Is it still a stairway to heaven or have they upgraded to like an escalator or teleport or something?— M. Kittenosaurus(@mkat816) March 7, 2013 My biggest problem with Facebook isn't design — it's that I won't put in work to update my scattered, irrelevant friend list— John Herrman (@jwherrman) March 7, 2013 a filibuster is basically the political equivalent of getting cornered by the drunkest guy at a party.— Morgan Murphy (@morgan_murphy) March 7, 2013 I'm sure everybody's already tweeting about how this would be composer Maurice Ravel's 148th birthday. #partytime #ravel #poppinbottles— Thomas Lennon (@thomaslennon) March 7, 2013 People may not take my threats seriously, but after I nuke the U.S., I'm going to kill Superman. #shitjustgotreal— KimJongNumberUn (@KimJongNumberUn) March 7, 2013 -- Calendar and Tweets rounded up by Alexis Kleinman And you can follow us on Twitter, too, if you want, no pressure: @AlexisKleinman and @MarkGongloff
Tunisian opposition politician shot dead, protests erupt (Reuters) China says extremely concerned after latest North Korea threats (Reuters) Postal Service to cut Saturday mail to trim costs (AP) Debt Rise Colors Budget Talks (WSJ) Obama proposes short-term budget fix, Republicans swiftly object (Reuters) S&P Analyst Joked of Bringing Down the House Before Crash (BBG) Dell’s Bigger Challenge Ahead in Turnaround After Buyout (BBG) Some of the Mark Carney Gloss Is Coming Off (WSJ) Japan Official Says BOJ Tools Sufficient as Shake-Up Looms (BBG) S&P Lawsuit Undermined by SEC Rules That Impede Competition (BBG) Heavy Clashes Erupt in Syrian Capital (WSJ) Carmakers Use Aluminum Over Steel in Boost for Rio (BBG) Beijing vows to raise minimum wages (FT) China Port Operators Step Up Overseas Investment (WSJ) Overnight Media Digest WSJ * A slowly improving U.S. economy and recently enacted tax increases will help bring down the federal deficit for the next few years, the Congressional Budget Office said Tuesday, but it will take another $2 trillion in belt-tightening over the next decade to begin to move the federal debt closer to historic levels. * The U.S. government wants Standard & Poor's Ratings Services to pay more than $5 billion - roughly what its parent company has earned in the past seven years - for giving its seal of approval to bundles of subprime mortgages that eventually crumbled, costing investors billions and helping sink the economy. * Nasdaq OMX Group's missteps during last year's debut of Facebook Inc shares cost Wall Street an estimated $500 million. In the end, U.S. securities regulators may end up fining the exchange group 1 percent of that. * Pinterest is in talks to raise a new round of financing that would value the online scrapbooking site at $2 billion to $2.5 billion. * Regulators leading the world-wide probe into rate-rigging allegations are expected to announce Wednesday a settlement of around 400 million pounds ($626.72 million) with Royal Bank of Scotland, according to people close to the investigation. * John Malone's international cable business Liberty Global Inc has agreed to acquire U.K. cable-television and Internet provider Virgin Media Inc for $16 billion, in a deal that may create a stronger rival to market leader British Sky Broadcasting Group Plc. * Walt Disney Co's net income weakened in the latest quarter, even as revenue grew, reflecting slimmer profits at the movie studio, where home-video titles were less lucrative than those released in the final months of 2011. * Chipotle Mexican Grill Inc and Panera Bread Co have posted solid results even as traditional fast-food chains like McDonald's Corp and Yum Brands Inc are struggling with waning consumer confidence. FT John Malone's Liberty Global Inc struck a deal to buy British cable group Virgin Media for $23.3 billion in a cash and stock deal, a move that would put the U.S. billionaire up against old rival Rupert Murdoch. Michael Dell struck a deal to take Dell Inc private for $24.4 billion in the biggest leveraged buyout since the financial crisis, partnering with the Silver Lake private equity firm and Microsoft Corp to try to turn around the struggling computer company without Wall Street scrutiny. Business secretary Vince Cable is expected to revive a radical plan to return state-owned Royal Bank of Scotland to private sector hands by distributing free shares to the public. BP Plc is facing demands of more than $34 billion in damages from states and local government in the United States over its 2010 Deepwater Horizon disaster. The claims could significantly increase its potential bill for the Gulf of Mexico spill. Swiss bank UBS said it was cutting bonus payments to its staff in a move to appease regulators and investors and recoup a large part of its $1.5 billion Libor fine. Boeing said it sought permission from U.S. aviation authorities to start test flights of its 787 Dreamliner jet as part of its effort to identify the cause of battery failures that forced the plane to be grounded. European aerospace and defence company EADS plans to bring an American on its board for the first time as the company plans to boost its credentials in the lucrative US market. The Airbus parent has nominated Ralph Crosby, a former executive at Northrop Grumman, to join its board. Jim O'Neill, chairman of Goldman Sachs' asset-management division and the man who coined the acronym 'BRIC', will retire from the bank later this year. NYT * Court documents offer a look at the inner workings of Standard and Poor's, which the U.S. government says inflated credit ratings with dire consequences for the entire economy. * Dell Inc, seeking to revive itself after years of decline, said on Tuesday it had agreed to go private in a deal led by its founder and the investment firm Silver Lake. * U.S. President Barack Obama on Tuesday called on Congress to quickly pass a new package of limited spending cuts and tax increases to head off substantial across-the-board reductions to domestic and military spending set to begin on March 1, but his appeal for more revenue was dismissed by Republicans. * Liberty Global Inc, the international cable company owned by American billionaire John Malone, agreed on Tuesday to buy the British cable company Virgin Media Inc for about $16 billion. * Law firm Debevoise & Plimpton's move to get out of the estate-planning business comes as the legal industry continues to emphasize more profitable practices. * Twitter confirmed on Tuesday that it was acquiring Bluefin Labs, a company that analyzes online chatter about TV shows and companies and sells its findings. * Jim O'Neill, the economist who a decade ago coined the term "BRICs" - the acronym for the emerging growth economies in Brazil, Russia, India and China - plans to retire from Goldman Sachs Group Inc later this year, the firm announced on Tuesday. Canada THE GLOBE AND MAIL * The Canadian government is prepared to knock holes in the hefty tariff walls shielding dairy producers from foreign competition and admit more European cheese into the country in return for greater access to EU markets for Canada's beef and pork. * The Conservative government is preparing to commit long-term cash for infrastructure in its 2013 budget in an effort to squeeze more projects - including partnerships with the private sector - out of limited public funds. Reports in the business section: * Suncor Energy Inc has taken a writedown of nearly C$1.5 billion on its Voyageur project, a massive oil sands plant that is now at serious risk of cancellation. * Kathleen Taylor spent years preparing for the top job at Four Seasons Hotels Ltd, but the company said on Tuesday that she will be replaced only three years after she finally sat down in the corner office. NATIONAL POST * Prime Minister Stephen Harper would seek a constitutional amendment to give the House of Commons primacy over any future elected Senate, said Harper's point-person on reform in the Senate. FINANCIAL POST * Car loans drove Canadians to record debt in the fourth quarter of 2012 as the pace of consumer borrowing began to pick up after a brief lull, according to a survey released on Tuesday. China CHINA SECURITIES JOURNAL -- Top Chinese steel maker Baoshan Iron & Steel Co said it had so far bought back 424 million shares in response to a regulatory call last year for listed companies to buy back their own shares to support the stock market. CHINA DAILY (www.chinadaily.com.cn) -- Chinese health authorities have launched a campaign to address abusive practices in the country's growing assisted reproductive technology industry. -- Beijing weather authorities have launched a "fireworks index" to inform residents celebrating the upcoming Spring Festival holiday whether conditions are appropriate for setting off fireworks. SHANGHAI DAILY -- Ten people who illegally detained citizens trying to take complaints to the central government have been jailed. The defendants allegedly intercepted people coming to Beijing to complain about land seizures. The practice is believed to be common in China, the report said. -- Clothing retailer H&M has been fined by the Shanghai city market watchdog for selling substandard shoes. PEOPLE'S DAILY -- China will announce the names of the 10 most polluted cities in the country every month, said Wu Xiaoqing, vice minister of environmental protection. Fly On The Wall 7:00 AM Market Snapshot ANALYST RESEARCH Upgrades Allergan (AGN) upgraded to Outperform from Market Perform at JMP SecuritiesCarlyle Group (CG) upgraded to Buy from Neutral at CitigroupDell (DELL) upgraded to Neutral from Sell at CitigroupExpress (EXPR) upgraded to Overweight from Neutral at JPMorganGannett (GCI) upgraded to Buy from Neutral at CitigroupMarsh & McLennan (MMC) upgraded to Buy from Neutral at Goldman Downgrades Arch Coal (ACI) downgraded to Neutral from Overweight at JPMorganAshford Hospitality (AHT) downgraded to Neutral from Outperform at RW BairdC.H. Robinson (CHRW) downgraded to Underperform from Buy at BofA/MerrillCentene (CNC) downgraded to Neutral from Buy at CitigroupCharter (CHTR) downgraded to Market Perform from Outperform at Raymond JamesExpedia (EXPE) downgraded to Sector Perform from Outperform at RBC CapitalHologic (HOLX) downgraded to Neutral from Buy at BofA/MerrillIntercontinental Hotels (IHG) downgraded to Neutral from Outperform at RW BairdMarcus (MCS) downgraded to Neutral from Outperform at RW BairdMcClatchy (MNI) downgraded to Neutral from Buy at CitigroupMinerals Technologies (MTX) downgraded to Neutral from Overweight at JPMorganPebblebrook Hotel (PEB) downgraded to Neutral from Outperform at RW BairdSandRidge Permian Trust (PER) downgraded to Sector Perform at RBC CapitalSilgan Holdings (SLGN) downgraded to Neutral from Buy at CitigroupSirius XM (SIRI) downgraded to Neutral from Outperform at MacquarieSohu.com (SOHU) downgraded to Neutral from Outperform at MacquarieTrimble Navigation (TRMB) downgraded to Neutral from Overweight at JPMorganValidus (VR) downgraded to Neutral from Conviction Buy at GoldmanVascular Solutions (VASC) downgraded to Hold from Buy at Benchmark Co. Initiations Advanced Energy (AEIS) initiated with a Buy at CitigroupFinish Line (FINL) initiated with a Neutral at RW BairdFirst Solar (FSLR) initiated with a Buy at CitigroupFoot Locker (FL) initiated with an Outperform at RW BairdGlobal Eagle (ENT) initiated with an Overweight at Piper JaffrayMEMC Electronic (WFR) initiated with a Buy at CitigroupSunPower (SPWR) initiated with a Buy, added to Top Picks Live at CitigroupSuntech (STP) initiated with a Sell at CitigroupTesaro (TSRO) initiated with a Buy at Deutsche BankThor Industries (THO) initiated with an Outperform at BMO CapitalTrina Solar (TSL) initiated with a Neutral at CitigroupYingli Green (YGE) initiated with a Neutral at Citigroup HOT STOCKS Liberty Global (LBTYA) to acquire Virgin Media (VMED) for $23.3BSilver Wheaton (SLW) acquired some gold production from two Vale (VALE) mines for $1.9B Biogen (BIIB) to acquire full rights and control of Tysabri from Elan (ELN)Disney (DIS) said confident about FY13, ability to create long-term growthFord (F) announced 900 dealers to be certified to sell plug-in EVs by springHome Depot (HD) to hire 80,000 associates for spring seasonChipotle (CMG): Confident in continued ability to drive sales growth in 2013Sees 2013 comparable restaurant sales flat to low single digits3M Company (MMM) authorized $7.5B share repurchase programMoody's affirmed MetLife's (MET) ratings, long-term ratings' outlook to negativeFitch: Yum! Brands (YUM) ratings not immediately impacted by China weaknessEquity Residential (EQR) sees Q1 FFO 62c-66c, consensus 66cZynga (ZNGA) sees FY13 EBITDA margin 0%-10%Said no full year 2013 year guidance, cites platform transition Netflix (NFLX), Queen Latifah's Flavor Unit Entertainment announced multi-year deal EARNINGS Companies that beat consensus earnings expectations last night and today include:Elan (ELN), W.R. Grace (GRA), KKR Financial (KFN), Horace Mann (HMN), Genworth (GNW), Jive Software (JIVE), Take-Two (TTWO), Hanesbrands (HBI), Panera Bread (PNRA), Hain Celestial (HAIN), Zynga (ZNGA) Companies that missed consensus earnings expectations include:AU Optronics (AUO), C.H. Robinson (CHRW), Stanley Furniture (STLY), Chipotle (CMG), Expedia (EXPE) Companies that matched consensus earnings expectations include:Myriad Genetics (MYGN), Aflac (AFL), Fiserv (FISV), CME Group (CME), Thoratec (THOR) NEWSPAPERS/WEBSITES U.S. stock exchanges, banks, trading firms and mutual funds want the SEC to study the effect of pricing some small stocks in nickels and dimes, rather than in pennies, the Wall Street Journal reportsMicrosoft’s (MSFT) contribution to the Dell (DELL) buyout is a $2B gamble that the software firm can boost up one of its major customers without upsetting all the others, the Wall Street Journal reportsThe Federal Reserve said that one of its internal websites had been briefly breached by hackers, though no critical functions of the U.S. central bank were affected by the intrusion, Reuters reportsSoftbank (SFTBF) will issue $3.2B in corporate bonds, the biggest ever by a non-financial Japanese firm to retail investors, to convert part of the $17.7B in short-term loans used to purchase Sprint Nextel (S) to longer term debt, sources say, Reuters reportsWith Michael Dell’s (DELL) deal to take his company private, he now faces the larger challenge of turning a business falling behind in personal computers into a provider of high-margin cloud-computing tools and services, Bloomberg reportsAutomakers from Ford (F) to Audi (VLKAY) and Jaguar Land Rover (TTM) are using record amounts of aluminum to replace heavier steel, providing relief to producers of the metal facing excess supplies and depressed prices, Bloomberg reports SYNDICATE Boise Cascade (BCC) 11.765M share IPO priced at $21.00Celldex (CLDX) 12M share Secondary priced at $7.50MagnaChip (MX) 5M share Secondary priced at $14.50NCI Building Systems (NCS) files to sell 54.14M shares of common stock for holdersRose Rock Midstream (RRMS) files to sell 2M common units for holdersSilver Bull (SVBL) proposes public offering of unitsTICC Capital (TICC) files to sell 3M shares of common stockWNS Holdings (WNS) files to sell 12.6M ADSs for Warburg Pincus
HISTORICALLY, futures exchanges have been very effective at preventing the failings of individual traders from hurting others. That is one reason why America’s Dodd-Frank law introduced new rules for over-the-counter (OTC) swaps designed to make them more like futures. (“Swap” is a broad term for many types of financial derivatives directly agreed between two parties, including credit default swaps and currency forwards. The most common is the interest rate swap, which allows people to transform floating-rate debt into fixed-rate debt and vice versa.) In particular, policymakers want greater transparency and central counterparty clearing. If swaps are traded on exchanges rather than negotiated bilaterally, regulators and market participants should have an easier time measuring—and containing—systemic risk. (Customers should also get better prices.) Likewise, having a clearinghouse that collects margin and is capitalised by fees from members should make it easier to cancel out positions and minimise counterparty losses in the event of default.*The easiest way to make the swaps markets behave more like the futures markets is to encourage the existing futures exchanges to create products that displace swaps. This “futurisation of swaps” has already started. Back in October, the Intercontinental Exchange (ICE) converted the energy swaps contracts it cleared into futures ...
HISTORICALLY, futures exchanges have been very effective at preventing the failings of individual traders from hurting others. That is one reason why America’s Dodd-Frank law introduced new rules for over-the-counter (OTC) swaps designed to make them more like futures. (“Swap” is a broad term for many types of financial derivatives directly agreed between two parties, including credit default swaps and currency forwards. The most common is the interest rate swap, which allows people to transform floating-rate debt into fixed-rate debt and vice versa.) In particular, policymakers want greater transparency and central counterparty clearing. If swaps are traded on exchanges rather than negotiated bilaterally, regulators and market participants should have an easier time measuring—and containing—systemic risk. (Customers should also get better prices.) Likewise, having a clearinghouse that collects margin and is capitalised by fees from members should make it easier to cancel out positions and minimise counterparty losses in the event of default.*The easiest way to make the swaps markets behave more like the futures markets is to encourage the existing futures exchanges to create products that displace swaps. This “futurisation of swaps” has already started. Back in October, the Intercontinental Exchange (ICE) converted the energy swaps contracts it cleared into futures contracts. That was pretty easy to pull off because both ICE and its traders were already very familiar with commodity futures. In December, the CME Group started offering a more exotic product, the “deliverable interest rate swap future”. Like all futures contracts, the product is a promise by the seller to provide something to the buyer at a fixed point in the future. But instead of wheat or government bonds, sellers of this new contract agree to provide buyers with an interest rate swap, which would presumably have to be acquired from a bank or other swap dealer. ICE plans on releasing a new futures contract in April that would be based on an index of credit default swap (CDS) prices.This process could continue for quite a while. The Bank for International Settlements estimates that the current size of the global OTC swaps market is somewhere between $600 and $700 trillion (in notional terms). For perspective, the World Bank estimates that the combined equity market capitalisation of every listed company on Earth is about $50 trillion. America’s futures markets are about half of that size. The big exchanges therefore stand to gain tremendously from even a relatively small shift towards futures and away from swaps. The incumbents—the big dealer banks and the interdealer brokers—stand to lose out. They, and others with vested interests in the status quo, argue that the rules being written by America’s Commodity Futures Trading Commission (CFTC) are unfairly biased in favour of the futures markets. In an effort to sort out everyone’s views, the CFTC hosted a public roundtable last Thursday. Your correspondent was in attendance.Everyone admitted that the OTC swaps market was insufficiently regulated before the crisis. Some were even willing to admit that certain swaps only existed to get around regulations affecting futures trading.** The debate was whether the regulatory pendulum had swung too far. Those with that view seemed to mostly be concerned with maintaining what they called a “level playing field” between futures and swaps markets. Swaps and futures are supposed to be different products that are treated differently under the law. Therefore, they said, a futures contract that is simply a promise to deliver a swap should be treated like the underlying swap contract, rather than other futures contracts to deliver physical commodities, government bonds, or shares in the S&P 500. The critics worry that the CFTC’s rule-making will stifle competition among swaps trading platforms and clearinghouses. In particular, they are concerned by the fact that margin requirements for futures will be lower than for swaps contracts. Unsurprisingly, the men and women representing the exchanges had little sympathy with the notion of “a level playing field” on which swaps and futures could compete. They argued that futures and swaps operate on two separate “playing fields” that should have distinct rules.The exchanges and those who prefer using futures made some good counterarguments. You might think that a swap by any other name is just as risky but according to Donald Wilson, the founder of the DRW Trading Group, the two products create different risks for clearinghouses. Futures traders keep their cash with futures commission merchants, which act a bit like deposit-taking banks that lack deposit insurance. When a trader blows up, the losses are first absorbed by whatever margin he posted. Then the clearinghouse’s capital absorbs the next batch of losses up to a certain amount. Any remaining losses are distributed to the trader’s FCM, which spreads out the pain to across the other customer accounts. This caps the risk to the clearinghouse by transferring it to the futures traders. By contrast, there are currently no equivalents to FCMs in the swaps markets. This means that the clearinghouses have to absorb a greater share of any loss. Thus, clearinghouses should demand a lower margin for a futures contract than an economically-equivalent swap. If the goal is to protect the clearinghouse from defaulting, the existing differentiation is not unreasonable. Still, it seems easy to imagine scenarios in which “swap futures”, especially futures based on CDS, end up proving far more troublesome than traditional futures contracts.The other interesting question is whether these rules threaten to create a duopoly at the expense of customers. The current plan under America’s Dodd-Frank law is that swaps can be traded across different “swap execution facilities” while being cleared elsewhere, such as at LCH.Clearnet. By contrast, the futures exchanges are vertically integrated. If you buy a Brent oil future from ICE you must clear the trade with them, even though CME offers an economically equivalent product. Regrettably, the CFTC had very few people representing the interests of end users to see how they would be affected by “futurisation” and what they would prefer. Moreover, almost all of those people were narrowly focused on the energy swaps market. But according to the BIS estimates mentioned above, commodity swaps, which include energy as well as other products, have been worth less than half of one percent of the global swaps market since the middle of 2009. Most (77%) swaps are interest rate swaps. The rest are currency swaps (10%), “other” (7%), credit default swaps (4%) and equity derivatives (1%). Many nonfinancial companies use interest rate swaps to transform floating-rate obligations into fixed ones, as do municipalities and other local governments. Pension funds use them to help hedge their long-duration liabilities in lieu of buying bond futures, which require (minimal) margin payments. Others use them to speculate. I wish we had heard more from all of these actors. The energy traders we did hear from were mostly concerned with minimising their margin payments. One woman represented a real estate developer that found interest rate swaps helpful because her firm could use their property as collateral and did not need to post cash margins.At the end of a very long day, I found it very difficult to reach any conclusions. Even after having spent the past few days thinking and writing about it, it still seems very unclear what regulators should be doing. Ultimately, as Ben Bernanke observed more than twenty years ago, the clearinghouse system works in part because the government stands behind them as utilities. They are effectively too big to fail, although their activities seem to be far less corrosive than other financial utilities. Hopefully the “futurisation of swaps” will not change that. *Many swaps were already cleared before the crisis. At the time of its bankruptcy, Lehman Brothers had more than 66,000 interest rate swaps outstanding, for a total notional exposure of $9 trillion. This led some people to worry that Lehman’s postions could not be unwound without enormous losses that would cascade throughout the financial system. As it turned out, this fear was misplaced. LCH.Clearnet, the clearinghouse, rapidly netted out and liquidated Lehman’s entire interest rate swap portfolio without imposing losses on any counterparties.**The best examples of this are in the world of commodity swaps. Commodity futures trading is regulated, with limits imposed on market participants based on whether they are a producer, a “hedger” (i.e., an actual consumer of raw commodities), or a speculator (everyone else). Speculators can get around these position limits by going to dealer banks and purchasing an equivalent exposure through a swap. The banks can then buy or sell the commodity futures on behalf of their speculator clients by claiming that they have a legitimate to need to “hedge” their commodity exposure—even though this exposure only exists because the banks sold the speculators a swap to get around the position limits on futures trading. Tellingly, the volume of commodity swaps surged during the bull market before the crisis but has been much lower since then. Similar patterns are not obvious in the interest rate, currency, or equity swap markets. This is not to say that all commodity swaps are examples of regulatory arbitrage, but some of them clearly are.
Today is Tim Geithner's last day as Treasury Secretary. Below are some quotes from various exit interviews and recaps conducted with the former NY Fed president. We provide our succinct annotations to some of his answers. On the bank bailout: “To save an economy from a failing financial system, you have to do things that are going to be fundamentally impossible to explain to people,” Geithner said. “You’re going to look like you’re giving money to people who were responsible for burning down the economy.” He is correct - the people who "burned down the economy" have received over $2 trillion in money since the great financial crisis began courtesy of the Fed... ... and continue to receive $85 billion each month in gratitude for their hard work: * * * “F--- the banks,”: One episode recalls how Geithner, widely thought to be a friend of the financial industry, reacted to concerns of banks protesting Obama’s push for new rules for Wall Street. “F--- the banks,” he said, according to people familiar with the episode. Another solid dose of the hypocrisy we have all grown to love and expect coming from the man who purposefully leaked material, non-public information to the banks ahead of the critical August 2007 Fed action, upon which the banks subsequently acted as we first reported: MR. LACKER. If I could just follow up on that, Mr. Chairman. CHAIRMAN BERNANKE. Yes, go ahead. MR. LACKER. Vice Chairman Geithner, did you say that [the banks] are unaware of what we’re considering or what we might be doing with the discount rate? VICE CHAIRMAN GEITHNER. Yes. MR. LACKER. Vice Chairman Geithner, I spoke with Ken Lewis, President and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that. CHAIRMAN BERNANKE. Okay. Thank you. Go ahead, Vice Chairman Geithner. VICE CHAIRMAN GEITHNER. Well, I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the window. The only thing I’ve done is to try to help them understand—and I’m sure that’s been true across the System—what the scope of that is because these people generally don’t use the window and they don’t really understand in some sense what it’s about. F--- the banks indeed... But not before we give them a few [_]illion dollars in funding. * * * On rewriting the nation’s financial rules: Early in the process, during a meeting with Obama at the White House, Jamie Dimon, the chief of executive of JPMorgan Chase, made an offer to come with other bankers to Treasury to help develop the broad framework for how to tighten oversight of Wall Street. Geithner declined. Dimon followed up. Geithner declined again. Dimon grew frustrated and complained personally to Obama and others in the White House that Geithner was being unhelpful, according to people familiar with the matter. “Whiners”: To his colleagues, the Treasury secretary described bankers who relentlessly protested the new regulations as “whiners” and, in routine meetings with top chief executives held at the Willard Intercontinental Hotel, he often told them they should stop fighting regulation. That at least is the spin. Here are the facts as presented by Dallas Fed president Dick Fisher: As of third quarter 2012, there were approximately 5,600 commercial banking organizations in the U.S. The bulk of these—roughly 5,500—were community banks with assets of less than $10 billion. These community-focused organizations accounted for 98.6 percent of all banks but only 12 percent of total industry assets. Another group numbering nearly 70 banking organizations—with assets of between $10 billion and $250 billion—accounted for 1.2 percent of banks, while controlling 19 percent of industry assets. The remaining group, the megabanks—with assets of between $250 billion and $2.3 trillion—was made up of a mere 12 institutions. These dozen behemoths accounted for roughly 0.2 percent of all banks, but they held 69 percent of industry assets. In simple terms: total bank assets: $13 trillion; 69% of that is $9 trillion. So 12 banks, among which the very much "complaining" Jamie Dimon, and other "whiners" control $9 trillion. And that is how TBTF became TBTFest. But at least they are whining. * * * And last but not least: What’s next? “I have no idea what I’m going to do,” Geithner said. “For all my professional life, I’ve made basically one choice about what kind of work I want to do. And the reasons that led me to that are very powerful and are very enduring.” Will Geithner be the next Fed chairman: “Not a chance,” he said. “I have great respect for the institution, but that will be someone else's privilege.” Instead of commenting, we will merely post Geithner's assessment of America's downgrade risk 4 months before it was downgraded. Sources: Washington Post, Politico * * *
Cleaned-Up Transcript from October 15, 2012: Center for Latin American Studies: A Dialogue: Inequality in the Americas: Brad DeLong Opening Remarks
Harley Shaiken: Hello. I’d like to welcome everyone on behalf of the Center for Latin American Studies at UC Berkeley, and on behalf of the University of Chile's School of Economics and Business. This is part of a series that the University of Chile and Berkeley are doing: "Inequality: A Dialogue Across the Americas". The issue of inequality in the United States is a central one at this moment, with an election upcoming with broad concerns about the economy. It is clearly also a central concern in Chile, and throughout the Americas. This is the second of a series that we are doing. The first was in early September, with former president Ricardo Lagos, of Chile and Robert Reich from here at Berkeley. Today, I am going to introduce both our speakers, one in Berkeley, one in Chile, and then after brief opening presentations we will ask a question of a speaker in another country--in fact, on another continent.Then we will open for questions here at Berkeley, at the University of Chile, and several questions that we’ve received on the internet. I’m very pleased that we have with us today, Professor Brad DeLong, of UC Berkeley, he’s in the Economics Department here at Berkeley. He is the Chair of the Political Economy major. He is also a research associate at the National Bureau of Economic Research. He was Deputy Assistant Secretary of the Treasury for Economic Policy, under President Clinton. He’s one of the most widely read, thoughtful, bold, and provocative--all of the above--bloggers and tweeters observing the economic scene today. After he speaks, I am very pleased that we will have Professor Oscar Landerretche, who is the director of the School of Economics and Business at the University of Chile. He is an editorial columnist for a Chilean Daily, La Tercera. We have two really informed and thoughtful people with us. So please join me in welcoming Brad DeLong. Brad DeLong: Thank you very much for inviting me. I am always happy to be here at the Center for Latin American Studies. I am even happier to be part of tho intercontinental dialogue, if only because the slow creation of--call it a global intellectual space--is what ought to be the twenty-first century mission of Universities like this one. A thousand years ago, when the university starts in the West--it had started earlier elsewhere--the basic problem was a need for more well-educated people. Emperors needed judges. Popes needed theologians. Theologians and judges need to have and read books. But back in 1100 or so books were expensive. Come 1100 or so, when the University of Bologna is founded, your average book requires about six months of skilled-monk labor-time to produce--preparing the parchment, preparing the ink, writing out the book, illustrating the manuscript, binding and covering it, and so forth. It was then much much cheaper to get all the budding judges and theologians together in a room in Bologna, or Naples, or Paris, or Oxford--and have somebody read them from the single copy of the book that existed while they took their notes. It would have been prohibitively expensive to create and distribute, to people distributed all over western Europe, each their own copy of one of these hideously expensive books. Well, books are much cheaper now. But we still have universities. They are places where people can come together and easily talk to each other about important intellectual issues and principles. We could have a better world if we could generalize this to the globe. If the entire globe could become one global university, rather than a collation of small individual intellectual hotspots tenuously linked, and with the rest of the world glowing less brightly with intellectual light. Today too small a relative proportion of the world’s population has full intellectual access. Fixing that is the business we’re in for the twenty-first century. Fixing that is the business that this particular technology experiment is in aid of. And with that commercial for interdisciplinary distance learning and engagement, let me note that I have already used up a third of my introductory-comment time. Let me shift to inequality. There are, broadly speaking, three dimensions of Inequality. The first dimension is global inequality between nations. The fact is that the technologies of the industrial revolution--which are now the common heritage of all humankind--have been successfully implemented much much much much more in some parts of the world than in others. Up until 1975 I would say that the relative gap was growing. The rich North Atlantic plus Japan was successfully adapting these technologies extraordinarily rapidly. But by and large the rest of the world was adopting these technologies significantly more slowly,. Thus the relative gap between the North Atlantic core and the rest was in almost all cases growing rapidly, with the exception of the Southern Cone of South America which played a unique and puzzling role that shifted from decade to decade. Since 1975, we have become much more optimistic. Our statistics about global inequality since 1975 have shown rapid increases in equality. They have shown an end to the 1800-1975 trend of rising inequality, whereby if you picked two people at random across the globe you would find the relative gap between their standards of living more unequal at later dates than earlier dates. A potential problem with this shift is that this is entirely due to good growth performance over the past generation in two countries: China and India. That they have had a good generation is wonderful. Will they have another good generation? We hope so. Should we have confidence? Perhaps we should. These two countries have each had a very good growth generation, together they are 40% of the human race, and so now an extra 40% of human beings are used to rapid economic growth--and perhaps they will demand it of their political leaders in the future. On the other hand, they are just two governments out of 170. What if over the next generation their quality of growth policy falls back and the next two replacement countries that experience growth miracles over the next generation are, say. Jamaica and Bermuda? Then the overall global statistics won’t look nearly as good. That is our first dimension of inequality: global inequality. For the second dimension of inequality let me turn to the United States and to the coming to the United States of what we now call the Second Gilded Age. We used to have a framework for understanding the time dimension of inequality in the United States: we called it the "Kuznets Curve". The United States starts out as a country that is relatively equal--at least among white guys who speak English. Free land, lack of serfdom, the possibility of moving the west if you don’t like the wages you’re being offered in the east--all of these produce a middle-class society. Then comes 1870 or so, and things shift. The frontier closes. Industrial technologies emerge and they are highly productive and also capital intensive. So we move into a world of plutocrats and merchant princes: people in the cities, either off the farms or from overseas, competing against each other for jobs. And we get the extraordinarily stark widening of American income inequality up until the mid-1920’s or so. This then calls forth a political reaction. Call it progressivism, call it social democracy, call it--in Europe--socialism. The idea is that the government needs to put its thumbs on the scale, heavily, to create an equal income distribution and a middle class society. Progressivism and its candidates are elected to power in democratic countries in the North Atlantic in the twentieth century--in spite of everything you say about Gramsci and hegemony and the ability of money to speak loudly in politics. Thus from 1925 to 1980 we see substantial reductions in inequality in the United States--the creation of a middle-class society, at first only for white guys and then, gradually, for others. In 1980 things shift again. Since 1980 we have had an extraordinary explosion of inequality in the United States. This explosion has taken place along two dimensions. First, we have seen extraordinarily rapid growth between the top twenty percent and the lower eighty percent. The benefits to achieving a college education skyrocket--for reasons that I don’t really have time to go into, and for reasons that are still somewhat uncertain. Second, we have an even larger explosion of inequality between the top .01 percent, the top 15,000 households, and the rest of the top twenty percent. This second explosion is the most puzzling and remarkable feature of the past generation. It puts the American political system under substantial long term threat, if only because equality of opportunity in the next generation will require substantially greater equality of result in this generation than we see today: a world in which Republican presidential candidate Mitt Romney puts his wealth into a blind trust but that blind trust then decides just as a matter of chance that what it should fund Tagg Romney and he then raises money from interests that want the Romney clan to think well of them. That is not a society fulfilling a democratic commitment to equality of opportunity, not at all. And there is a third dimension, for the rise of the 0.01% produces not just a plutocratic over-class in the United States but a transnational global plutocratic over-class. How many of the bond purchases by the People’s Bank of China over the past generation will wind up in the hands of relatives of Chinese Communist Party leaders? How many of them will be living in Gestad or Monaco or Beverly Hills in ten or fifteen years ago? How is social democratic politics and equality of opportunity going to be attainable in the world of the future? We know that money speaks loudly in politics, but plutocracy seems to be acquiring so much money that speaks very loudly indeed. And let me stop there, so we can have a dialogue rather than a lecture. Harley Shaiken: Thank you. That was a superb beginning. We very much appreciate you stressing the unique path-breaking nature of this event, and here is that path breaking nature: I'm now turning it over to Professor Oscar Landerretche, all the way south in Santiago, Chile. Oscar Landerretche: Can you hear me? Harley? Harley Shaiken: Yes Oscar Landerretche: Let us start. First, I would like to thank the University of Berkeley, Harley Shaiken, and Brad DeLong for this opportunity. I agree completely with the idea that we have to do more of this sort of thing to get our faculties and our students to interact on these matters. I think it’s a very interesting comparative way of thinking about inequality because of the enormous differences between Chile and the United States. They are very obvious. From the viewpoint of the Chilean economy, of a small open emerging economy, we have, of course, an unmoved mover of inequality--which is global inequality trends. As Brad DeLong pointed out, if in Chile we managed to make our country the most equal country in the world it probably wouldn’t affect global trends, because we’re very small. We just have to take those global trends. We are affected by them in different ways, depending on our relationship with the rest of the world. Chile is one of the most open countries and has been for a long time one of the most open countries in the world. That’s the unmoved mover of inequality for us. But, of course, that’s not all. A country is not only its trade and the relative prices that it brings. There are at least five different dimensions in which this inequality plays out. The first, and the favorite of most people talking about public issues, is the distribution of productivity and education. The second is the distribution of bargaining capabilities. The third is the economic structure of the economy--what you produce. The fourth is your tax structure. The fifth is your transfer and entitlement structure. These five dimensions determine the answer to the question: How do we participate in world inequality? Or, if you prefer: What does our inequality share in the world's patterns? These five dimensions--you have to address them simultaneously--if you look, for example, you will see that as well as world inequality has increased during the last few decades. Although that world inequality trend has reversed because of the things that Brad pointed out, as this has happened the Chilean economy has become more and more open even than it was before. If you look at the distribution of education, what we’ve had is an expansion in quantity and coverage of education--but not really in the quality. The numbers do show that has had a little bit of an impact, because even if you have relatively low-quality education if you expand it of course you achieve something with that. You’ve had basically no change in the distribution of bargaining capabilities at all. You’ve had basically no change in the tax structure. In the economic structure of the economy, you’ve had--well if not a Dutch disease--a sort of Chilean flu, not a full-throttle Dutch disease but the effect on the economy of the commodity price boom. Where we’ve seen more action is on the transfer and entitlement structure, where there has been substantial expansions in the last decade or so. That’s been very important. But the other ones haven’t been that important. So, what’s been the result of this, in the context of world income inequality basically becoming worse? What we’ve seen is that if you look at autonomous income inequality in Chile, it’s become mildly worse, and if you look at total income inequality in Chile--that is, autonomous income inequality, plus the efforts that the state makes with its social programs of entitlements and transfers and, in the case of Chile, the tax code--it’s basically neutral in distributive terms. Total income inequality has become a little bit better. Just a little bit. Now, if you look at these two things, autonomous income inequality becoming a little bit worse, and total income inequality becoming a little bit better, you could argue that that’s a pretty good result given what’s going on the world--given that you’re a very very open economy. If you value economic openness--and there are good reasons to value it for small economy--then you could argue: well, the counterfactual could’ve been much much worse. So that’s one sort of argument that you can have on inequality trends in Chile. If you don’t value economic openness, then you could’ve had more aggressive results maybe--and that’s what maybe you’re observing in other Latin American countries such as Brazil and Argentina, which are not so open and can therefore, with not very very much more aggressive policies achieve a little bit more in terms of reducing income inequality in these las ten years. The question is: why can’t we move more aggressively? Why isn’t it possible to advance more aggressively, considering that it’s very important to advance more aggressively because we are in one of the world’s most unequal regions? The Economist just pointed out that it’s one of the regions that’s improving. But it’s improving from being the worst. So there’s a long way to go to get really cheerful about inequality in Latin America. So why can’t we move more aggressively? I would say that these five areas of policy: education, labor, economic structure, what you produce, what sectors lead your growth, tax structure, transfer entitlements--all have major stakeholders and losers that you’re going to affect, while the winners in redistribution are usually abstract and diluted. That makes it very complicated to articulate a political strategy that sustains public policy efforts to increase equality, I think that’s the main thing we are facing here in Chile. Part of the social conflict that we’re living with here in our country has to do with the country sorting out a strategy to get these things together in some sort of policy. It’s very hard, because, you know, public discussion doesn’t have many dimensions. Just to finish, I would say that it’s not very different from what one observes in the United States. Just to provoke a bit of discussion, if you look at Obama’s first term program there was some idea of modifying the relationship of the United States with the world economy. There were some proposals of, say, treating differently in tax terms firms that invested abroad or stayed in the states. There was some rhetoric about that. It probably had no real policy effect. In education there have been some efforts. Small efforts in economic structure. There has been a lot of talk about the green economy. But it’s very hard to get something really significant going. Except maybe what happened in Detroit, which was a specific bet--not on a new sector but on bringing back an old one, very successfully it seems. In tax structure it remains to be seen. In bargaining power, in labor relations, I believe there is not much there. But there is some effort in changing, sort of bargaining power with financial reform. So not in labor issues but in consumer financial issues and in transfers and entitlement. There has been some efforts in the health reform issues. So I think it’s very similar what happens in two different countries at two very different moments of development. For the current Democratic administration, it’s very hard to coordinate efforts in all these areas. The problem is that you really need to coordinate efforts in all these areas, because if you want to do education reform, you have to talk about economic structure; if you want to do economic structure reform and have new sectors and develop new areas of production, you need to talk about bargaining, and labor market, and tax structure etc. The relationship between all these areas is a very complicated political issue. My view is that over there and over here people who are worried about the income distribution--if they’re worried because they value income distribution in itself, or if they’re worried or because they believe that very unequal societies may be very unstable and have slow growth, whatever the reason--it seems that this relationship between the public policy issues and challenges and democratic politics working to relate all these different areas is not working very well. It seems to be increasingly hard to do. So I think that we’re facing a very difficult set of challenges to address this problem. We will see during the next couple of years if we manage to do it. I’ll leave it there so we can have a conversation. Harley Shaiken: Clearly inequality is a critical issue in Chile, in the United States, in fact in North America and in South America. So, Brad, do you have a question for Oscar? Brad DeLong: Let’s focus on education. My teachers Claudia Golden and Larry Katz make an impressive and largely convincing argument that the trends in inequality between the top twenty percent and the bottom eighty percent in the United States, at least, have been overwhelmingly driven by the race between technology and education. Technology has kept running at a more or less constant pace. Education has not. From, say, 1920 to 1980, the United States essentially followed the recipe of Berkeley chancellor Clark Kerr: the United States ought to provide as much education for free to its citizens as they wanted. Devotees of the right approved of this policy. People who worship Ayn Rand and have read The Fountainhead a few too many times or Atlas Shrugged a few too many times thought that universal free public education was a way you could separate the sheep from the goats, the strivers from the moochers--a way that the strivers could strive and attain the eminence to that they deserve. People on the left noted that if you make education free you get an awful lot of educated and well-trained people, so the return to human capital goes down, the education premium that those who have been to college and have been trained in the professions can demand becomes a lot lower. And as your accountants and lawyers and doctors facing competition in the labor market can demand lower salaries, that leaves more money for the assembly line workers and the janitors and the home health aids and the nurses and the waitresses. Around 1980, this strategy of growth and equality through education in the United States breaks down. Since then the costs of higher education have been rising at an extraordinarily rapid pace in the United States, as government subsidies are withdrawn, and as private colleges react to rising sticker costs of public colleges by raising their own sticker prices. In addition the universal commitment to pre-college high quality education has been in decline. This has stuck. Thus, unless we see a major change in American political economy, this education road that appears to have been very effective at promoting equality between the 1920s and the 1970s is now closed to the United States. Chile has been massively upgrading its commitment to education in the past decade. Is this education road to growth and equality open to Chile now? Or if not why not? Oscar Landerretche: Chile has in the last couple of years undertaken a very dramatic experiment. The short story is the following. During the last ten years, Chile universalized access to higher education through a very aggressive credit policy. It is very expensive and not very well designed, but if you look at Chile twelve years ago--you know we have fifteen, sixteen million people--we had 200,000 to 300,000 people studying in universities, technical colleges, etc. Now we have 1.2 million. That’s a very big change in a very few years. The problem is that this generation of kids that have entered the university--some of which are sitting here with me--have a perception, especially in let’s say lesser universities, the newer ones, that are not proven, that the returns to education are just not there. There’s a study by conservative think tank, a sort of equivalent to the Heritage Foundation, that estimated that around forty percent of the careers being offered by the higher education system have a negative net present value in income terms. So the assumption that’s been applied here--that you’re going to fill the market with all these professionals and someway the economy is going to create the jobs for them--is a radical supply-side aggressive policy where what you’re doing is not making physical capital very cheap like the classical sort of Reaganomics, but you’re making human capital extremely available. Somehow, magically, the economy is going to create all these jobs for lawyers and anthropologists and designers. But you don’t have that in an economy that is very centered in commodities. So, the problem with Chile is that we don’t have the economic structure to absorb the educated that the United States had with that policy. Even ten years into this--so it’s very recent--the perception by these kids is that it’s not working. Many of them have these expensive loans. They come out to the market and they feel that they don’t have any employment. So we’re going in the direction of what you see in Buenos Aires--very sophisticated taxi drivers that would be very interesting to drive around with, but very frustrated and very very angry politics. Once again Chile’s experimenting--or it has experimented already--with a very radical approach to higher education. I believe it’s not going to work. We have to change gears in a way. That’s my view. Brad DeLong: Israel did it in the 1990s. It managed to reconfigure its place in the European division of labor, to accommodate a population that suddenly became much much more educated to a remarkable degree very very quickly. Israel is not that much small in economy than Chile. On the other hand, distance matters a lot. Israel is very close to the population centers of Europe. When you want to sell the work of your most highly-trained and educated workers abroad it is a lot easier if you just have to fly from Tel Aviv to Zurich than of you have the fifteen-hour flight from Santiago to Los Angeles. Is it that long? It’s only twelve hours. Harley Shaiken: It only seems like fifteen hours Brad DeLong: So perhaps Chile will be the first country to over-invest in higher education. From our perspective it’ll be interesting to watch what happens. From your perspective there’s rather more at stake. Oscare Landerretche: Indeed. Harley Shaiken: Oscar, you can comment on that. Then please ask a question of Brad. Oscar Landerretche: I think that what we’re seeing here is we are sort of working our way into some strategies to get this to work. What we’re seeing is that we need to be very aggressive in all these areas that I was mentioning. And one of the reasons that makes our story a bit different from Israel, or other countries, is that we also have the issue of Dutch disease here. It’s not exactly Dutch disease, but it’s very close to being Dutch disease. It’s very hard, because at the same time you’re making all these one million kids available with all their degrees and their studies, you have this really amazing booming copper price and foodstuffs which have had very very clear consequences. You can see what happens with the exchange rate cycle. That makes it very very hard. We have to sort of work our way around that. I was curious about, a parallel with the U.S actually. The U.S is a big economy, but in a way it seems to me that you haven’t really had a Dutch disease with a commodity boom but I sort of feel that what’s happened with the financial services sector--from the viewpoint of the classical industrial sort of economy in the United States, is basically a Dutch disease thing. You have this big shock in a sector that makes everything very expensive for everybody else. You're dealing with the social consequences: the white angry middle-aged ex-industrial worker, that goes into the Tea Party. This sort of dynamic has been seen in other countries. I was wondering how that effects the sort of political discussion on inequality, because it seems to me that the same happens in Chile--we have this enormous copper price that you really have to make an enormous effort to fight against it,if you want to have other sectors. It seems to me that the financial sector in the U.S. is not going to go away anywhere. It’s just going to be a very very important sector. It is going to continue to pressure the rest of the structure. It doesn’t seem to me the government will be able to replicate the effort it made in Detroit in many other places. So I don’t know what you think, I mean how plausible it is, to face that dilemma. Harley Shaiken: Brad? Brad DeLong: Excuse me. Our technological multimedia masters want me up at the podium--they say the camera angles are better. With respect to the copper disease, the people who actually know about it in the offices to the left and the right of me--Maury Obstfeld and barry Eichengreen--do strongly recommend dealing with it via the Norwegian model: large sovereign wealth funds invested abroad funded and financed by a government taxing commodity export earnings that is willing to say: this is safeguarding your great grandchildren’s inheritance, and that is why we’re doing this. This is the way to have a stable and well-functioning economy, and also to pile up wealth for the future, when you are subject to the commodity-export cycle. It’s been very successful for Norway. I think it’s certainly worth considering for Chile. As for the other question, yes, over the past generation the U.S. government has decided more or less by accident--in the same way, that Britain decided by accident to conquer two-thirds of the world starting in 1750--that it wants to shift seven percent of GDP out of manufacturing and other sectors and into what the market was telling us were the sectors of the future. So we shifted three percent of GDP into health care administration, and four percent of GDP into finance. Now even at the time we noticed that shifting an extra three percent of GDP into health care administration was a huge mistake. What the extra three percent of people working in health care administration are doing was working for insurance companies trying to find ways not to pay for the treatment of sick people. They are not only not producing anything useful, they simply increase risk and fear--and make people scared that if they do go to the doctor they then will not understand the bill they get and will not be able to pay it. We still have a three dollar dispute with NorCal Radiology. It impacts our credit rating. It does not make us terribly happy. There is also the four percent increase in the share of GDP going to finance. This, too, is surely a zero or a negative sum game. Consider one of Mitt Romney’s big backers--I’m picking on Mitt Romney more than usual these days, I’m not quite sure why--Anthony Scaramucci. Wall Street mogul. Thinks that what the world really needs is far less regulation of Wall Street, and far more room for Anthony Scaramucci to go about his business. What is his business? His business is charging people one percent of their wealth each year for the privilege of hearing him tell them which hedge funds will do best over the next year and thus which hedge funds they should invest in. Now if Anthony Scaramucci actually knew enough about hedge funds to know which would do best over the next year, he would be making even more money by running a successful hedge fund himself. He would be competing with Renaissance or Bridgewater. He’d be up there as someone who was making money for his clients. But he doesn't. He’s in a position where lots of people want an expert to tell them what to do, have been told by their friends that he is the expert to listen to. As near as I can see, what the extra four percent of U.S. GDP devoted to finance is doing is taking money not so much from the bottom eighty percent but from the rest of the top ten percent that wants to know where to put their money--through price pressure, through arbitrage, through fees. It doesn't do anything productive in terms of spreading risk, improving corporate governance, or diminishing moral hazard in the credit channel--rather the reverse. But it does increase uncertainty. And it has brought us our current depression. So we have moved seven percent of the U.S. economy into activities that are at best completely unproductive. Now we have to figure out how to move resources out of these sectors. At the moment we’re unable to do so because we’re still fighting the lesser depression and trying to keep it from turning into a greater depression. Any advice as to how to deal with our short run problem, so we can then turn to the long run problem of structural adjustment, would I think be very welcome. Harley Shaiken: Now we’re going to open it up to questions from both audiences. If we could start perhaps with a question from Chile, to either of the speakers? Chilean Audience Member: Can you hear me now? Okay, so here goes the question. I would really like to know from Brad, what are the prospects that he sees for inequality in the U.S.? In other words, what are the drivers for equality in the United States? As we look ahead, if we are optimistic, to what extent does the pursue of more equality in the U.S. is limited or constrained by global forces? In other words, by the fact that the U.S. has to be competitive in the global economy or by the fact that there are other kinds of power pressures for the U.S. being a big power and so on? Brad DeLong: This is I think an argument from my old teacher Richard Freeman, about how in the eighties and nineties effectively 2 billion workers were added to the potential global manufacturing work force. Developments in communication and trade, the coming of the container, the coming of the Deng Xiaoping policy reforms in China, reform in India, confidence these policy changes would persist--all these meant that businesses all around the world wondering where to locate manufacturing could be confident that they could if they wanted to, if it made sense, draw on a labor force that was 2 billion bigger than it had been in the 1970s. In that context, the fact that the United States had a lot of highly-skilled manufacturing workers who had an immense productivity edge was no long an effective factor in world production. Thus the claim is that an awful lot of the rise in inequality in the United States between 1980 and today is the result of this global pressure on the American economy. Back in the mid 1990s when I was working for the Clinton Administration, I wrote a bunch of memos about how this was then nonsense--that is, it was simply too small to matter. Since the mid 1990s, this factor has become significantly larger. But I’d say it’s still in fourth place as far as the increase in U.S. inequality is concerned. First place has been the education factor--the fact the United States is no longer clearly the most educated country in the world, and the education system is no longer is putting downward pressure on wage inequality. Second place is the shift in the tax and transfer system--the fact that our tax and transfer system as a whole is less progressive than it was a generation ago, and that in fact it’s regarded as Kenyan Muslim socialism to even return taxes on the rich back to their levels of the Clinton Administration. Don’t laugh too much. It really is the case that the bar for what is called "communism" has been significantly lowered. Now it's the policies of Bill Clinton that are "communistic" according to Fox News. Third are the social structural and economic changes that allow the princes of Wall Street and the plutocrat CEOs to successfully charge what they do charge. If this were 1960 or so, and George Romney as head of American Motors proposed for himself the kind of pay scale that the Presidents of GM and Ford get today--you would’ve seen an immediate explosion from the UAW. The UAW would’ve been out there striking everything and closing down the entire U.S. auto industry within sixteen hours. That no longer happen. That plus the willingness of the upper ten percent to pay extraordinary amounts for advice to what their investments should be is, I think, largely a socio-cultural change. I would call that third. Global pressures are fourth. They are there, but they are not half but more like ten percent of the process. And with that ten percent we should in fact be willing to deal. We still are the most favored nation by luck in history. We thus have responsibility to manage the international system as a whole. We have a responsibility to be the importer of last resort for countries that are trying to develop by building up their own industries. Harley Shaiken: Now we’ll have a question from here in Berkeley, does anyone have a question for either Oscar or Brad? Why don’t we take your question, and then I have a question from the internet. Wait one moment until we get you the microphone. Audience Member in Berkeley: Hello. This question is for Oscar. You were asking why Chile cannot move more aggressively to improve its inequality issue, and you mentioned that the winners are pretty much more abstract, while the losers are pretty evident and they have real interests at stake Can you elaborate a little bit more on that and on what other issues are hindering the advance of further equality in Chile? Oscar Landerretche: Sure. What I see is that the context of this is that Chile has always been a very unequal society In striking contrast with the United States, which has had historical periods of relative equality. If somebody came up with a magic policy formula and actually managed to improve our Gini coefficient by 15 points or so--which is what we would need to become something like a European country--the structure of the economy would be very very different. In every single sense it would be extremely different from what we have today. You would have to have other economic sectors that do not exist right now. You would have to have a different political structure, and you would have to have a different labor structure, a different education system. So it’s very uncertain who’s going to come up winning and losing in that scenario. Thus it very hard to promise someone that we are going to make dramatic changes in our economy and you’re going to come up a winner. It’s very hard to make that promise. What else are we going to produce apart from commodities, you know food stuffs and copper, what else are we going to produce? Which way to go? Are we going to go, let’s say in Norwegian style strategy like Brad suggested or are we going to go a different Australian style? Ae we going to go with Spanish style? I don’t know. Depending on what sectors are going to come up first, the structure of the economy and society are going to be very different. On the other hand the losers are very clear. And Chile is a very small country. It’s markets are very concentrated. It’s basically controlled by just a handful of very large family conglomerates. They’re going to lose. It’s easier for the losers to coordinate their strategy to defend what they have than the winners, who don’t really know who they are==it’s very theoretical, an abstract notion, and all of these abstract notions usually get defeated in politics. So: that’s what I think, I think that it’s a very difficult political agenda to actually accomplish. Harley Shaiken: We have time for one more brief question from each country, and then, if the questions and the answers are brief enough, I’d like to ask both our speakers to make very brief concluding remarks. If you’d like to leave everyone with one final ideaon the themes we’ve been discussing. So is there a question from Chile? Chilean Audience Member: Hello. Can you hear me? Can you hear me now? Okay. If we agree with the statement that political structure defines the economic structure. And if we agree with the second statement that our countries--Chile at least--are losing the battle against inequality, do you think that an economic discussion is enough for winning this battle? Or we should start thinking about some political changes in the way politics and economics dialogue? When you said money has too much power, that you can’t defeat money, are you having this discussion in the United States? Brad DeLong: Not very constructively. The Supreme Court, especially, has been playing an extraordinarily unhelpful role. With moderate Republican Senators who had been advocates of campaign finance reform and campaign funding equalization in the past falling in line behind their party in spite of their expressed policy preferences. Norm Ornstein from the American Enterprise Institute was here last June giving an extremely bitter discussion of the disappearance of the Republican moderates, and the cowardice of those who remain. I would say first that it’s not clear to me that Chile is losing the battle against inequality. Suppose there’s a marathon. Suppose somebody has completed all twenty six miles of the Marathon, and somebody else is still at the starting line--because of the past combination of the latafundista history of Chile and the dictatorship. Those forces have done to Chile what they used to do to Houdini--tie him in chains, lock him in a box, throw him in the sea. The fact that Chile has managed to untie itself from the chains of latafundista and escape from the box of the dictatorship and actually swim to the river and reach the starting line--that is, I think, a very impressive historical achievement. As to changing political structures, and areducing the influence of money and politics. The answer has got to be yes, but the answer has also got to be to move extremely, extremely cautiously, There is some truth to the statement that the true will of the people--if the people knew what they ought to know about the political destinies and programs of the parties they vote for--would not be what’s reflected in the voting polls in any election day in an election in which money has a megaphone. But if the twentieth century proves anything, it is that those who are loudly and stridently saying that they know the will of the people better than the people’s elected representatives are very dangerous indeed. Harley Shaiken: Is there a question here at Berkeley? I have a related question that came over the internet that we can conclude with. Then I will ask both of our speakers for very brief concluding comments. I want to remind everyone that Wednesday afternoon we will have a video of this discussion up on the website for the Center for Latin American Studies: http://clas.berkeley.edu. This question is from someone who is a professor at UC Berkeley but also a Chilean, so it combines both countries for our final question: Given the growing inequality in the U.S. how do you explain the lack of social outrage in the country? Is it that people are not aware, indifferent or find this level of inequality acceptable and deserving? I think that’s probably for you Brad. Brad DeLong: Oh dear, I want to sharpen that question and give it historical context. During the Gilded Age of the 1890s and 1900s you had strong political movements saying "something is going remarkably wrong with this, this isn’t the country we thought we were going to live in". The way that the historian, I'm blanking, Ray Ginger? Harley Shaiken: Yes, Ray Ginger. Brad DeLong: Ray Ginger put it in two absolutely brilliant books-- Altgeld’s America and The Age of Excess--even the Republicans thought that they wanted to live in Abe Lincoln’s America, where when you are young you split wood into fence rails and go to law school at night and when you are middle-aged you become a lawyer and get rich and when you are old you enter politics and save the union and free the slaves. They wanted to live in that kind of world, of upward mobility, in which opportunity is wide open even to the son of a penniless and not very successful rural farmer. By 1890 they discovered that they weren’t living in Abe Lincoln's America at all. As a result in the First Gilded Age you had two political movements. The Democratic, left, farmer, labor, semi-socialist, Populist Movement on the one hand. The mixed bipartisan Democratic and Republican, urban, Progressive Movement on the other. Both of them were desperately eager to change America, to repair the flaws of the Gilded Age, to reduce inequality, to make the economy work for everybody--or at least for every white guy--and even to grant women the vote. They wanted this so much so that someone like Republican President Theodore Roosevelt--as aggressively a partisan an animal as you would ever see--would place his loyalty to the Republican cause second to his loyalty to his progressive principles for American reform. He was happy denouncing Democrats as communist anarchists, but equally happy denouncing rich republicans as "malefactors of great wealth" who desperately needed to be controlled. Theodore Roosevelt wove his political career out of being head of the Republican party and head of the Progressive Movement. And at the end non-Progressive Republican President Taft simply offended him one time too many, and Roosevelt decided to blow up the Republican Party and hand the presidency to Woodrow Wilson from 1912-1920. That was the history of America from 1880-1920 or so. After 1920 you do get a Republican Gilded Age resurgence under Harding, Coolidge, Hoover--very corrupt, especially under Harding. But by the late 1920s Progressivism is rising again--even Hoover is running as a Progressive. Then when the Great Depression comes Franklin Roosevelt comes in and he takes the entire progressive agenda off the shelf and promptly begins to implement it. We haven’t had anything like that over the past thirty years. And here I’m simply going to throw up my hands and say that I don't know why. It’s in a great mystery to me. As an economic historian I like to look at political economic patterns from the past and to say we should learn from these and generalize them and take them as providing some insight into the present and the future. In general, we economic historians are extraordinarily successful. There are lots of lessons to be drawn from the first age of globalization for the second. There are lots of lessons to be drawn from the high school-ization of America for the college-ization of America and for education elsewhere in the world. There are lots and lots of lessons to be drawn from the Great Depression for today. But the political economy of Gilded Ages? Why the first Gilded age produces a Populist and a Progressive reaction and the second, so far, does not? There I throw up my hands and say that my economic historian training betrays me. I have no clue as to what is going on here. Harley Shaiken: With that, I just want to say that we will be continuing this conversation across the hemisphere next Monday, with Paul Pierson, who is a professor of political science and the co-author of *Winner Take All Society *here at Berkeley, and Daniel Hojman, at the University of Chile, the school of Business and Economics. Now let me turn it over to Oscar, and then very briefly to Brad, Brad DeLong: And Paul is going to be talking about the .01 percent. Harley Shaiken: Oscar, very briefly, if you could leave us with a thought. Oscar Landerretche: Yes. Just to finish very briefly with a whack at the same question. I think that what you observe here is the importance of the population understanding what you’re doing, in a sense. Perhaps in the previous Gilded Age some people came up with plausible ways of facing the problem that became credible,. The problem I see with the current trends in indignation are that people are angry--they occupy things--but we haven’t really seen leadership come out with plausible directions to go. So after a while your indignation gets diluted in the general stream of life. We’re missing some sort of political leadership that enables people to construct solutions to this problem. I think that one should look at the world of post-war Britain. The country wanted to be more egalitarian but they didn’t want to become the Soviet Union. The Labour Party came up with a leader called Clement Attlee who came up with a solution for that--and it wasn’t obvious. So I think that we’re trapped, waiting for the next Clement Attlee. Harley Shaiken: Brad? Brad DeLong: I think I’ve talked more than my share. Let me just say, that we all hope that that Chile’s experiment in ramping up its educational system rapidly over a short time does have a very good outcome. It is a possible road to growth with substantial equality, which is very difficult to achieve in a country that not only starts with a burden of latifundia, dictatorship, and if not Dutch disease Chilean flu as well. So let me thank you very much for inviting me, and turn it back over to Oscar. Harley Shaiken: Unfortunately, we are out of time. I’d like to thank everyone in Chile, everyone here at Berkeley, and this not the end of the conversation but the beginning. To be continued. Thank you.
Deutsche Bank analysts Daniel Brebner and Xiao Fu have just released a new report saying that gold is money (via Business Insider): While it is included in the commodities basket it is in fact a medium of exchange and one that is officially recognised (if not publically used as such). We see gold as an officially recognised form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves. *** We would go further however, and argue that gold could be characterised as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies. In describing gold as such we refer to Gresham’s Law – when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation. *** In our view the ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. There are very few media which can do this. Fiat currencies physically have no use other than that which is prescribed to them by government and accepted by the public. That fiat currencies cost little to produce is of a secondary concern and we believe, quite irrelevant to the primary purpose. Gold is neither production good nor consumption good. Jewellery we see as a form of storage or hoarding (the people of Portugal have all but exhausted their personal gold stores – hoarded in the form of jewellery – having converted them to survive the crisis). If gold did have a meaningful commercial use we believe that it would make the metal less attractive as a medium of exchange as the value of the metal in whatever market it was used in could periodically interfere with its medium-of-exchange role… Other characteristics are important of course in fulfilling the requirements for ‘good’ money: indestructibility, divisibility, transportability and universal acceptability. They are not alone … World Bank president Robert Zoellick pointed out in 2010: Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today. Former Fed chairman Alan Greenspan said in 2009: Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said. The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said… “What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said. And we noted in 2010: Alan Greenspan told the Council of Foreign Relations last week: Fiat money has no place to go but gold. Greenspan also said that supply and demand explanations treating gold like other commodities “simply don’t pan out.” Greenspan also spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes, and said: If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it. Former chief Merrill Lynch economist David Rosenberg wrote in March: The best currency may be physical gold… Phoenix Capital Research argues that central banks are themselves loading up on gold because they know that the entire fiat money scam will soon collapse. Indeed, it is fiat currency – and not gold – which is in a bubble. As Bond king Bill Gross said recently: Gold can’t be reproduced. It could certainly be taken out of the ground in an increasing rate but there’s a limiting amount of gold. And there has been an unlimited amount of paper money over the past 20 to 30 years and now – in this period of central bank expansion where it’s QE1 or QE2, or whether it’s the LTROs of the ECB or this potential new program … then central banks are at their leisure to basically print money. Gold is a fixed commodity that has a considerable store of value that paper money has not…. When a central bank starts writing checks and printing money in the trillions of dollars, it’s best to have something tangible that can’t be reproduced, such as gold. Forget Theory … Are People Actually Accepting Gold as Money? But forget all the theory. Are people actually accepting gold as money? Utah has declared gold coins to be money. CNN reported in February: A growing number of states are seeking shiny new currencies made of silver and gold. Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. *** Unlike individual communities, which are allowed to create their own currency — as long as it is easily distinguishable from U.S. dollars — the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.” Financial Times reported in 2010: Intercontinental Exchange, the US futures exchange group, has followed rival CME Group by allowing its European clearing house to accept gold bullion as collateral for transactions. JP Morgan accepts gold bullion as collateral. So does Donald Trump. China is paying for oil with gold. India is probably doing so as well. And central banks are considering allowing banks to hold gold as a risk-free, tier 1 asset. Caveats: Be careful with unallocated accounts, accounts held by big banks, paper forms of gold and tungsten (see this, this, this and this). Finally, note that FDR was not the only leader to confiscate gold. In the Yuan dynasty six centuries earlier - in an attempt to prop up its fiat currency and prevent runaway inflation - the Chinese government attempted to prohibit all transactions in or possession of silver or gold, which had to be turned over to the government. China has outlawed possession of silver several times since, and has just lifted the most recent ban.
Joe Gagnon has a nice blog which allows comments only by e-mail. He has a proposal in two parts Next week the Fed should promise to hold the prime mortgage rate below 3 percent for at least 12 months. It can do this by unlimited purchases of agency mortgage-backed securities. By giving people a fixed time period to take advantage of the lowest mortgage rates in history, the Fed could meaningfully boost the housing market just when buyers are beginning to believe that prices are starting to head up. The Administration could capitalize on this opportunity by forcing the housing agencies and jawboning the banks to stop applying excessively high credit standards for prime mortgages. To maximize the potential benefits of sound monetary policy, the Fed should seriously consider the proposals of Christina Romer and Michael Woodford to target a fixed path of nominal GDP, the broadest measure of economic activity in dollar terms. The path should be based on a year of normal conditions, such as 2007, and should increase at a rate of 4.5 percent, which would allow for average growth of 2.5 percent and average inflation of 2 percent. Because we are far below such a path right now, it would take a few years of growth above 2.5 percent and/or inflation above 2 percent to return to normal. This policy would allay market fears of premature Fed tightening while being consistent with the Fed’s stated long-run inflation goal of 2 percent. Dear Joe Gagnon Absolutely. I'd note that Bernanke's cost 3) higher expected inflation is an important benefit, since it implies lower real interest rates if nominal interest rates are at the lower bound. I think that "trading among private agents could dry up, degrading liquidity and price discovery " really means that profits of financial intermediaries might be reduced. I'm sure Bernanke doesn't care about them, but the argument that a high volume of trade is socially useful as asset prices are closer to fundamental values if trading volume is high doesn't pass the laugh test. This is casually assumed, because almost all experts say it is so. Almost all experts are financiers. They know that a high volume of trading is key to their profits (not just fees, the traders who think they are sophisticated know they need noise traders in order to profit from their sophistication). With admirable modesty and a firm devotion to avoiding pointless quarrels among people who mostly agree, you merely note that you think that the Romer/Woodford nominal GDP targeting proposal would be a useful addition to your proposal. You don't argue that it would be necessary for unlimited purchases of agency MBS aiming to hit a prime mortgage rate target to have a huge effect on the economy. You don't concede that their proposal would have any major impact on the economy all by itself. But you won't quite say that you think that nominal GDP targeting is barking up the wrong tree (with my intercontinental ESP I am sure you think that -- in any case I do). I guess this is the right approach. If the debate is current policy vs the Romer/Woodford/Gagnon proposal then each of the two very different parts of the proposal have a better chance. Emphasizing disagreements among people who basically agree is a good way to organize a circular firing squad. I have edited my third paragraph to remove a false assertion on a point of fact. Woodford definitely supports purchases of agency MBS. He has written this repeatedly. I'm sure Romer agrees too. Bernanke definitely suggested (as definitely as a Fed chairman can) that he thinks that MBS purchases should be part of any further QE which he might decide is a good idea maybe. So I'd say you (you four including Bernanke I'd bet) don't mostly agree but agree completely except for a bit of different emphasis. Still I fear the dread worst of both worlds compromise. It seems to me very likely that the FOMC will reach a near as possible consensus for QE III of the sort closest to normal monetary policy -- that is based on much larger than usual purchases of much longer maturity than usual Treasuries, but still on money for treasuries open market operations. It seems to me that this must be what happened when they decided to design QE II to be about as ineffective as possible (I am thinking of the choice of 7 year notes rather than MBS and not about the $600 B ceiling or the assurance that they weren't aiming for higher inflation). Quite frankly, I think you are too modest for the country's own good. Please blow your own horn more Sincerely yours Robert Waldmann This is an open e-mail which I will post on the web. If you should under estimate the importance of your time and reply, I will consider the reply private unless told otherwise.
From GoldCore LCH.Clearnet Accepts ‘Loco London’ Gold As Collateral Next Tuesday Today's AM fix was USD 1,640.50, EUR 1,315.87, and GBP 1,038.49 per ounce. Yesterday’s AM fix was USD 1,624.00, EUR 1,308.94and GBP 1,030.26 per ounce. Silver is trading at $29.44/oz, €23.74/oz and £18.72/oz. Platinum is trading at $1,524.75/oz, palladium at $628.60/oz and rhodium at $1,025/oz. Gold climbed $16.60 or 1.02% in New York yesterday and closed at $1,637.60. Silver surged to hit a high of $29.501 and finished with a gain of 1.6%. Gold in USD – 50, 100, 200 Day Moving Average (Bloomberg) Gold briefly popped above the 200 day moving average at $1,643/oz this morning and remains near the 3 ½ month high set in the prior session. A break above the 200 day moving average, after similar breaks of the 50 and 100 day moving averages, will be bullish technically (see chart). Market watchers are still optimistic that the ECB’s Mario Draghi will bring out the bazooka and unleash more euro paper in the form of the SMP program which would be the icing on the cake for what is an already very bullish gold scenario. Recent news that the ECB has been creating alternatives to limit Spanish and Italian borrowing costs may have sent gold higher yesterday, increasing its inflation hedge appeal. Later today the FOMC releases the minutes from its latest meeting and investors will search for clues on when QE3 will occur. Gold’s remonetisation in the international financial and monetary system continues. LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives. It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday. It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system. Overnight, Citigroup CEO Vikram Pandit warned in Singapore that risks are set to increase as non-bank financial systems expand, adding that it’s impossible for a regulatory body to “see everything.” Cross Currency Table – (Bloomberg) LCH.Clearnet Group Ltd. said it will accept loco London gold as collateral for margin-cover requirements on OTC precious-metals forward contracts and on Hong Kong Mercantile Exchange precious-metals contracts starting Aug. 28. Loco London gold are London Good Delivery Bars (roughly 400-ounce or 12.5 kilograms gold bar) held with LBMA members within the London bullion clearing system. The clearing house has already been using gold bullion as collateral since 2011 but now will accept loco London gold as collateral. The push to use gold as collateral follows similar steps from a growing number of exchanges and banks to increase the use of gold as an acceptable deposit and collateral reinforcing gold's renewed status as a safe haven currency. Intercontinental Exchange Inc. (ICE) also has allowed the use of gold as collateral. LCH.Clearnet limited the amount of gold that could be used as collateral to no more than 40% of the total margin cover requirement for a member across all products and at a maximum of $200 million, or roughly 130,000 troy ounces, per member group. The move follows the initiative of the World Gold Council, who last year submitted evidence to the Basel Committee for gold to be included in banks’ ‘Tier 1’ assets by European banking regulators, recognising gold’s growing relevance as a high quality liquid asset. David Farrar, Director, LCH.Clearnet said at the time that “market participants want greater choice when it comes to assets that can be used as collateral. Gold is ideal; as an asset it typically performs well in times of financial stress, remains liquid and has a well established pricing mechanism.” Gold Prices/Fixes/Rates/Vols – (Bloomberg) We pointed out the importance of this development last year but it was ignored by most of the media and even much of the blogosphere. The CME and LCH.Clearnet both allowing gold bullion as collateral is extremely bullish for the gold market. With counterparty and sovereign risk remaining elevated, gold is no longer being seen simply as a commodity. Rather, it is increasingly viewed by market participants as an important asset and a currency with no counterparty risk. We are gradually seeing the remonetisation and indeed the ’financialisation’ of gold, as gold is gradually being reincorporated into the modern financial and monetary system. This should result in the coming months and years in markedly higher prices than those of today. Keynes’s ‘barbaric relic’ is becoming less barbaric by the day. However, the man on the street remains completely unaware of this trend and continues to sell gold (jewellery) rather than buy gold (bullion) as clearly seen in the international phenomenon that is 'cash for gold'. Huge developments in the gold market such as this continue to be ignored by non specialist financial media and its implications not realized by many so called experts. The "experts" and public consensus is that gold is a risky volatile commodity and may even be a “bubble".” The truth, which is being seen more clearly by the day, is that gold is actually a finite currency and the safest form of money in the world. For breaking news and commentary on financial markets and gold, follow us on Twitter. NEWSWIRE(Bloomberg) -- CME Clearing Europe to Clear London Silver Forwards from Aug. 28 CME Clearing Europe will start clearing London silver forwards from Aug. 28, it said in an e- mailed statement today. The product will be physically-settled, it said. (Bloomberg) -- Lonmin Says Marikana Worker Attendance Falls to 22% From 33% Lonmin Plc said about 22 percent of the 28,000 workers at its Marikana mine in South Africa reported for duty today compared with 33 percent yesterday. There probably won’t be any significant production restart this week, Susan Vey, a spokeswoman for the company said by phone from the mine today. The mine will be shut for a memorial service tomorrow, she said. “We’re hoping for a complete change” on Aug. 27, she said. (Bloomberg) -- Peru’s June Gold Output Fell 5.9% to 13,094 Kg, Ministry Says Peru’s gold production fell 5.9 percent to 13,094 kilograms in June from a year earlier on declines at Cia. de Minas Buenaventura’s La Zanja mine and Barrick Gold Corp’s Misquichilca mine. (Bloomberg) – Platinum May Rise With Gold For Six Months Platinum may rise with gold over the next two quarters, Daniel Brebner, an analyst at Deutsche Bank AG said. Copper “continues to have problems on the supply side,” Brebner said. Copper is probably going to a have a shortage this year, not a surplus as expected earlier in the year, he said. (Bloomberg) -- Pandit Says Shadow Banking Is a Major Concern Citigroup CEO Vikram Pandit says risks to increase as non-bank financial systems expand, adding that it’s impossible for a regulatory body to “see everything.” He spoke at a speech in Singapore. ? Pandit says investors see opportunity in light regulation in shadow banking ? “Every piece of regulation we are talking about today has but one goal; to enhance the safety and soundness of the financial system. But this goal will not be achieved if all that we accomplish is to impose more requirements on the formal banking sector while leaving the non-bank financial sector relatively untouched.” (Bloomberg) -- Commodities Enter Bull Market - Gaining 21% Commodities entered a bull market, gaining 21 percent from a June low, as grain prices surged after the most severe U.S. drought in half a century and as crude oil rallied amid increased tension in the Middle East. The Standard & Poor’s GSCI Spot Index of 24 raw materials rose 0.9 percent to end at 675.55 yesterday in New York. The gauge has jumped from this year’s lowest close of 559 on June 21. A gain of more than 20 percent is the common definition of a bull market. Crude accounts for more than 50 percent of index. NEWSGold near 3-1/2 month high on ECB hopes - ReutersGold To Rally As Central Banks, Investors Buy, Coutts Says - Bloomberg Shares slip after Japan exports fall, euro steady - Reuters Gold Flat in Asia; FOMC Minutes in Focus – Wall Street JournalCOMMENTARY Why a collapse of the Eurozone must be avoided – Hyperinflation - Vox What 40 Years Of Gold Confiscation By The US Government Looks Like – Zero Hedge Is Gold Money? LCH Accepts Shiny Yellow Metal As Collateral – Zero Hedge Suicidal Skullduggery in the City & Unusually Small Heads on the Street – Max Keiser
Оператор финансовых бирж Гонконга Hong Kong Exchanges & Clearing, пятый по объёмам рынка капитала в мире, собирается заплатить 1,39 млрд фунтов стерлингов ($2,15 млрд) за Лондонскую биржу металлов (LME). Сегодня на LME приходится до 80% торговли фьючерсов на промышленные металлы, сообщает Bloomberg. Акционеры LME получат 107.60 фунтов стерлингов за акцию в денежной форме. Крупнейшие акционеры Лондонской биржи - JPMorgan Chase, Goldman Sachs и Metdist. Гонконг – единственное место в Китае, где инвесторы могут свободно покупать и продавать акции в Industrial and Commercial Bank of China, самом крупном кредитном учреждении Китая, входящем в так называемую "Большую четверку" государственных банков КНР. Для Гонконгской биржи это будет первая зарубежная сделка. Уже 135 лет LME является ориентиром для покупателей металлов, включая медь, алюминий и никель, которые Китай потребляет больше, чем любая другая страна в мире. Стоит напомнить, за LME боролись сразу три потенциальных покупателя: CME Group, InterContinental Exchange и Hong Kong Exchanges вместе с Clearing Ltd. В прошлом году объём торгов на бирже составил $15,4 трлн.