The FDIC took over the following failed banks over the weekend of August 28, 2009, bringing the year’s total to 84.
Affinity Bank, Ventura, CA
Mainstreet Bank, Forest Lake, MN
Bradford Bank, Baltimore, MD
Number of Failures broken down by month:
January – 6
February – 10
March – 5
April – 8
May – 7
June – 9
July – 24
August – 15
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Anyone with more than a casual interest in why their 401(k) has tanked over the past year knows that it’s because of the global credit crisis. It was triggered by the collapse of the housing market in the United States and magnified worldwide by the sale of complicated investments that Warren Buffett once labeled financial weapons of mass destruction.
They are called credit derivatives or credit default swaps.
As correspondent Steve Kroft first reported last fall, they are essentially side bets on the performance of the U.S. mortgage markets and some of the biggest financial institutions in the world – a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages.
It would have been illegal during most of the 20th century under the gaming laws, but in 2000, Congress gave Wall Street an exemption and it has turned out to be a very bad idea.
While Congress and the rest of the country scratched their heads trying to figure out how we got into this mess, 60 Minutes decided to go to Frank Partnoy, a law professor at the University of San Diego, who has written a couple of books on the subject.
Ask to explain what a derivative is, Partnoy says, “A derivative is a financial instrument whose value is based on something else. It’s basically a side bet.”
Think of it for a moment as a football game. Every week, the New York Giants take the field with hopes of getting back to the Super Bowl. If they do, they will get more money and glory for the team and its owners. They have a direct investment in the game. But the people in the stands may also have a financial stake in the ouctome, in the form of a bet with a friend or a bookie.
“We could call that a derivative. It’s a side bet. We don’t own the teams. But we have a bet based on the outcome. And a lot of derivatives are bets based on the outcome of games of a sort. Not football games, but games in the markets,” Partnoy explains.
Partnoy says the bet was whether interest rates were going to go up or down. “And the new bet that arose over the last several years is a bet based on whether people will default on their mortgages.”
And that was the bet that blew up Wall Street. The TNT was the collapse of the housing market and the failure of complicated mortgage securities that the big investment houses created and sold around the world.
But the rocket fuel was the trillions of dollars in side bets on those mortgage securities, called “credit default swaps.” They were essentially private insurance contracts that paid off if the investment went bad, but you didn’t have to actually own the investment to collect on the insurance.
When 60 Minutes last spoke with Eric Dinallo, he was insurance superintendent for the state of New York. He says credit default swaps were totally unregulated and the big banks and investment houses that sold them didn’t have to set aside any money to cover potential losses and pay off their bets.
“As the market began to seize up and as the market for the underlying obligations began to perform poorly, everybody wanted to get paid, had a right to get paid on those credit default swaps. And there was no ‘there’ there. There was no money behind the commitments. And people came up short. And so that’s to a large extent what happened to Bear Sterns, Lehman Brothers, and the holding company of AIG,” he explains.
In other words, three of the nation’s largest financial institutions had made more bad bets than they could afford to pay off. Bear Stearns was sold to J.P. Morgan for pennies on the dollar, Lehman Brothers was allowed to go belly up, and AIG, considered too big to let fail, is on life support thanks to a $180 billion investment by U.S. taxpayers.
“It’s legalized gambling. It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell,” Dinallo says.
“I mean it sounds a little like a bookie operation,” Kroft comments.
“Yes, and it used to be illegal. It was very illegal 100 years ago,” Dinallo says In the early part of the 20th century, the streets of New York and other large cities were lined with gaming establishments called “bucket shops,” where people could place wagers on whether the price of stocks would go up or down without actually buying them. This unfettered speculation contributed to the panic and stock market crash of 1907, and state laws all over the country were enacted to ban them.
“Big headlines, huge type. This is the front page of the New York Times,” Dinallo explains, holding up a headline that reads “No bucket shops for new law to hit.”
“So they’d already closed up ’cause the law was coming. Here’s a picture of one of them. And they were like parlors. See,” Dinallo says. “Betting parlors. It was a felony. Well, it was a felony when a law came into effect because it had brought down the market in 1907. And they said, ‘We’re not gonna let this happen again.’ And then 100 years later in 2000, we rolled them all back.”
The vehicle for doing this was an obscure but critical piece of federal legislation called the Commodity Futures Modernization Act of 2000. And the bill was a big favorite of the financial industry it would eventually help destroy.
It not only removed derivatives and credit default swaps from the purview of federal oversight, on page 262 of the legislation, Congress pre-empted the states from enforcing existing gambling and bucket shop laws against Wall Street.
“It makes it sound like they knew it was illegal,” Kroft remarks.
“I would agree,” Dinallo says. “They did know it was illegal. Or at least prosecutable.”
In retrospect, giving Wall Street immunity from state gambling laws and legalizing activity that had been banned for most of the 20th century should have given lawmakers pause, but on the last day and the last vote of the lame duck 106th Congress, Wall Street got what it wanted when the Senate passed the bill unanimously.
“There was an awful lot of, ‘Trust us. Leave it alone. We can do it better than government,’ without any realistic understanding of the dangers involved,” says Harvey Goldschmid, a Columbia University law professor and a former commissioner and general counsel of the Securities and Exchange Commission.
He says the bill was passed at the height of Wall Street and Washington’s love affair with deregulation, an infatuation that was endorsed by President Clinton at the White House and encouraged by Federal Reserve Chairman Alan Greenspan.
“That was the wildest and silliest period in many ways. Now, again, that’s with hindsight because the argument at the time was these are grownups. They’re institutions with a great deal of money. Government will only get in the way. Fears it will be taken overseas. Leave it alone. But it was a wrong-headed argument. And turned out to be, of course, extraordinarily unwise,” Goldschmid says.Asked what role Greenspan played in all of this, Professor Goldschmid says, “Well, he made clear in his public speeches and book that a Libertarian drive was part of the way he looked at the world. He’s a very talented man. But that didn’t take us where we had to be.”
“Alan was the most powerful man in Washington in a real sense. Certainly a rival to the president and had enormous influence on Capitol Hill,” Goldschmid says.
“And he was at the height of his power,” Kroft adds.
Within eight years, unregulated derivatives and swaps helped produce the largest financial services economy the United States has ever had. Estimates of the market for credit default swaps grew from $100 billion to more than $50 trillion, and you could bet on anything from the solvency of communities to the fate of General Motors.
It also produced a huge transfer of private wealth to Wall Street traders and investment bankers, who collected billions of dollars in bonuses. A lot of the money was made financing what seemed to be a never-ending housing boom, selling mortgage securities they thought were safe and credit default swaps that would never have to be paid off.
“The credit default swaps was the key of what went wrong and what’s created these enormous losses,” Goldschmid says.
“Is it your impression that people at the big Wall Street investment houses knew what was going on and knew the kind of risks that they were exposed to?” Kroft asks.
“No. My impression is to the contrary, that even at senior levels they only vaguely understood the risks. They only vaguely followed what was going on,” Goldschmid says. “And when it tumbled, there was some genuine surprise not only at the board level where there wasn’t enough oversight but at senior management level.”
They didn’t know what was going on in part because credit default swaps were totally unregulated. No one knew how many there were or who owned them. There was no central exchange or clearing house to keep track of all the bets and to hold the money to make sure they got paid off. Eventually, savvy investors figured out that the cheapest, most effective way to bet against the entire housing market was to buy credit defaults swaps, in effect taking out inexpensive insurance policies that would pay off big when other people’s mortgage investments failed “I know people personally who have taken away more than $1 billion from having been on the right side of these transactions,” says Jim Grant, publisher of Grant’s Interest Rate Observer and one of the country’s foremost experts on credit markets.
“If you can and you could lay down cents on the dollar to place a bet on the solvency of Wall Street, for example, as some did, when Wall Street became evidently insolvent, that cents on the dollar bet went up 30, 40, and 50 fold. Not everyone who did that wants to get his name in the paper. But there are some spectacularly rich people who came out of this,” Grant says.
“Who got richer,” Kroft remarks.
“Who got richer, who became, you know, fantastically richer,” Grant says.
A lot of them were hedge fund managers. John Paulson’s Credit Opportunities Fund returned almost 600 percent last year, with Paulson pocketing a reported $3.7 billion.
Bill Ackman, of Pershing Square Capital Management, said he plans to make hundreds of millions. Both declined 60 Minutes’ request for an interview.
Congress seemed shocked and outraged by the consequences of its decision eight years ago to effectively deregulate swaps and derivatives. Various members of the House and Senate have hauled in the usual suspects to accept or share the blame.
“Were you wrong?” Rep. Henry Waxman asked former Federal Reserve Chairman Greenspan.
“Credit default swaps, I think, have some serious problems with them,” Greenspan replied.
It appears to be the first step in a long process of restoring at least some of the regulations and safeguards that might have prevented, or at least mitigated this disaster after the damage has already been done.
Where do we go from here?
“We need the most dramatic rethinking of the regulatory scheme for financial markets since the New Deal. If anything has demonstrated that imperative, it’s the economy right now and the tragic circumstances we’re in,” Goldschmid says.
Asked how much danger he thinks is still out there, Goldschmid says, “We don’t know. Part of the problem of the lack of transparency in these markets has been we don’t really know.”
To view the story, click on the following link:
http://www.cbsnews.com/video/watch/?id=5274961n
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WASHINGTON – The government insurance fund that protects more than $4.5 trillion in U.S. bank deposits fell to just $10.4 billion at the end of June, as the banking industry continues to struggle with souring loans.
The Federal Deposit Insurance Corp. fund is at its lowest level since mid-1993, during the savings-and-loan crisis. That makes it likely that the government will have to charge banks another special fee to recapitalize its reserves. Officials could also consider borrowing up to $100 billion from the Treasury Department, but they have avoided this option so far.
![[FDIC]](https://i0.wp.com/s.wsj.net/public/resources/images/OB-EI211_0827ba_D_20090827125135.jpg)
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FDIC Chairman Sheila Bair briefs the media on the bank-and-thrift industry earnings for the second quarter of 2009 on Aug. 27.
FDIC Chairman Sheila Bair said Thursday that the agency had “ample” resources to protect depositors and had no immediate plans to raise or borrow funds. She said the FDIC expects the number of banks failing or at risk of failing to remain “elevated,” even after the broader economy turns around. “Cleaning up balance sheets is a painful process that takes time,” Ms. Bair said.
The agency said it had 416 banks on its “problem” list at the end of June, up from 305 at the end of March. Banks on the problem list are considered at higher risk of failure and face tougher regulatory scrutiny. The FDIC said assets of banks on the problem list totaled $299.8 billion—a figure that suggests that Citigroup Inc. and some of the country’s other largest banks aren’t on the list.
![[Deposit Insurance Fund]](https://i0.wp.com/s.wsj.net/public/resources/images/AM-AG681_FDICDA_D_20090827162020.jpg)
The FDIC, in a quarterly report, said the industry posted an aggregate net loss of $3.7 billion in the second quarter, mostly because banks increased expenses for bad loans. This is a reversal from the first quarter, when the banking industry turned a slight profit, and shows banks still have a long way to go to work through their problems.
The FDIC also said borrowers are falling behind on loans at record levels and across most major loan categories. The number of loans at least 90 days past due climbed for a 13th consecutive quarter, while the percentage of loans at least three months overdue hit 4.35%, the highest level recorded since the FDIC began collecting this data 26 years ago.
“Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses,” Ms. Bair said.
The biggest problem areas continued to be property-related loans, suggesting the housing market is still under stress despite some recent good news. The FDIC said residential mortgage loans at least 90 days past due climbed 12.7% in the quarter. The number of construction and development loans at least three months behind increased 16.6%.
Banks responded to the credit problems by writing off assets at a record pace and continuing to add to their reserves. Banks added $16.8 billion to their loan-loss reserves during the second quarter, while writing off $48.9 billion.
Even so, loans are souring faster than banks can sock away funds to cover potential losses. The FDIC said U.S. banks had only 63.5 cents in reserve for every dollar of loans at least 90 days past due at the end of the second quarter, the lowest level since the third quarter of 1991.
The $10.4 billion in the deposit-insurance fund was down from an already-low $13.3 billion at the end of March. The deposit-insurance fund topped $45.2 billion a year ago. The fund fell to 0.22% of insured deposits on June 30, the lowest level since March 31, 1993.
The FDIC said it added $10.2 billion to the fund in the second quarter through assessments, including a $5.6 billion special fee that banks were charged at the end of June, and other interest and fees. At the same time, it transferred $11.6 billion from the fund to a separate loss-reserve fund, bringing that fund up to $32 billion and giving the agency $42 billion in reserves to cover insured deposits.
Eighty-one banks have already failed so far this year, up from 25 in 2008. Bank failures this year have already cost the FDIC roughly $19 billion. The FDIC said the U.S. had 8,195 banks at the end of June.
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By Joanna Chung in Washington and Francesco Guerrera in Pittsburgh
August 27 2009 20:38
The number of US banks at risk of failure is at a 15-year-high while the fund protecting depositors is at its lowest level since 1993, according to figures that highlight the spread of the crisis to the lower reaches of the financial system.
The Federal Deposit Insurance Corporation, a banking regulator, on Thursday said the number of “problem banks” had risen from 305 to 416 during the second quarter. The FDIC does not name the lenders on the “problem list” but said that total assets of that group had increased from $220bn to $299.8bn in the three months through June.
That relatively low figure suggests that after hitting large institutions which traded complex securities, the financial crisis and the recession are taking a toll on smaller banks that lend to businesses and consumers.
Sheila Bair, the FDIC chairman, said on Thursday that while earlier losses in the industry were related to troubled residential loans and complex mortgage-related assets, there were now problems with more conventional types of retail and commercial loans that have been hit hard by the recession. “These credit problems will outlast the recession by at least a couple of quarters,’’ she said.
The FDIC’s total asset figure indicates that Citigroup is not on the “problem list”, in spite of fears among executives and investors that its financial problems and regulators’ concerns over the management team could prompt an inclusion. Citi declined to comment.
Thursday’s news of a sharp fall in the FDIC’s deposit insurance fund, which insures up to $250,000 per depositor in each bank, underscored the problems faced by regulators when contemplating the rescue or wind-down of institutions with trillions of dollars on their balance sheets.
The agency said its fund had fallen to just $10.4bn from $13bn in the quarter, the lowest level since March 1993 when the US was in the middle of the savings and loans crisis. The fund has been depleted by bank failures: regulators have shut 81 banks this year.
“In many important respects, financial markets are returning to normal,’’ said Ms Bair. “Combined with the positive economic news in recent weeks, we’re hopeful that this will lead to a moderation in credit problems in coming quarters. But, as our report shows, cleaning up balance sheets is a painful process that takes time.’’
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WASHINGTON — The Obama administration shaved $262 billion from its estimated 2009 federal budget deficit but said the U.S. will run a $9 trillion deficit over the next 10 years — $2 trillion more than it forecast earlier this year.
The administration, in its mid-year budget review, painted a picture of a nation that is at once stabilizing as the economy begins to recover but that is also in for a prolonged period of economic weakness, joblessness and unsustainable government spending.
Unemployment is expected to fare far worse than initial White House projections in February, when the administration predicted a jobless rate of 8.1% for 2009, a number that has already been surpassed by reality. The administration now foresees unemployment hitting 10% at some point over the next year and a half, with the jobless rate averaging 9.3% in 2009 and 9.8% in 2010.
Chair of the White House Council of Economic Advisers Christina Romer addresses a breakfast meeting earlier this month.
“We do predict unemployment will reach 10% for some months and some quarters,” Christina Romer, who heads President Barack Obama’s Council of Economic Advisers, said in a call with reporters to discuss the revised budget assumptions.
The White House is also projecting a slower climb out of the recession than earlier this year, estimating negative 2.8% economic growth for 2009, as opposed to its earlier estimate of negative 1.2% growth. For 2010, the administration sees 2% growth, down from the rosier 3.2% it projected in February. The revised estimate “reflects new information all forecasters received earlier this year about the severity of the forecast,” said Ms. Romer.
Ms. Romer said the revisions are largely due to deterioration in economic output since January, when the administration first cobbled together its budget projections, and the unusual nature of this recession, in which joblessness is higher than many expected.
A small piece of good news: The administration is predicting a smaller 2009 deficit of $1.58 trillion, down from $1.84 trillion predicted in February. That revision is attributable largely to smaller-than-expected costs associated with the financial crisis.
Many financial companies receiving bailout money are returning funds and the administration said it removed a budget placeholder that assumed another $250 billion in related costs. The White House also is estimating that less money will be spent by the Federal Deposit Insurance Corp., on bank rescues.
“We now expect that the policies put in place to repair the financial system will cost taxpayers less than expected,” said Peter Orszag, who heads the White House’s Office of Management and Budget.
Still, in a measure of the dire state the nation’s fiscal picture, the level of U.S. public debt when measured as a percentage of economic output is projected to reach its highest levels since World War II. The administration is projecting that public debt will hit 66.3% of gross domestic product in 2010, more than any other time since the 1940s, when it peaked at more than 121% of GDP.
That figure is more than symbolic. Higher debt means the U.S. is paying more to finance its deficit. Interest payments are projected to hit 3.4% of GDP by 2019.
Republicans plan to assail the administration’s projections by saying they paint too rosy a picture by assuming revenue that is unlikely to materialize. Doug Holtz-Eakin, who was Republican Sen. John McCain’s economic adviser in the 2008 presidential election, said in a memo prepared for the Republican congressional leadership that the Obama team was using false assumptions to pad its numbers, including $640 billion from its planned cap-and-trade program, which has yet to be approved by Congress, and $200 billion from taxing international business.
Administration officials blamed the worsening long-term deficit outlook on increased spending associated with programs to help blunt the impact of the recession. The U.S. will have to spend more on such programs as unemployment insurance and food stamps as more people go without work.
The bulk of the long-term deficit is primarily related to spending on entitlement programs, such as Social Security and Medicare. Costs associated with those programs are projected to continue growing, eventually swamping the federal budget.
Mr. Orszag said the administration is committed to bringing down the size of the budget deficit but said that now is not the moment to rein in government spending.
“It’s desirable to allow deficits to increase during an economic downturn,” he said, referring to the stimulating effect that increased government spending can have on the economy. Many economists say the administration’s $787 billion stimulus package, even as it adds to the federal deficit, is also fueling growth, adding anywhere from one to three percentage points in second-quarter GDP.
Mr. Orszag said the administration would detail in its 2011 budget “proposals to put the nation on a fiscally sustainable path.” A key to getting those costs under control, he said, is to rein in spending on health care costs, which are adding to the ballooning Medicare tally. Mr. Orszag said the administration’s health care overhaul would help bring down those costs.
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CHARLOTTE, N.C. (AP) — Banking equities analyst Richard Bove said Sunday that it’s possible 150 to 200 more U.S. banks could fail in the current banking crisis, putting greater stress on the Federal Deposit Insurance Corp.’s deposit insurance fund.
The FDIC, which insures deposits, may be forced to turn to non-U.S. banks and private equity funds to help shore up the banking system, the Rochdale Securities analyst wrote in a note to investors.
Among the 81 banks closed so far this year — compared with 25 last year and three in all of 2007 — were a stream of smaller institutions, many ruined by losses on ordinary loans amid the souring economy, tumbling home prices and spiking unemployment.
The FDIC expects bank failures will cost the insurance deposit fund around $70 billion through 2013. The fund stood at $13 billion — its lowest level since 1993 — at the end of March. It has slipped to 0.27 percent of total insured deposits, below the minimum of 1.15 percent mandated by Congress.
Banks’ payments to keep the FDIC afloat could eat up 25 percent of their pretax income in 2010, according to Bove.
The FDIC last week seized Colonial Bank, a big lender in real estate development, and sold its $20 billion in deposits, 346 branches in five states and about $22 billion of its assets to BB&T Corp.
It was the biggest bank failure so far this year, and the sixth-largest in U.S. history, expected to cost the insurance fund $2.8 billion.
On Friday, regulators shut down Guaranty Bank, a big Texas-based lender afflicted by loan losses. It was the second-largest U.S. bank failure this year.
The costliest failure was the July 2008 seizure of big California lender IndyMac Bank, on which the fund is estimated to have lost $10.7 billion.
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The FDIC took over the following failed banks on August 21, 2009, bringing the year’s total to 81.
Guaranty Bank, Austin, TX
Capital South Bank, Birmingham, AL
First Coweta Bank, Newnan, GA
ebank, Atlanta, GA
Number of Failures broken down by month:
January – 6
February – 10
March – 5
April – 8
May – 7
June – 8
July – 24
August – 12
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Fri Aug 21, 2009 7:34pm BST NEW YORK, Aug 21 (Reuters) - Gold futures rose toward $960 an ounce on Friday, gaining more than 1 percent as the dollar slumped against the euro, boosting the metal's appeal as a hedge against the falling U.S. currency.
For the latest detailed report, click on [GOL/].
GOLD
* December gold GCZ9 settled up $13, or 1.4 percent, at $954.70 an ounce on the COMEX division of the New York Mercantile Exchange.
* Ranged from $939.20 to $959.90 -- the highest price since Aug. 14.
* Gold accelerated gains after COMEX pit open as the dollar slumped to a two-week low against the euro on the back of optimistic services-sector data in the euro zone. [FRX/]
* The inverse relationship between gold and the dollar has been reasserting itself. Earlier this year, the traditional link broke down because both assets benefited from a flight to safety amid economic fears - analysts.
* Investors sold U.S. dollar holdings to buy gold and crude oil, and the December contract looked set to break out and test the next significant resistance level at $975 an ounce - George Gero, vice president of RBC Capital Markets Global Futures.
* Gold jumped above $950 an ounce ahead of option expiry next week - Jon Nadler, senior analyst at bullion dealer Kitco Metals Inc.
* Earlier in the session, oil rallied to just below $75 a barrel. Gold is generally viewed as a hedge against oil-led inflation.
* Gold/oil ratio at 12.90, down slightly from the previous session's 12.92.
* COMEX estimated 1 p.m. gold volume at 82,044 lots.
* Spot gold XAU= at $952.95 an ounce at 2:15 p.m. EDT (1815 GMT), against $939.35 in late Thursday dealings in New York.
* London afternoon gold fix XAUFIX= at $952.50 an ounce. Capital Gold Group, gold group, gold, gold prices, gold news, gold coins, gold bullion, gold IRA, IRA gold
By Shiyin Chen
Aug. 21 (Bloomberg) — The dollar’s role as a good store of value is “questionable” and the currency has a high degree of risk, said Nobel Prize-winning economist Joseph Stiglitz.
“There is a need for a global reserve system,” Stiglitz, a Columbia University economics professor, said at a conference in Bangkok today. Support from countries like China should ensure orderly discussions on a new reserve system, he added.
The dollar has lost 12 percent since March 5 against an index comprising the euro, yen and four other major currencies. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.
“The current reserve system is in the process of fraying,” Stiglitz said. “The dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk.”
The dollar will weaken as the U.S. pumps “massive” amounts of money into the economy, according to Curtis A. Mewbourne a portfolio manager at Pacific Investment Management Co., the world’s biggest manager of bond funds.
Still, pessimism over the dollar’s prospects may be excessive, with its status as the world’s reserve currency still intact, said David Woo, global head of foreign exchange strategy at Barclays Capital in London.
“The reserve currency issue was a big issue three months ago,” Woo said in a Bloomberg Television interview yesterday. “But guess what? The dollar hasn’t gone anywhere over the last three months for the most part and if anything, we’ve seen a slowdown in dollar-selling by central banks.”
Flood of Liquidity
Policy makers in the U.S. and Europe have flooded the global economy with liquidity, which could lead to speculative bubbles due to limited opportunities for investment, Stiglitz said. The Nobel Prize winner said he was not confident of the Fed’s claim that it would withdraw liquidity when needed.
Under Chairman Ben S. Bernanke’s stewardship, the Fed cut the benchmark lending rate to as low as zero and expanded credit to the economy by $1.1 trillion over the past year. In the euro region, the European Central Bank has reduced interest rates to a record low of 1 percent.
“As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future?” Stiglitz told the conference. “Right now we’re facing deflation, but some time in the future, there will be consequences.”
Asset Bubbles
The liquidity pumped into the U.S. economy may also end up elsewhere, including in Asian property and stocks, Stiglitz said later in Bankgok.
“The liquidity is going to be spent, but not necessarily in America,” he said. Asian economies may have to “protect against an American-led asset bubbles.”
The global financial crisis also signals the failure of American-style capitalism, Stiglitz told the conference. The worldwide financial system only worked because of repeated government bailouts and markets have been saved from their failures to allocate risk, he said.
Stiglitz said more collective action was needed on a global level to address the crisis and that the Group of 20 has been slow in addressing fundamental problems such as weak aggregate demand. Finance ministers and central bankers from the G20 are due to meet in London on Sept. 4-5.
Early Stages
The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007, has led to almost $1.6 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
Treasury Secretary Timothy Geithner said yesterday the U.S. recovery is still in its early stages, propelled by an improving job market and a housing industry that’s beginning to stabilize.
“We have a long way to go, but we are starting to see signs of stability, and these signs mark the first steps to recovery,” Geithner said in prepared remarks in Berea, Ohio.
Stiglitz has a more pessimistic view on the U.S. economy, saying that while the worst of the recession may have passed, the likelihood of unemployment in the next one to three years being higher than it had been was “very great.”
The economist shared the Nobel Prize in 2001 for work on problems that may arise in markets when parties don’t have equal access to information. He was formerly chairman of the White House Council of Economic Advisers under Bill Clinton.
Stiglitz was also the chief economist at the World Bank between 1997 and 2000, during which he clashed with the White House over economic policies it supported at the International Monetary Fund
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By Garfield Reynolds and Wes Goodman
Aug. 19 (Bloomberg) — Pacific Investment Management Co., the world’s biggest manager of bond funds, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.
The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.
“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.
The Dollar Index, which tracks the greenback against a basket of currencies, touched 78.823 today, the lowest this week. It has fallen 12 percent from this year’s high in March as U.S. authorities pledged $12.8 trillion to combat the recession. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.
“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Mewbourne wrote.
Percentage of Reserves
The dollar as a percentage of global central banks’ foreign reserves increased to 65 percent in the first three months of the year, from 64.1 percent in the previous quarter, according to the International Monetary Fund. Its share has remained around 65 percent the last five years, after falling from 72.7 percent in 2001.
The U.S. government boosted spending and the Federal Reserve bought bonds to revive credit markets that seized up after financial companies posted $1.6 trillion in writedowns and losses, raising concern there is an oversupply of greenbacks.
The currency rose 0.1 percent to $1.4118 per euro as of 9:06 a.m. in New York. The Dollar Index is down about 2.8 percent this year, after a 6 percent gain in 2008.
Asian currencies stand to benefit as the region’s economy grows and the dollar’s allure fades, said Rajeev de Mello, Singapore-based head of Asian investments at Western Asset Management Co., which oversees $473.4 billion.
Sample Coin
“We are positive on the Asian currencies against the dollar and think they will continue to rally,” de Mello said in an interview. “I do think the diversification of reserves is something that’s important and I think we’ll see some from China into other currencies and this will benefit as well Asian currencies and other emerging currencies.”
China’s central bank renewed its call for a new global currency in June and said the International Monetary Fund should manage more of members’ foreign-exchange reserves. Russian President Dmitry Medvedev last month illustrated his call for a supranational currency by producing a sample coin after a summit of the Group of Eight nations.
Mewbourne joins investor Jim Rogers, who said last year that he was shifting all his assets out of dollars and buying Chinese yuan because the Fed eroded the value of the U.S. currency. The dollar is losing its status as the world’s reserve currency, said Rogers, who is the author of books on investing including “Hot Commodities.”
Sovereign Funds
Bill Gross, who runs the $169 billion Pimco Total Return Fund, is also warning the U.S. currency will fall.
Holders of dollars should diversify before central banks and sovereign wealth funds do the same because of concern government budget deficits will deepen, Gross said in June.
Gross’ fund has returned 12 percent in the past year, outperforming 96 percent of its peers, according to data compiled by Bloomberg.
Billionaire Warren Buffett wrote in a New York Times commentary today that the dollar is under threat from the “monetary medicine” that has been pumped into the financial system.
“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, wrote. The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, he said.
Budget Deficit
The U.S. budget deficit reached a record $1.27 trillion for the first 10 months of the fiscal year and broke a monthly high for July, the government said Aug. 12.
There is no viable immediate alternative to the U.S. dollar for now as the euro region lacks a political union while Japan’s economic weakness makes it impossible to consider the yen for such a role, Pimco’s Mewbourne wrote. The currencies of emerging states such as China can’t play a reserve role as long as they are subject to capital controls, which restrict international traders to using non-deliverable forwards, he wrote.
Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE
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