MarketObservation.com

VOX: A bankruptcy to Save GM, Nov. 19, 2008

"The restructuring cost at GM will of course be high, both in human and financial terms. But the alternative is worse: to spend $25 billion on aggravating and postponing the problem. It would be better to give away that money directly to the workers rather than let GM decide how to dissipate it. At over $200,000 for each of GM’s 123,000 North American employees it would a very nice gift. The taxpayers’ cost would be the same, but at least the money would help secure a future to hard-hit households.

Overall, however, we believe that paying off workers and liquidating the company is equivalent to putting the patient out of his misery before attempting to administer the best economic medicine. Some may argue that GM has been receiving medicine from taxpayers for quite some time, but clearly it has been receiving the wrong medicine. A Chapter 11 bankruptcy gives a firm that needs to restructure the chance to recover. If Chapter 11 cannot save GM, then nothing can."

Source: Extract from article linked to above

The Guardian: Interest rates will fall again, Bank indicates, Nov. 19, 2008

The Bank of England sent out a clear message today that interest rates would be cut again next month when it revealed that the nine-strong monetary policy committee considered reducing borrowing costs by more than the 1.5 percentage points it announced earlier this month.

Minutes of the MPC's November meeting showed that Threadneedle Street believed "a very significant reduction in bank rate - possibly in excess of two percentage points - might be required" to prevent inflation falling below the government's 2% inflation target. read more

Bill George, Harvard professor, John Paul, Wharton School of Business professor and Rebecca Jarvis (CNBC) discuss the situation of the Detroit auto industry:

FT: Call for ambitious German stimulus, Nov. 19, 2008

Germany should launch a much more ambitious economic stimulus package as part of a concerted European response to the gathering economic crisis, a European Central Bank policymaker has urged.

Ewald Nowotny, Austria’s central bank governor, also called for an acceleration of eastern European aid programmes in an interview with the Financial Times, in what amounts to one of the boldest calls yet by a central banker for more aggressive action at a time when much of the continent is already in recession. rad more

VOX: 2009 will be the nightmare on Main Street by Nicholas Bloom, Assistant Professor of Economics at Stanford University, Nov. 2008

"In my academic research I have been looking at the impact of large uncertainty shocks on the US economy over the last 40 years.1 These events – like the Cuban Missile Crisis, the Assassination of JFK, the Gulf War and 9/11 – typically double stock-market volatility and reduce stock-market levels by 10%. Their average impact is to reduce GDP growth by 1.5% in the following 6 months, with a recovery within 12 months.

In comparison, the credit crunch is a monster of a shock. It has generated an incredible six-fold increase in stock-market volatility and a 30% fall in the stock market level – three times the average impact of the previous uncertainty shocks. Based on these numbers my central prediction is that GDP growth will be reduced by 4.5% in 2009 because of the credit crunch. Since the consensus forecast2 before the credit crunch for US and UK growth was +1.5%, this reduction in growth leads me to predict a -3% contraction in 2009. Forecasting 2010 is even less accurate, but my central prediction is a return to about +1.5% growth."

Source: Extract from article linked to above

Bloomberg: Consumer Prices in U.S. Decline 1%, Most on Record, Nov. 19, 2008

The cost of living in the U.S. fell by the most on record as fuel costs plummeted and retailers used discounts for cars and clothing to entice consumers hobbled by job losses and sinking home values.

Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, after being unchanged the prior month, the Labor Department said in Washington. Excluding food and energy, so-called core prices unexpectedly fell for the first time since 1982. read more

Project Syndicate: Save the Emerging Markets by Dani Rodrik, Nov. 2008

"To make matters even worse, emerging markets are deprived of the one tool that the advanced countries have employed in order to stem their own financial panics: domestic fiscal resources or domestic liquidity. Emerging markets need foreign currency and, therefore, external support.

What needs to be done is clear. The International Monetary Fund and the G7 countries’ central banks must act as global lenders of last resort and provide ample liquidity – quickly and with few strings attached – to support emerging markets’ currencies. The scale of the lending that is required will likely run into hundreds of billions of US dollars, and exceed anything that the IMF has done to date. But there is no shortage of resources. If necessary, the IMF can issue special drawing rights (SDRs) to generate the global liquidity needed.

Moreover, China, which holds nearly $2 trillion in foreign reserves, must be part of this rescue mission. The Chinese economy’s dynamism is highly dependent on exports, which would suffer greatly from a collapse of emerging markets. In fact, China, with its need for high growth to pay for social peace, may be the country most at risk from a severe global downturn."

Source: Extract from article linked to above

FT: BASF cutbacks will affect 20,000 staff, Nov. 19, 2008

BASF, the world’s largest chemicals maker by revenue, cut its profit outlook for 2008 and announced cutbacks in production, citing a ”massive” decline in demand in key industries.

“We already drew attention to the difficult economic situation at the end of October. Since then, customer demand in key markets has declined significantly,” said Mr Jürgen Hambrecht, BASF’s chief executive said in a statement. “In particular, customers in the automotive industry have cancelled orders at short notice.” read more

FT: US economy chiefs say policies bear fruit, Nov. 18, 2008

The cost of insuring top quality US companies against default hit a record high on Tuesday even as Hank Paulson and Ben Bernanke told Congress that their radical policy actions to ease the credit crisis were starting to bear fruit.

“We have turned the corner in terms of stabilising the system and preventing collapse,” said Mr Paulson, Treasury secretary. He called for patience, saying: “There is a lot of work that still needs to be done in terms of recovery of the financial system.” read more

Swissinfo: Right to eat comes before fuel, minister says, Nov. 18, 2008

An international conference is taking place in São Paulo, Brazil, to discuss biofuels and how promoting them could help solve global security and environmental issues.
In an interview with swissinfo, Environment and Transport Minister Moritz Leuenberger explains the Swiss position: that the right to food comes before the right to mobility. read more

MarketWatch: Toyota cuts 2008 China sales target by 14% to 600,000 units

"Toyota Motor Corp. has cut its automobile sales forecast in China by 14.3% this year, according to a Japanese media report Wednesday. The automaker is now targeting 600,000 vehicle sales, about 100,000 less than its previous forecast, the Nikkei newspaper reported, citing figures released by a Tokyo executive in Guangzhou Tuesday. The revised sales target reflects a 20% year-on-year growth in sales, down from its previous forecast of 40%"

Marginal Revolution: Facts about automakers, Nov. 18, 2008

Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has led to a net reduction in capital of $465 billion...This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.” read more

FT: Inflation falls for first time in 15 months, Nov. 18, 2008

Consumer prices tumbled in October, justifying the Bank of England’s dramatic 1.5 percentage point interest rate cut earlier this month and opening the door for further reductions in the costs of borrowing, according to economists.

The official measure of consumer prices dropped 0.7 per cent last month to a much lower-than-expected annualised rate of 4.5 per cent, after peaking at 5.2 per cent in September. read more

Here is an article which does not share the widespread view that the Big Three should be put in chapter 11 instead of getting a lifeline from government:

The New Republican: Panic in Detroit by Jonathan Cohn, Nov. 14, 2008

"Nothing can stop the revolution in auto-making and drivetrain technology; even under the best of circumstances, the Big Three need to become smaller, more efficient, and more environmentally conscious. But if the government manages that change and uses it as a springboard for discussion of broader economic reforms, everybody can benefit."

WSJ: NABE: ‘Prolonged’ Recession Expected, Nov. 17, 2008

“Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy,” said NABE President Chris Varvares, who’s also president of Macroeconomic Advisers.

According to NABE, 96% of survey respondents said the U.S. is in recession, with respondents split on whether it began in late 2007 to early 2008 or in the third quarter of this year. Gross domestic product contracted 0.3%, at an annual rate, during the third quarter. The NABE panel expects GDP to fall at a 2.6% rate this quarter and 1.3% in the first quarter of 2009.

Nearly three-quarters of NABE respondents think the recession will persist beyond the first quarter next year, with growth coming in at an anemic 0.7% for 2009 as a whole. That’s down from NABE’s October forecast of 2.2% GDP growth in 2009. The unemployment rate, meanwhile, is expected to rise to 7.5% by the end of next year, according to NABE. The jobless rate already sits at a 14-year high of 6.5%."

Source: Extract from article linked to above

German chancellor Angela Merkel said yesterday that government help for the German GM subsidiary auto maker Opel could be possible. The German government will make a decision until Christmas the latest. They first will see what the US is doing. In case the German goverment provides a lifeline they want to make sure that the money stays in Germany. (nobody can blame them!)

FAZ: Hilfe für Opel nur unter harten Auflagen, Nov. 17, 2008

NYT: Clout Has Plunged for Automakers and Union, Too, Nov. 17, 2008

When the leaders of the three Detroit auto companies and the United Automobile Workers union travel to Washington to make their case for a federal bailout, they will be flying into stiff headwinds of public opinion.

Thus far, much of the commentary in Washington, in the pages of major newspapers and on the Web, has been against providing financial support for the companies, which they will say they desperately need in hearings beginning on Tuesday. read more

The pay bonanza is definitely a major reason for the crisis. We should also not forget Fannie and Freddie..

The Guardian: Former Fed chairman blames pay bonanza for the financial crisis'The managers didn't know what they were doing ... They were, Nov. 17, 2008

Paul Volcker, the central banker responsible for crushing inflation in America in the 1980s, today blamed excessive pay packages for leaving the world with a "broken financial system".

Speaking in London, the former chairman of the Federal Reserve who some have tipped for a key role in Barack Obama's new administration, said there had been "tremendous rewards and payments of magnitude for presumed success and not much penalty for failure." read more