August 31st, 2009
06:10 AM GMT
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When most people think of their own budgets, they think of money on a relatively simple scale; food, housing, transportation, household goods and so forth.

I’ve moved several times over the past several years. With each move I track my spending to gauge my new cost of living. It’s nothing complex. I simply jot down how much I spend each day on things like lunch, groceries and transportation. After a few weeks, it’s easy to see where I stand.

That’s because the numbers are simple.

But then you hear the staggering figures batted around over the past year. Whether it’s millions of dollars for Wall Street bonuses, or billions of dollars in bankruptcy filings, it all starts to turn into a blur of huge sums.

Then, as if those figures aren’t confusing enough, the White House comes along and projects a $9 trillion budget deficit over the next 10 years.

How does a person even get their mind around such a massive sum of money?

Nine trillion is nine million million dollars.

Sorry, did that just make things more confusing? Maybe these three points might help put it all in perspective:

-         If you spent ten million dollars a day, every single day going back to the year Christ was born, you would have only spent about $7.3 trillion by now.

-         As Temple University Professor John Allen Paulos pointed out to CNN a few months back, “A million seconds is about 11½ days. A billion seconds is about 32 years, and a trillion seconds is 32,000 years."

-         Or as Colleen McEdwards found in this week’s Biz Clinic, if you stacked one dollar bills one on top of the other, the pile could go to the Moon and back … then halfway back to the Moon.

And if each of the roughly 300 million Americans chipped in to payoff a $9 trillion deficit, we’d each have to shell out $30,000.

I don’t know about you, but that’s just not in my budget.

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Filed under: Biz Clinic

August 27th, 2009
04:14 PM GMT
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LONDON, England – On a quiet summer day in August, when many in London's financial district are away, or wishing they were away, comes a lightning bolt from the head of the Financial Services Authority.

Adair Turner proposes the idea of a special tax on financial transactions.
Adair Turner proposes the idea of a special tax on financial transactions.

Adair Turner, the man in charge of regulating the City of London, has said that some parts of the financial sector have grown "beyond a socially reasonable size," and some of what it does as "socially useless activity."

In short he thinks financial services account for too much of Britain's output, robbing other sectors of some of the best and brightest.

To underscore his point, he looks at what “percentage of highly intelligent people from our best universities went into financial services." And then goes to say, "Unless you've got a theory that explains why financial intermediation suddenly needs all this extra resource, there is something of a conundrum. Is it really the case that financial intermediation today is a more complex thing that a decade or two back?”

He proposes the idea of a special tax on financial transactions.

His is not a new idea.

Originally, an economist named James Tobin suggested a special tax on foreign currency transactions to curb speculation. Then in 2005, then president of France, Jacques Chirac, placed a "Tobin tax" on financial transactions to deal with what he perceived to be the excesses of "liberal globalization."

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," Turner said.

It's clear that freewheeling capitalism didn't work, that policymakers need to devise ways to curb excessive risk taking. Higher capital requirements should be the first line of defense.

Unsurprisingly, Turner's possible solution and open questioning of whether the financial district is too large, is already provoking sharp debate and response. He even went so far as too suggest that London's competitive advantage as one of the world's premier financial hubs shouldn't be defended at any cost.

The head of the British Bankers Association Angela Knight, did not mince words in response. "I think that if we say we do not want to have an international, competitive industry here, then we will do to financial services what we have done to manufacturing and engineering in the past and that is have it as a minor industry and lose it to others," she said.

I agree with Knight.

Yes, there have been excesses and recklessness in the financial sector that will take decades to unwind, including eye-popping amounts of money bailing out a financial system that could have been put to much more productive use.

But haven't they acknowledged the excesses? Let's not further undermine an economy already on its knees by making it less competitive and attractive. Let's first start with better supervision.

Do you agree there should be global taxes on financial transactions as a way of curbing excesses? Would such taxes be effective?

August 26th, 2009
10:04 AM GMT
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August 25th, 2009
03:53 PM GMT
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LONDON, England – The nomination of Ben Bernanke to a second term as chairman of the U.S. Federal Reserve comes as no surprise. The surprise would have been if U.S. President Barack Obama nominated someone else. The financial markets are satisfied with the job Bernanke is doing. In the middle of a crisis, you don't want to be changing the man responsible for steering the economy back on course.

U.S. President Barack Obama has again nominated Ben Bernanke, left, as chairman of the U.S. Federal Reserve.
U.S. President Barack Obama has again nominated Ben Bernanke, left, as chairman of the U.S. Federal Reserve.

Does it mean that Bernanke has done everything right? No, of course not, he hasn't - and he has admitted that he was mistaken early on in saying that the subprime crisis would be contained. But once he recognized how severe the crisis was, he and the Fed acted with boldness and innovation.

Bernanke also came under criticism for, among other things, allowing the failure of Lehman Brothers. But he defends the decision, saying the failure was unavoidable, that a buyer couldn't be found and that Lehman didn't have enough collateral to meet the criteria for a large Federal Reserve loan to stay afloat.

One area of concern is the massive amounts of liquidity the Fed has pumped into the system and whether those will lead to a re-emergence of inflation further down the road.

Bernanke is acutely aware of those concerns, and today pledged to work to the utmost of his abilities to "help provide a solid foundation for growth and prosperity in an environment of price stability."

His nomination to another four-year term still needs to be approved by the U.S. Senate. He will receive some tough questioning at his confirmation hearings, including why the Fed didn't do a better job of supervising the banks that got us into the subprime mess to begin with. The Fed's exit strategy from its ultra-loose monetary policy will undoubtedly be another area of questioning.

But at the end of the day, Bernanke will be reconfirmed. He has steered the Fed and the U.S. economy through unchartered territory. It's a long way to a full fledged recovery, but at this point, Bernanke deserves the chance to finish the job.

But what do you think – should Bernanke be reappointed? What is your biggest concern regarding the Fed as it goes forward?

August 25th, 2009
03:26 PM GMT
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LONDON, England –It's obvious General Motors is having second thoughts about parting with its European silver. For sure, it may still go through with selling a (large) stake of Opel to Canadian car parts maker Magna and Russian interests - but not on the terms that up to now have been reported in the press.

GM Motors has emerged from bankruptcy –- but what should it do about Opel?
GM Motors has emerged from bankruptcy –- but what should it do about Opel?

GM Europe is really only Opel (and its much smaller re-badged Vauxhall brand.) Opel could have a bright future when economies recover, moreso now that GM has the power to close plants, move production and do all the things a car manufacturer does to cut costs following its emergence from bankruptcy.

If Opel starts to let in other major shareholders, then GM losses the ability to make those decisions on its own, missing all the potential ("potential" mind you) profits if it calls the market right.

GM would also lose some of its intellectual property, which would end up in the hands of a Russian car maker. Why would GM contemplate that?

Having said all this, GM no longer has the final word on what happens to Opel. Remember, Opel is run by a trust with two GM appointees, two German government appointees (German taxpayers put in billions of dollars to keep Opel operating while GM went through U.S. bankruptcy protection) and one independent member of the trust panel.

GM must be, and is, getting much smaller. But it's now out of bankruptcy, it's temporarily restored a few suspended factory shifts at North America plants (thanks to Cash for Clunkers) and now it's having second thoughts about Europe.

What do you think? Should GM sell a majority stake of Opel/Vauxhall? Or stick with it?

August 25th, 2009
08:46 AM GMT
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August 24th, 2009
07:30 AM GMT
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HONG KONG, China – The Hang Seng is up 80 percent since March. Hong Kong recently emerged from the recession. And in this volatile housing market, property prices here - always a closely watched indicator - are on the rise again.

Take a walk through one of Hong Kong’s sprawling malls, or try to fight your way through the congested stores in Causeway Bay, and it’s clear that shoppers are out in force.

Many are holding the view that the worst is over. They might be right.

But Stephen Roach, chairman of Morgan Stanley Asia,  says caution is still the key. In a chat with Biz Clinic, Roach gives his views on where things stand.

The markets: The markets are “a lot stronger than the underlying state of the global economy,” says Roach, who previously was chief global economist for Morgan Stanley for more than 15 years. That will raise some real risks for equities in the second half of this year.

It’s important to remember that as much as 75 percent of the world’s economy has been contracting, and the American consumer remains “dead in the water” right now, Roach says. “When markets go up, memories get short.”

The housing myth: The focus on the U.S. housing market is “overblown,” Roach says. In his view, the damage has already been done. And even if housing does stabilize, consumers are still “stuck with too much debt on overvalued homes,” he says. “And now they’re stuck with job and income problems on top of that.”

Shooting down ‘green shoots’: It’s been the catch phrase of the recovery, but Roach shrugs off the idea of so-called “green shoots.” “(It’s a) fiction that’s been woven around liquidity driven markets,” he says, and the current “green shoots” will not blossom into large plants or bushes.

Keys to recovery: Here is what needs to happen for a global recovery, according to Roach :  

  1. First, the world needs another consumer than the “overly indebted, savings-short American consumer.”
  2. Second, we have to watch private debt levels, as well as public debt levels brought on by the massive stimulus programs all over the world.
  3. There needs to be job growth. Without that, Roach says we could see “a recovery with limited staying power, and one that is anemic at best.”
  4. And lastly, the United States has to save again, and excess savers in Asia have to start spending again. If that doesn’t happen, Roach says he’ll be “very cautious about the prognosis for the global economy.”
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Filed under: Biz Clinic

August 21st, 2009
06:03 PM GMT
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Last Friday, when it was announced that Volkswagen had agreed a takeover of Porsche, with a little help of money from Qatar, it seemed that this saga was nearing the end. No so.

After German prosecutors raided to Porsche offices in Stuttgart on Thursday looking for evidence of “market manipulation” and a violation of “disclosure rules” the whole thing now looks set to run and run.

So, what are they looking for? You may recall Volkswagen shares soared last October when the much smaller Porsche announced it had bought a majority stake, catching everyone off guard.

Many people in the markets had “shorted” the stock (basically a bet the shares would fall) and had to quickly try to buy shares, even as the price took off, in order to cover their exposure. Then, almost as quickly, the shares fell hard.

German stock market rules stipulate how many shares an entity can purchase (percentage wise) of another company before having to disclose that position to regulators. But apparently the same rule does not apply when it comes to share options (an option to buy shares at a certain price).

Porsche had built up a huge number of options, to the surprise of the market, and apparently to regulators.

No matter how this investigation plays out, some in Germany hope there will be a change in the law to cover options, to limit the chances of this happening again.

Of course, the Porsche position did not work. Volkswagen is going to gobble up the premium car maker.

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Filed under: Auto industry

August 21st, 2009
05:02 PM GMT
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LONDON, England - Wherever you live, there’s always a local oddity or two: uniquely strange driving habits on the roads, maybe, or fast-selling products whose actual use is obscure. Here in England, it’s the strange phenomenon of the fiver famine.

The fiver, let me explain, is our smallest banknote, both in size and value: the five pound note. You would have thought they’d be common – not exactly two-a-penny, but fairly easy to find.

Er … no. The fiver is a rare bird which only occasionally flits across one’s path in its gray-green plumage, whereas its plumper companion, the £10 note or tenner, a classic brown job, flies out of cash dispensers with great regularity.

And here’s the second oddity: when your patience pays off and you do track the rare fiver bird down, it’s usually in a sorry bedraggled state.

People here were quick to embrace credit cards and then debit cards, and the old-fashioned cheque is still around in the background, no doubt still recovering from the excitement of its 350th birthday party earlier this year.

But the shortage of handy fivers is a nuisance for people who are forced to use a lot of cash, like market traders and taxi drivers. I’m not saying they’d change a tenner for a fiver just to make life more convenient, but they dislike having to give their customers a clunking great pile of our weighty little £1 coins rather than a handy banknote.

Talk to the Bank of England or the Payments Council, which monitors all kinds of payment on behalf of retailers, and they look in all directions and usher you into a private room before revealing a dirty secret about us Brits: we abuse our banknotes.

I’m serious. Those big denominations get treated with respect, of course: the average £50 notes can look forward to a decade of pampered life, lovingly tucked into fat wallets or squirreled carefully away in safes. By contrast, a tenner might last only a year or two, while the unfortunate fiver is treated as small change and handled accordingly: scrumpled up into a ball, stuffed into pockets next to bunches of keys, put through the washing machine, and generally viewed with scant respect.

So as fast as the Bank of England issues nice fresh notes, they’re soon transformed into limp dog-eared little rags that are simply not crisp enough to put through the machinery that counts banknotes. That means they have to be weeded out, and banks generally prefer to save themselves the trouble and cost involved.

That means fivers aren’t available from cash dispensers (with exceptions; I was intrigued to be issued with £5 notes when withdrawing money on a recent visit to Liverpool). Given that nearly two-thirds of the cash withdrawn in the UK comes out of those holes in the wall, the result is a shortage.

Just to tighten the vicious circle, retailers generally don’t even bother to bank the fivers they accumulate. So even if the banks could put them into cash dispensers, they’d be short of them anyway.

So while it’s tempting to think that this is all down to the recession here and our wanting to spend less and take out smaller denomination banknotes, it’s really all about printing more of the kind of money we like to use most.

Now the retail banks and the Bank of England are working together to address that. For a couple of months now they have been running a pilot centred on Central and Southwest England.

It’s too early to say whether this will mean more fivers everywhere; I personally fear a lot of banknote printing machines will burn out as the Bank of England tries to cope with the fiver famine and the need to pump cash into the financial system.

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Filed under: BusinessMoney

August 21st, 2009
01:17 PM GMT
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