Finance & Business World

Australia has room to lower interest rates further and increase government spending to support the economy amid the current global crisis, former central bank Governor Ian Macfarlane said.

Reserve Bank of Australia Governor Glenn Stevens, Macfarlane’s successor, cut borrowing costs by 1 percentage point yesterday to a six-year low of 4.25 percent, extending the biggest round of reductions since 1991. While economic growth last quarter was the slowest in eight years, Australia has so far avoided a recession, unlike the U.S., U.K., Europe and Japan.

“We have scope to move both monetary and fiscal policy in an expansionary direction,” MacFarlane told a gathering of the Lowy Institute for International Policy in Sydney today. “Australia is better placed than any other Organization for Economic Cooperation and Development country I can think of.”

Australia’s government has posted budget surpluses for most of the decade and the central bank’s key overnight cash rate is more than four times higher than the U.S. Federal Reserve’s benchmark rate, and 100 basis points higher than the European Central Bank’s 3.25 percent key rate. To buttress the economy, Prime Minister Kevin Rudd said last week he may allow the government’s budget to slip into deficit.

Macfarlane, the head of central bank between 1996 and 2006, said while the global credit crunch means there is a need for tougher rules, there is “no point in moving to a tougher regulatory regime until we get the present mess sorted out.”

‘Immediate Need’

“The immediate need is to get credit flowing again,” said Macfarlane, who is an adviser to Goldman Sachs Group Inc. “We must return to a situation where lenders will be prepared to take the normal commercial risks, without which no economy can function.”

From an international perspective, Macfarlane said the current situation is more serious than the dot-com bubble, the 1998 Long Term Capital Management hedge fund bailout, the Asian financial meltdown a decade ago, the mergers-and-acquisition bubble of the late 1980s, the 1987 share market collapse, the 1980s U Free Credit Report and Score.S. savings and loan crisis, and the so-called third world debt crunch of the early 1980s.

“We have never seen such a freezing up of lending between the banks before, and we have never seen a situation where in the U.S., the U.K. and Europe, so many banks and other financial institutions have had to be fully or partially nationalized in order to prevent their collapse,” he said.

Macfarlane said the crisis has also “invalidated” the model of a deregulated financial system that has operated in recent decades by transmitting instability among banks to the wider economy.

U.S. Tarnished

“It has failed the market test: it has lost its owners, that is shareholders, vast amounts of money,” Macfarlane said. “It has also greatly reduced the moral authority of the U.S. in international financial affairs.”

Stevens, who lowered borrowing costs by three percentage points since September, said yesterday that monetary policy is now “expansionary” to help restore consumer and business confidence amid a 44 percent plunge in the benchmark S&P/ASX 200 stock index and the biggest decline in home prices since 1978.

For Australia, the global turmoil has been less serious, Macfarlane said. “Our banks remain well-capitalized, profitable and not exposed to subprime mortgages locally or in the U.S.,” he said.

“Mortgage arrears in Australia are miniscule by world standards and most of the corporate sector is moderately geared,” the former governor said. “If we had to make a judgment on whether our system was fundamentally unstable, we would have to say we see no evidence to suggest it.”

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The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.

The implosion of credit markets last month will cause the economy to shrink at a 3 percent annual rate in the fourth quarter and decline at a 1.5 percent pace in the first three months of 2009, according to the median estimate of 59 economists surveyed Nov. 3 to Nov. 11. Following last quarter's 0.3 percent drop, the slump would be the longest since 1974-75.

“The economy fell off a cliff in October,'' said Richard Berner, co-head of global economics at Morgan Stanley in New York. “We had a huge financial shock that intensified the credit crunch and triggered a sharp downturn.''

Declines in household spending will extend into next year as the worst financial crisis in seven decades forces employers to keep cutting payrolls on top of the 1.2 million jobs already lost this year. President-elect Barack Obama has said the U.S. needs a second economic stimulus package “sooner rather than later.''

The pace of contraction this quarter would be the worst since 1990. Berner is among economists projecting the current slump will also be the most serious in a quarter century as the lack of credit causes a reinforcing, vicious circle of declines in confidence, spending and hiring.

“All of these adverse feedback loops are working to reinforce the downturn,'' he said. “At the moment, it looks like the deepest U.S. recession since '81.''

Some members of the group that officially determines when U.S. contractions begin and end are even more pessimistic.

`Serious Recession'

“We're in for a pretty serious recession,'' Jeffrey Frankel, a member of the business-cycle dating committee of the National Bureau of Economic Research, said in a Nov. 10 interview with Bloomberg Television. “There's a chance it'll be the worst postwar recession.''

In addition to gross domestic product, the group tracks changes in payrolls, production, income and sales to make their call. The NBER usually declares a recession 12 to 18 months after it starts. The odds of an official contraction occurring within the next 12 months rose to 100 percent, according to this month's survey, up from 90 percent in October.

After dropping at a 3.1 percent pace in the third quarter, consumer spending will fall 2.9 percent this quarter and 1 short term cash loans.3 percent in the first three months of 2009, according to the survey median. Spending, which accounts for more than two-thirds of the economy, has never fallen for three consecutive quarters in the postwar era.

Rising Unemployment

Falling demand will cause an even bigger increase in unemployment than projected last month. Economists surveyed forecast the jobless rate will rise to 7 percent in the first quarter of 2009, up from last month's forecast of 6.6 percent. The rate will climb to 7.7 percent by the end of 2009, the highest level since 1992, the survey showed.

The jobless rate rose to 6.5 percent in October, the highest since 1994, the government said last week. Employers cut 240,000 jobs last month and the total number of unemployed Americans jumped to 10.1 million, the highest level in a quarter century.

“The combination of the credit crunch and the rapid decline in consumer spending were the two drivers'' behind the weakening employment outlook, said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.

The economic slump is contributing to a plunge in commodity prices that spells good news for inflation. Consumer prices will rise 1.8 percent next year, the smallest gain since the last official recession in 2001, after increasing 3 percent this year, the survey showed.

Less Inflation

The diminishing threat of inflation will give the Federal Reserve leeway to lower interest rates again, the survey showed. The benchmark rate, now at 1 percent, is likely to fall to 0.5 percent by March, its lowest level ever.

Obama, in his first post-election press conference, last week said he would follow up on any fiscal stimulus passed by Congress in the last weeks of the Bush administration with further measures after his Jan. 20 inauguration. Already, the government has approved a $700 billion financial rescue package, on top of wide-ranging measures from the Fed to boost liquidity.

“We have taken some major action to date, and we will need further action during this transition and subsequent months,'' Obama said.

U.S. automakers have been among the hardest hit by the slump in spending. Vehicle sales plunged in October for a 12th straight month, the longest streak in 17 years, overwhelming efforts by General Motors Corp., Ford Motor Co. and Chrysler LLC to cut costs by trimming payrolls and shutting factories.

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Airlines flying into and out of the European Union will fall under a greenhouse gas cap starting in 2012 under new laws approved by members of the coalition of nations, the New York Times reported Friday.

Starting Jan. 1, 2012, airlines flying into or out of the European Union will have to comply with the greenhouse gas requirements. The rules of the emissions trading system apply regardless of an airline’s nation of origin, the Times reported.

The International Air Transport Association told the Times, the new caps will cost airlines $4 free credit report.com.4 billion a year to comply. Approval of the new environmental codes comes as airlines are still reeling from high jet fuel costs. Passenger demand and cargo flights are on the decline in many parts of the world in the wake of the global financial downturn.

Many heavy industries in the EU already must comply with the caps, which were adopted in 2005, according to the Times.

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The Department of Justice has filed a lawsuit against the Washington Metropolitan Area Transit Authority in the U.S. District Court for D.C., alleging the transit authority discriminates against employees based on religion.

The woman named in the complaint is Gloria Jones, a member of the Apostolic Pentecostal faith, who applied for a bus driver position with the transit agency. The religion encourages women to wear long skirts, not pants.

The complaint alleges that WMATA didn’t hire her because her religious practices prevented her from complying with a part of WMATA’s uniform policy for bus drivers.

The complaint says that WMATA denies requests for religious accommodations to its uniform policy.

“While public employers have the authority to require uniforms, they cannot refuse to accommodate an employee’s religious practice when reasonable accommodation is possible,” said Grace Chung Becker, acting assistant attorney general for the civil rights division.

The alleged discrimination would fall under violation of Title VII of the Civil Rights Act of 1964, according to the Justice Department, which prohibits discriminating employees based on race, color, sex, national origin and religion no teletrak payday loans.

The complaint alleges that WMATA failed to reasonably accommodate and provide equal employment opportunities to its staff and potential employees when their religious practices conflict with WMATA’s uniform policy.

The suit seeks an order for WMATA to undo those alleged practices and seeks monetary damages and other relief for victims of religious discrimination by WMATA.

A spokeswoman for the transit authority said the agency does not comment on ongoing litigation.

The Justice Department’s civil division would not comment on the expected timeline of the suit because cases against transit systems can go in different directions.

This is the ninth Title VII suit the civil rights division has filed so far this year.

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Randy Newman once famously sang that short people got no reason to live. Apparently, SEC chairman Christopher Cox feels the same way about short sellers.

The Securities and Exchange Commission’s plan to temporarily ban short selling in shares of 799 financial services companies is a bold - but highly flawed - move to try and restore confidence in Wall Street and the entire banking system.

I understand why the SEC is taking this step, but I think it sets a dangerous precedent, could create more problems than it solves and doesn’t address the fundamental problem facing bank stocks.

First off, this bet on declining stock prices is a healthy part of the financial markets. Short sellers borrow shares they don’t own and sell them, hoping to later buy them back at a lower price so they can pocket the difference.

The practice ensures an orderly functioning of the stock market - "longs" bet on the upside, "shorts" bet on the downside, and the markets move along.

Banning the practice could cause disruptions. "This is borderline insanity - if the SEC had set out specifically to make the liquidity problems worse, they couldn’t have done a better job," said William Fleckenstein, president of Fleckenstein Capital, a Seattle-based firm that specializes in short selling. "Guys that are short are like guys that are long. We’re just looking to make money."

Second, in the past few years, shorts have often identified fraudulent companies such as Enron, Tyco and WorldCom before many others saw the problems. You can argue that shorts were once again early in identifying banks that were in financial danger.

It is true that short selling may have exacerbated the problems plaguing banks. Rapidly plunging stock prices led to a crisis of confidence that fed on itself and sent prices even lower. And as I pointed out in a column last week, short sellers have been increasingly making bearish bets on banks that are not facing big credit-related problems.

But it’s not the fault of short sellers that Lehman Brothers (LEH, Fortune 500), AIG (AIG, Fortune 500), Washington Mutual (WM, Fortune 500), Wachovia (WB, Fortune 500), Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500) - to name a few - have been bleeding red ink for the past few quarters.

The issue at hand is not that short selling is evil. It is that some short sellers engaged in illegal practices, manipulating the market by spreading rumors to push stocks lower.

It is such manipulation, not the practice of short selling itself, that the SEC should crack down on. The SEC’s statement about the ban lacked any mention of how the commission planned to fight fraud.

Instead, the SEC seemed to compare short sellers to kindergartners in need of a nap pay day loans. The statement Friday morning said that the temporary ban amounted to a "time-out."

What the SEC is doing is equivalent to a police department investigating a series of suspicious fires deciding that, rather than catching the crook, they’ll temporarily ban the sale of all matches in the hopes that after the ban is over, the arsonist will have decided to stop being a pyromaniac.

"What is the SEC gong to do next? Outlaw all selling?" asks Fleckenstein, who is also the author of the book Greenspan’s Bubbles.

The SEC’s ban creates a potential new problem. Between now and the end of the ban on Oct. 2, the value of many banks that deserve to be trading lower may become artificially inflated.

John Derrick, director of research at U.S. Global Investors, a money management firm based in San Antonio with about $5.4 billion in assets, said that while the SEC’s ban is a "prudent" idea for the short-term given how volatile the markets have been, he worries that there could be some very large unintended consequences.

After all, when the SEC first banned so-called "naked" short selling on a smaller group of financial stocks in July, that temporarily led to a big boost in bank stocks. That obviously didn’t last.

"Are we going to have a replay of July where we get a bounce for a few days and then you’re fighting the same battles a few months from now?" Derrick wondered.

For all the talk of capitalism now being dead given the government’s plan to likely assume much of the banking industry’s mortgage-related illiquid assets as well as the takeovers of Fannie Mae, Freddie Mac and AIG, the SEC’s action is far more ominous for those who believe in free markets.

There is ample historical precedent for the government stepping in to bailout companies deemed crucial to the nation’s economy: Penn Central Railroad, Chrysler and the Resolution Trust Corporation set up to help solve the savings and loan crisis all come to mind.

But what the SEC announced Friday is just a monumentally bad idea. Loyal readers of this column know that I am fairly optimistic about the chances for an economic and market rebound - and they often berate me for it.

However, one thing I am not is a market cheerleader or fan of excessive regulation. And at the end of the day, the SEC’s actions are highly hypocritical.

The SEC is attempting to curtail market manipulation. But it is doing so by manipulating the market. 

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The last hours, minutes really, of one the world’s largest investment banks make for a pretty unusual spectacle.

I’m standing outside Lehman Brothers (LEH, Fortune 500) headquarters on 7th Ave and 50th street in New York City, watching Lehman Brothers die.

Employees, some in suits, others in casual clothes, are filing out with all they can carry as time runs out.

They are walking down the sidewalk past police barricades as scores of New Yorkers and tourists gawk, some asking, "Which star is coming out?" - not knowing what’s going on.

A big cop issues the standard "keep moving" line to those of us who stop to gaze. He tells the crowd, "Go home. There is no one famous coming out. You are looking at a whole bunch of people who just lost their jobs."

Some of the people behind the barricades are loved ones - their faces distraught, their cars waiting to pick up their significant others and their boxes. One banker carries out a pair of green Lehman umbrellas, a paltry trophy.

Few parting employees are in a mood to talk - either they’re still adhering to CEO Dick Fuld’s tight-lipped, ‘We’re all in this together’ policy or they’re just exhausted and in major pain.

"No comment," is the standard line cash advance. A TV producer tries in vain to get interviews. I managed to ask one guy how he felt: "Look at all of us with boxes," he said with a grimace. "What do you think?"

As the night wears on, dozens of younger workers start coming out of the building. One yells, ‘Jackals," not knowing that the crowd is made up mostly of relatives or clueless onlookers. A pair of employees walk out carrying orchids.

Six months earlier and five blocks away, a similar scene played out as Bear Stearns collapsed. Tonight I’m wondering how many more crash and burn nights like this Wall Street, the markets and our economy can take. 

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Russia's future in global institutions such as the World Trade Organization depends on its compliance with an agreement to immediately withdraw troops from Georgia, two top U.S. officials said.

Secretary of State Condoleezza Rice urged Russian President Dmitry Medvedev to “keep his word'' on pulling troops back from Georgian territory, saying he has failed to comply so far. Defense Secretary Robert Gates cited a “menu'' of measures Russia might face should it violate the terms of a cease fire.

While it's too early to discuss specifics such as Russia's aspirations to join the WTO, “there's clearly a menu available to the West'' of consequences that can be imposed, Gates said today on ABC's “This Week'' program. “We now have time to consider carefully with our allies what actions we want to take.''

The U.S. and other western nations are pressing Medvedev to adhere to an accord he signed yesterday to end fighting that the United Nations says has displaced more than 118,000 people, with French President Nicolas Sarkozy warning of “grave consequences'' for European Union-Russia relations. Medvedev said today that his forces will start pulling out of Georgia tomorrow.

Georgian President Mikheil Saakashvili, who signed the cease-fire agreement on Aug. 15, said Russian forces are destroying the country's energy pipeline and port infrastructure.

“They're continuing their actions,'' Saakashvili said today on CNN's “Late Edition'' program. “They're increasingly widening their zone of occupation.''

Russian Withdrawal

Medvedev said he'll withdraw his forces into the breakaway region of South Ossetia. While Russia had peacekeepers there before the war, Rice said on the “Fox News Sunday'' program that Moscow must extract all other troops “back to the lines prior to this conflict.''

“Yet again the Russian president has given his word,'' said Rice. “I hope this time he'll honor it.''

The continued presence of Russian troops in Georgian cities, the port of Poti and along the country's east-west highway “is simply not acceptable,'' Rice said.

The cease-fire agreement does allow the Russians to take “some special security measures'' outside South Ossetia “for a limited period of time in a very prescribed way,'' she said. “They're not to go into urban centers. They're not to tie up the east-west highway.''

Retaining Control

Russian troops retain control of key areas of Georgia, including the central transport hub of Gori, the Interfax news service reported today, citing Anatoly Nogovitsyn, deputy chief of Russia's General Staff.

“My personal view is that there need to be some consequences for the actions that Russia has taken against a sovereign state,'' Rice said. “Russia has seriously damaged its own efforts to integrate into the West.''

She said she plans to discuss “what further messages we may wish to send, in what form'' with allies in the North Atlantic Treaty Organization at a meeting of their foreign ministers on Aug paydayloans. 19 in Brussels.

The U.S. is seeking confirmation of a declaration at the organization's April summit that Ukraine and Georgia “will become members of NATO,'' a step Russia opposes.

Rice plans to follow that stop with a visit to Warsaw to sign an agreement Poland approved last week to base part of a missile-defense system there that the U.S. wants to build to thwart potential attacks from Iran.

Ballistic Missiles

Russia has threatened to point ballistic missiles at the site in Poland, which would contain 10 American interceptors, and in the Czech Republic, where a radar station would be set up.

“The Russians will have failed in their effort to undermine Georgia,'' Rice said. “And we will be looking at what we can do with the states around that region as well.''

Russia's aggression on a number of fronts, including against Western investors and companies, has “sent a powerful signal,'' Gates said on ABC.

“We clearly have seen a side of Russia that we had hoped was a thing of the past,'' Gates said of the Georgian crisis. “And we obviously are going to have to reevaluate the direction of the strategic relationship with Russia going forward.''

The Georgian crisis dominated the U.S. presidential campaign debate on television news shows in the U.S. today.

Surrogates for Republican contender John McCain said his national security credentials make him best suited to confront Russia's aggression. Allies of Democratic candidate Barack Obama said McCain is too confrontational and would only continue Bush administration policies that have proven unwise.

`Bellicose Rhetoric'

McCain is prone to “bellicose rhetoric,'' Senator Evan Bayh, a Democrat from Indiana and potential Obama pick for vice president, said on “Face the Nation'' on CBS.

“If we followed'' Obama's advice to address tensions early on between Georgia and Russia, the crisis might have been avoided, but McCain, like the Bush administration, was “obsessed'' with Iraq, Bayh said.

Former Massachusetts governor Mitt Romney, a possible McCain running mate, said McCain pressed in the 1990s for the former Soviet states to join NATO as the “best defense'' against “Russian aggression.''

McCain has been in South Ossetia and to Georgia “multiple times,'' Romney said on “This Week'' on ABC. “In a dangerous and troubled world, it's helpful to have a leader'' who “knows these places, knows the people, understands the setting.''

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Home sales in the U.S. probably declined in June as the housing slump headed for a third year, undermining the economy and prompting businesses and consumers to trim spending, economists said before reports this week.

Combined sales of new and existing homes dropped 1.3 percent last month, according to the median estimate of economists surveyed by Bloomberg News. Orders for durable goods, products meant to last several years, probably fell 0.3 percent.

The biggest housing recession in a generation, now being exacerbated by a tightening in credit as financial losses spread, threatens to stall economic growth. The surge in raw-material costs and slowing demand will likely prompt companies to keep reducing investment in a bid to protect profits.

“Stress in financial markets and curtailment in lending are going to make it more difficult to buy homes,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. “Manufacturers that produce for homebuilders or homeowners are being hurt by the slump in housing.''

The National Association of Realtors' report on sales of existing homes is due July 24. Purchases declined to a 4.93 million annual pace from 4.99 million in May, according to the survey median. Sales reached a 4.89 million pace in April, the fewest since comparable records began in 1999.

A day later, the Commerce Department is forecast to report that sales of new houses dropped to an annual pace of 503,000 from 512,000 in May, according to survey estimates. Sales of existing and new homes are down 35 percent from their July 2005 peak.

Construction Drops

Reacting to the weak sales, builders in June began work on the fewest single-family homes since 1991, the Commerce Department reported last week. That signals that home construction will continue to weigh on the economy after subtracting from growth since the first quarter of 2006.

More Americans are walking away from their homes as property values tumble and borrowing costs on adjustable-rate mortgages reset higher. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said July 10 easy payday loans.

Stricter lending regulations and the drop in home prices make it harder for Americans to tap home equity for extra cash. Consumer spending in the first quarter grew at the slowest pace since the 2001 recession and is likely to keep slowing later this year, according to economists surveyed this month by Bloomberg.

Bernanke's View

Federal Reserve Chairman Ben S. Bernanke last week abandoned his June assessment that the threat of an economic downturn had diminished, telling lawmakers in semiannual testimony in Washington that there were “significant downside risks to the outlook for growth.''

The index of leading economic indicators may have fallen in June for the first time in four months, economists forecast a report tomorrow will show. The Conference Board's gauge dropped 0.1 percent after increasing by the same amount in May, signaling growth is likely to slow over the next three to six months.

The report on durable goods, due from the Commerce Department on July 25, is also projected to show that orders excluding transportation equipment fell 0.2 percent in June, according to the Bloomberg survey.

Carmakers in particular have been battered. Sales of cars and light trucks fell to an annual pace of 13.6 million units in June, the lowest since 1993, according to industry figures.

General Motors Corp., buffeted by three years of losses, will hasten reductions in truck production and planned closings of four truck plants, Chief Operating Officer Fritz Henderson said on July 15.

“Lack of demand warrants'' accelerating the cutbacks, he said in a press conference in Detroit. “The market is even softer'' than GM projected in June, when the reductions were first announced. “We need to act now.''

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Cox Communications Inc. expanded its On Demand service to customers in Glendale, Peoria, Sun City, Sun City West, Surprise and northwest Phoenix as of last weekend.

Cox started the roll-out in February and is slowly upgrading to allow customers to choose shows from its video-on-demand service.

Cox On Demand features scores of shows, movies and other information — depending on what services a person subscribes to — with the ability to start the selected program at any time no fax payday loans.

Cox plans to have the system available Valleywide by the end of summer.

For info: www.cox.com/arizona.

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Delta Airlines on Monday added a $110 roundtrip fuel surcharge to its Los Angeles-Honolulu flights.

The notice was posted Friday on the Web site of California-based travel company Pleasant Holidays.

As of Monday, online fares for travel in mid-July between L.A. and Honolulu ranged from $726 on Northwest Airlines to $1,441 on Delta Air Lines.

Airline capacity from the West Coast to Hawaii was reduced by 94,000 a seats a month with the shutdown of Aloha Airlines on March 31 and ATA Airlines on April 2 fast cash advance loan.

With the exception of a new Hawaiian Airlines route between Honolulu and Oakland, launched May 1, U.S. carriers have not added capacity.

Hawaiian is owned by Hawaiian Holdings (Amex: HA).

United Airlines, American Airlines, US Airways, Mesa Airlines, Alaska Airlines and Continental Airlines currently fly regularly scheduled routes between Hawaii and the Mainland.

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