EU presidency: US economic plans 'a road to hell' - March, 2009

EU presidency: US economic plans 'a road to hell'

March, 2009

The president of the European Union slammed President Barack Obama's plans to have the U.S. spend its way out of recession as "a road to hell," underscoring European differences with Washington ahead of a crucial summit next week on fixing the world economy. Other European politicians kept their distance from the blunt remarks by Czech Prime Minister Mirek Topolanek, with some reproaching the Czech leader for his strong language and others reaffirming their good diplomatic ties with the U.S.

Topolanek, whose country currently holds the rotating EU presidency, told the European Parliament on Wednesday that Obama's massive stimulus package and banking bailout "will undermine the liquidity of the global financial market." European governments, led by France and Germany, say the focus should be on tighter financial regulation, while the U.S. is pushing for larger economic stimulus plans — but nobody has so far escalated the rhetoric to such strident levels. Topolanek's remarks are the strongest criticism so far from a European leader as the 27-nation bloc sticks to its position that its member countries are already spending enough to stimulate demand.

The remark highlights the difficulties leaders may face coming up with a common approach at the April 2 summit in London among leaders of the Group of 20 industrialized and leading developing countries. The host of the summit, British Prime Minister Gordon Brown, praised Obama on Tuesday for his willingness to work with Europe on reforming the global economy in the run-up to the G-20 summit. The United States plans to spend heavily to try and lift its economy out of recession with a $787 billion economic stimulus plan of tax rebates, health and welfare benefits, as well as extra energy and infrastructure spending. To encourage banks to lend again, the government will also pump $1 trillion into the financial system by buying up treasury bonds and mortgage securities in an effort to clear some of the "toxic assets" — devalued and untradeable assets — from banks' balance sheets.

Topolanek, whose government lost a vote of confidence Tuesday but who will remain EU president until a new Czech government is established, bluntly said that "the United States did not take the right path." He slammed the U.S.' widening budget deficit and protectionist trade measures — such as the "Buy America" policies included in the stimulus bill, although Obama has said he opposes protectionism in principle.

Topolanek said that "all of these steps, these combinations and permanency is the road to hell." "We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way," he said. "Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the liquidity of the global financial market," said Topolanek.

Since the EU presidency is expected to always to take the sensitivities of the member nations into account, the statement was daring and alarmed other European leaders, who moved quickly to mend fences with Washington. Martin Schulz, leader of the Socialist group in the European parliament, said it was "not the level on which the EU ought to be operating with the United States." "You have not understood what the task of the EU presidency is," he told Topolanek in the debate. European Commission President Jose Manuel Barroso also weighed in with a tribute to trans-Atlantic cooperation. "I really believe it is not a helpful debate, as I see sometimes, to try to suggest that Americans and Europeans are coming with very different approaches to the crisis," he told legislators. "On the contrary, what we are seeing is increased convergence."

Although German Chancellor Angela Merkel has warned against a spending race and said that ever bigger bailouts would create too much of a budgetary risk, French President Nicolas Sarkozy said Tuesday he is prepared to support the economy with a new spending package that may go down well in Washington. Obama insisted Tuesday that his massive budget proposal is moving the nation down the right path and will help the ailing economy grow again. "This budget is inseparable from this recovery," he said, "because it is what lays the foundation for a secure and lasting prosperity." Obama also claimed early progress in his aggressive campaign to lead the United States out of its worst economic crisis in 70 years and declared that despite obstacles ahead, the U.S. is "moving in the right direction."


In other news:

George Soros: All This New Regulation Is Just ‘Tinkering’

George Soros Interview from the World Economic Forum 2009:

The Washington, D.C., Park Hyatt is a modernist marvel of marble and brass. But when it comes to The Wall Street Journal’s Future of Finance conference, it has the feeling of an old-fashioned Baptist revival church. The conference’s 130 attendees are speaking frankly of the challenges and frustrations they have encountered since the global financial crisis began. They also have flashed a bit of wit. “If you called it the Future of Finance, that implies you have some optimism,” quipped Treasury Secretary Timothy Geithner to his interviewer, WSJ Deputy Managing Editor Alan Murray.

In that spirit, Deal Journal has compiled some of the more intriguing quotes of the day:

George Soros: chairman of Soros Fund Management:

All we are doing right now with this talk of public-private partnerships and new regulation is “tinkering,” the financier said. “It assumes that the system is basically Ok. The idea that the markets are self-correcting has been proven false. The efficient markets hypothesis has been broken…the market , rather than reflecting the underlying reality [of companies], is always distorting it. There is mispricing and it affects the fundamentals [of companies]. I call this ‘reflexivity.’” “Systemic risk is that markets are prone to create bubbles and we need to do something about that. I am very much in favor of short-selling. It actually deepens the market. However, I also recognize systemic risk. There are such things as bear raids, and they can change the fundamentals that markets can affect…I am actually in favor of the uptick rule. It allows short-selling but prevents bear raids…I never said bear raids are conspiracies. People acting on their own can create bear raids.”

Arthur Levitt, former chairman of the Securities and Exchange Commission, on Wall Street vs. Main Street:

“This is an issue of ‘we’ and ‘they.’ Compensation is a part of it, but a symbolic part of it. We are a centrist nation….we’re now shifting to the left pretty far in terms of business-bashing and it has reached extremes of incivility that are intolerable.”

Alan Binder, professor at Princeton and former vice chairman of the Federal Reserve:

“We had go-for-broke incentives to traders and CEOs–and it shouldn’t be surprising that they went for broke.”

Peter Fisher, co-head of fixed income at BlackRock:

“The market for credit-default swaps has become a form of off-track betting.”

Meredith Whitney, analyst:

  • On banks: “There’s not a lot of incentive to lend if you’re sitting on rotting loans.”
  • On toxic assets: “If you sell first you will get the best offer.”
  • On separating investment banks that buy and sell stocks and bonds from commercial banks that rely on retail deposits: “Citigroup’s problem was not the investment bank. It was a lack of controls and a lack of understanding on where the bodies were buried. It’s not so much that a commercial bank was in investment banking.”

Glenn Hutchins, co-founder of private equity firm Silver Lake Partners:

  • On the ability to price and trade stocks: “Here in stock trading, the speed of light is too slow. We are designing systems that allow sub-millisecond trading.”
  • In answer to the question of what Washington can do to help Wall Street: “We don’t really need their help right now.” The best thing the government can do is “don’t increase the after-tax cost of capital.”
  • On outrage: The widening gap in earning power between bankers, financiers and average Americans helped set the stage for worry. “That weakened the notion of the American dream–that we all rise and fall together,” Hutchins said.
  • On Wall Street and Main Street: “Washington and Wall Street are the equivalent of Gettysburg and Antietam right now.”

    “There is this impression that the bank bailout is for Wall Street and the mortgage initiatives are for Main Street, and never the twain shall meet.” Instead, we should say “that everyone has an interest in solving this social problem. Trust is a two-way street…Wall Street needs to trust the political leaders, too.”

  • On restoring confidence, Hutchins endorsed the Federal Reserve’s statement that no more banks are going to fail. Such clear policy statements help Wall Street and Main Street have faith in the government.

Gary Cohn, co-president of Goldman Sachs:

Cohn had an interesting debate with Gregory Fleming, former president of Merrill Lynch and now a professor at Yale Law School. Fleming asked about “the wholesale funding model,” in which financial institutions fund themselves entirely through short-term borrowing from other financial institutions. That is usually in contrast to the deposit model, in which banks take deposits from consumers and use those deposits to back loans to other individuals and to companies. Cohn noted that even deposit-taking institutions don’t depend on deposits alone anymore. He used the example of Citigroup, which has about $800 billion of deposits and depends on more than $3 trillion funded through the markets. “None of the money-center banks [like Citigroup, Bank of America and J.P. Morgan] fund themselves,” Cohn said. “They all depend on the capital markets.” For the capital markets to work, Cohn noted, banks have to start lending to each other more. “We have to wean ourselves off FDIC paper,” he said of the reliance on government-backed paper. “We should pay whatever we need to pay to fund our balance sheet.”

Jim Chanos, founder of Kynikos Associates, worried about the end of the government welfare state:

“Private markets are still leery of dealing on their own without government assistance. What happens when government has to pull back.”

Paul Volcker, former Federal Reserve chairman, on China’s attempts to keep its currency from strengthening: “The Chinese are a little disingenuous–they bought the dollars because they wanted to.”

Separately, he said, “We’re in a government-dependent financial system; I never thought I’d see the day.”


The U.S. Economy Does Not Exist

With all the despair over the American economy's disappearing jobs and plummeting growth, here's mind bender for you: There is no U.S. economy. The national economy, as we traditionally think of it, is a myth. A fake. Over. So contend Bruce Katz, Mark Muro and Jennifer Bradley in the latest issue of the journal "Democracy." The United States is not a single unified economy, they say, nor even a breakdown of 50 state economies. Instead, the country's 100 largest metropolitan regions are the real drivers of economic activity, generating two-thirds of the nation's jobs and three-quarters of its output.

The sooner we reorient federal economic policies to support this "MetroNation," the quicker we can fix the mess we're in. "America can no longer pretend that it is a single economy, nor can it imagine that it is a nation of independent, small towns, punctuated by large but isolated urban centers," the Brookings Institution scholars argue. "It must embrace its metropolitan future." The authors criticize one-size-fits-all federal rules -- on everything from transportation infrastructure policy to workforce training programs -- that stifle the creativity of metro areas and hamper their ability to tailor growth and development efforts to local needs.

But before trying to rework the relationship between the states and Washington, step one may be rethinking what we should even call these places. The "California" economy is really the "San Francisco-Los Angeles-San Diego-San Jose" economy, with those metro areas making up 72 percent of the state's GDP. And Chicago is not Chicago, but the "Chicago-Naperville-Joliet, IL-IN-WI" region, the authors write, almost apologetically. "Unwieldy as they may be, these bureaucratic handles encode the boundary-jumping, state-spanning, increasingly complex reach of metropolitan life." Unwieldy puts it mildly. But if we can have the Los Angeles Angels of Anaheim, why not the Naperville-Joliet Cubs of Greater Chicagoland? Hey, whatever breaks the curse.


Russian Scholar Says U.S. Will Collapse Next Year

If you're inclined to believe Igor Panarin, and the Kremlin wouldn't mind if you did, then President Barack Obama will order martial law this year, the U.S. will split into six rump-states before 2011, and Russia and China will become the backbones of a new world order. Panarin might be easy to ignore but for the fact that he is a dean at the Foreign Ministry's school for future diplomats and a regular on Russia's state-guided TV channels. And his predictions fit into the anti-American story line of the Kremlin leadership. "There is a high probability that the collapse of the United States will occur by 2010," Panarin told dozens of students, professors and diplomats Tuesday at the Diplomatic Academy — a lecture the ministry pointedly invited The Associated Press and other foreign media to attend. The prediction from Panarin, a former spokesman for Russia's Federal Space Agency and reportedly an ex-KGB analyst, meshes with the negative view of the U.S. that has been flowing from the Kremlin in recent years, in particular from Vladimir Putin.

Putin, the former president who is now prime minister, has likened the United States to Nazi Germany's Third Reich and blames Washington for the global financial crisis that has pounded the Russian economy. Panarin didn't give many specifics on what underlies his analysis, mostly citing newspapers, magazines and other open sources. He also noted he had been predicting the demise of the world's wealthiest country for more than a decade now. But he said the recent economic turmoil in the U.S. and other "social and cultural phenomena" led him to nail down a specific timeframe for "The End" — when the United States will break up into six autonomous regions and Alaska will revert to Russian control. Panarin argued that Americans are in moral decline, saying their great psychological stress is evident from school shootings, the size of the prison population and the number of gay men. Turning to economic woes, he cited the slide in major stock indexes, the decline in U.S. gross domestic product and Washington's bailout of banking giant Citigroup as evidence that American dominance of global markets has collapsed. "I was there recently and things are far from good," he said. "What's happened is the collapse of the American dream."

Panarin insisted he didn't wish for a U.S. collapse, but he predicted Russia and China would emerge from the economic turmoil stronger and said the two nations should work together, even to create a new currency to replace the U.S. dollar. Asked for comment on how the Foreign Ministry views Panarin's theories, a spokesman said all questions had to be submitted in writing and no answers were likely before Wednesday. It wasn't clear how persuasive the 20-minute lecture was. One instructor asked Panarin whether his predictions more accurately describe Russia, which is undergoing its worst economic crisis in a decade as well as a demographic collapse that has led some scholars to predict the country's demise. Panarin dismissed that idea: "The collapse of Russia will not occur." But Alexei Malashenko, a scholar-in-residence at the Carnegie Moscow Center who did not attend the lecture, sided with the skeptical instructor, saying Russia is the country that is on the verge of disintegration. "I can't imagine at all how the United States could ever fall apart," Malashenko told the AP.


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