Bernanke led the economy through the tumultuous months of the most severe recession since the 1930s, as the Fed took extraordinary measures to inject hundreds of billions into the battered financial system

Federal Reserve chairman Ben Bernanke is set to appear before a panel investigating the financial crisis to give his take on the meltdown and his views on potential system-wide risks posed by large financial institutions.

Bernanke led the economy through the tumultuous months of the most severe recession since the 1930s, as the Federal Reserve took extraordinary measures to inject hundreds of billions into the battered financial system.

And he said last week the central bank is prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation – a prolonged drop in prices of wages, goods and assets like homes and stocks.

Bernanke’s scheduled appearance Thursday at a hearing by the Financial Crisis Inquiry Commission comes as the congressionally appointed panel approaches the end of its yearlong investigation of the roots of the economic disaster. Sheila Bair, the chairman of Federal Deposit Insurance, also is testifying before the panel.

At a session on Wednesday the commission examined the danger of having banks deemed “too big to fail” and their potential to topple the financial system. The former chief of Lehman Brothers, Richard Fuld, testified that the Wall Street titan could have been rescued in the autumn of 2008, but federal regulators refused to help – even though they later bailed out other big banks.

Panel chairman Phil Angelides said there appeared to be “a conscious policy decision” by the regulators not to rescue Lehman.

Under the landmark financial overhaul law enacted in July, regulators are empowered to shut down financial institutions whose collapse could threaten the system.

Bernanke has said that a key lesson learned from the crisis is that the Fed cannot focus solely on the soundness of individual banks, and must cast a watchful eye on the health of the financial system as a whole. The central bank already has moved to conduct bank examinations that take a broader-picture approach, he says.

Bernanke could be asked by panel members about the Fed’s handling of the Lehman Brothers episode and Fuld’s accusations. Thomas Baxter, general counsel of the New York Fed, insisted at Wednesday’s hearing that the Fed lacked the legal authority to provide a government guarantee of Lehman’s obligations to its trading partners or other aid the firm sought. Hundreds of billions worth of collateral would have been needed to secure a guarantee of that magnitude, and Lehman did not have it, Baxter said.

Bair, the FDIC chief, has been one of the most vocal critics of the “too big to fail” approach that brought the government rushing in to bail out big banks in the crisis.

“Never again should taxpayers be asked to bail out a failing financial firm,” Bair told community bankers in a speech in March. “It’s time that the big players understand that they sink or swim on their own.”

Bair took on a high profile and gained popularity outside Washington early in the crisis, as she pressed for more government intervention to help struggling homeowners. That opened a rift with then-president George W Bush’s treasury secretary, Henry Paulson.

Ben Bernanke to appear before financial crisis hearing is a post from: Bad Credit Loans

A new report shows the most highly paid executives are those who’ve laid off most workers: a bitter irony before Labour Day

This weekend is Labour Day in the US, and that means a variety of different things to different people: it is officially the last weekend of summer, when Americans set up barbecues in their backyards; it is also the weekend that outdoor swimming pools close up for the winter; and it is the beginning of the National Football League season.

In historical fact, Labour Day marks the anniversary of the killing of protestors by federal marshals at the 1894 union strike at the Pullman railway company in Illinois. President Grover Cleveland, who had deployed 12,000 troops to break the strike, hastily created the holiday to appease outraged workers.

Today, in midst of the great recession, Labour Day also marks a miserable time for American workers. Overall unemployment is steady at about 9.5%, according to the US Bureau of Labour Statistics. Indeed, for young people aged 16-to-24, the unemployment rate for youth reached a record 19.1%, the highest since records were created in 1948.

Yet, there is one group of Americans that will be putting extra relish on the grilled hot dogs this coming weekend – the CEOs of the Fortune 500, who have made out like bandits, despite (or more likely, because of) the great recession, which has provided them all sorts of excuses to fire workers.

The Washington-based Institute for Policy Studies (IPS) has just released its annual survey of executive compensation. The IPS has calculated that the CEOs of the 50 companies that have laid off the most workers since the onset of the economic crisis took home 42% more pay in 2009 than their peers on the Standard & Poor’s 500 index. In fact, 72% of the companies announced mass layoffs at a time of positive earnings reports. (Note that this is not the list of the highest paid CEOs – that list is at Forbes, where H Lawrence Culp Jr of Danaher, a medical technology company, took home $141.36m.)

Here are some highlights from the IPS survey:

Fred Hassan, the CEO of New Jersey-based drug-maker Schering-Plough, collected just shy of $50m (including a $33m golden parachute when Merck bought up his company), while 16,000 workers lost their jobs. His salary alone could have have paid all these workers over 10 weeks of unemployment benefits. Frederick “Fritz” Henderson, who became CEO of General Motors when President Obama ordered Rick Wagoner to stand aside, made $5.45m before he resigned in December 2009; in the meantime, 75,733 workers were issued pink slips.

American Express received $3.39bn of federal Troubled Asset Relief Programme (Tarp) funding in 2008. The company has laid off 4,000 workers since then, but CEO Kenneth Chenault was paid $16.8m in 2009, including a cash bonus of more than $5m. You can be sure Chenault doesn’t leave home without his business card!

But perhaps even more galling are the men who paid themselves more than their entire company paid in federal taxes, despite the fact that under current law, US corporations are required to pay a 35% statutory tax rate on corporate profits. Companies use elaborate tax avoidance schemes to circumvent this, and some pay less than 2%.

Occidental Petroleum CEO Ray Irani made $31.4m last year. That works out to almost twice as much as the $16m that this international oil company paid in federal corporate income tax. (Over the last decade, Irani has collected almost a billion dollars, enabling him to build a mulitmillion-dollar faux French chateau in Bel-Air.)

William Weldon, CEO of drug-manufacturer Johnson & Johnson, got a $25.6m windfall in 2009, even though his company is facing serious charges of defects with multiple products. In the last year, Johnson & Johnson has recalled over 100m bottles of Tylenol, Motrin, Benadryl, Zyrtec and assorted other over-the-counter medicines. The company also has difficulties with its disposable contact lens and its hip-replacement products.

“Our findings illustrate the great unfairness of the great recession,” concludes Sarah Anderson, lead author on the IPS study. “CEOs are squeezing workers to boost short-term profits and fatten their own paychecks.”

CEO pay: their profit, your loss | Pratap Chatterjee is a post from: Bad Credit Loans

• Dow Jones up 200 points as recession fears recede
• But UK industrial orders lowest for nine months

Share prices rose strongly in the City and on Wall Street after a stronger than expected showing by America’s factories last month helped ease concerns of a double-dip recessionin the world’s largest economy.

Amid signs of relief in New York, the Dow Jones industrial average surged by more than 200 points following the release of the monthly snapshot of US manufacturing from the Institute for Supply Management.

Dealers shrugged off separate data indicating further declines for the US construction sector and a decline in private sector employment over the past month to concentrate on a pick-up in manufacturing activity in America and China.

Stock prices rallied in London, even though a similar health check of UK manufacturing provided less upbeat news and suggested that the manufacturing revival could be fading. The FTSE Index closed 141.19 points higher at 5366.41 points.

Wall Street had been braced for a sharp fall in the ISM index after a slew of gloomy economic news in the past month and was taken by surprise by the rise from 55.5 in July to 56.3 last month. Any reading above 50 suggests that activity is expanding.

On the currency markets, both the US dollar and the Japanese yen fell after the manufacturing data. Concerns that the downturn in the global economy may be entering a new phase has prompted a flight into so-called safe havens, but today’s news boosted the appetite of investors for riskier assets. Government debt prices extended losses, with the price of benchmark 10-year US Treasury bills and German Bund futures shedding more than a full point.

Oil prices also rose sharply in the wake of the ISM report showing a 13th consecutive month of rising US factory production, with the cost of crude in the US rising by more than $2 a barrel to just over $74.

Analysts warned however that the market was likely to remain volatile ahead of Friday’s release of unemployment figures for August. Any fresh signs of weakness in the US labour market are likely to increase speculation that the Federal Reserve will resume its quantitative easing programme later in the year.

However, a leading Fed official said that the central bank would risk undermining its credibility if it embarked on further monetary action without evidence of a dangerous downward price spiral.

Philadelphia Federal Reserve Bank president Charles Plosser, who said he did not see a deflation risk at present, warned in a Reuters interview that more monetary stimulus would not be effective in tackling a “difficult and unpleasant” unemployment problem. “Moving around the interest rate on long-term bonds by 10 or 20 or 30 basis points is not going to solve the unemployment problems and it is dangerous to think that it will,” Plosser said.

The Markit/CIPS survey of British industry dropped from 56.9 in July to 54.3 in August, its lowest reading in nine months. Chris Williamson, chief economist at Markit, said the drop in new orders – a key indicator of future growth – had suffered its steepest fall in six and a half years. “A particularly weak reading for consumer goods – total new orders almost stagnated, despite a modest rise in overseas orders – corroborates the weakness signalled for the consumer sector by the YouGov/Markit Household Finance Index, which has shown confidence to have fallen since the emergency budget.”

Capital Economics’ chief European economist, Jonathan Loynes, said the CIPS survey showed the recovery among manufacturers was “losing momentum”.

“There is further support here for the view that the rapid growth in the economy seen in the second quarter – to which industry made a strong contribution – will not be sustained in the coming quarters,” he added.

Rise in US industrial output drives markets higher is a post from: Bad Credit Loans

The FT’s Martin Wolf poses an interesting hypothetical in this column (dunno about this link, you may have to register), but he fails to answer it fully. The hypothetical goes like this:

Suppose that the US presidential election of 1932 had, in fact, taken place in 1930, at an early stage in the Great Depression. Suppose, too, that Franklin Delano Roosevelt had won then, though not by the landslide of 1932. How different subsequent events might have been. The president might have watched helplessly as output and employment collapsed. The decades of Democratic dominance might not have happened.

On such chances the wheel of history turns. But this time was different: the crisis brought Barack Obama to power close to the beginning of the economic collapse. I (among others) then argued that policy needed to be hugely aggressive. Alas, it was not.

In other words, for pure FDR parallelism, we’d be two months out from the presidential election right now. Bush would have been in there these last two years, as Herbert Hoover was, and he would have been the one to endure the 10% unemployment. Just an interesting thought exercise.

But Wolf’s real point is that Obama marked himself for failure from the start because the stimulus wasn’t big enough. He mounts the economic case for such and makes it well, and suggests that Obama failed because he didn’t do that.

But the column completely ignores the fact that there’s this thing called Congress. There was simply no way to get a $1 trillion-plus stimulus bill through Congress.

This is a big problem with a lot of economics writing, and a lot of social scientific writing on politics in general: it takes no account of politics. Paul Krugman, in one of his recent books, explained that he spent years ignoring politics because he figured that the political system was basically sort of corrupt and filled with second-raters, but that when politicians were met with empirical economic evidence that said “do X,” they by and large accepted it and went out and did X.

He was very slow to learn, in the age of modern conservatism, that empirical evidence isn’t worth a postage stamp. And so he recalibrated his polemics accordingly.

Similarly, there was a big book a couple of years ago by a political scientist named Larry Bartels, Unequal Democracy. He showed that growth has been greater under Democratic presidents than Republican ones since World War II. And he did it in an empirical way that (I presume) satisfied the peer-reviewish demands of his trade.

But Bartels too basically acknowledged in his book: I didn’t used to think politics was such a big deal. Or he used to think pols were basically rational actors. In other words it took these social scientists a long time to cotton on to something that was obvious to a lot of us who cover politics, which is that while one side may occasionally play fast and loose with numbers to serve its agenda, we had another side that was just making stuff up all time.

So I don’t understand how Wolf can write a column like that and not place the blame for the size of the stimulus where it belongs. And maybe he thinks Obama is a failure now, and that’s his right. But what kind of failure would Obama have been if he’d tried to pass a $1.3 trillion stimulus and failed, as he almost surely would have, and we’d had nothing, and today faced unemployment of 15%, while Obama would have been tarred just one month into office as “too far left” for even his own party?

If FDR had been elected in 1930 | Michael Tomasky is a post from: Bad Credit Loans

The FTSE 100 has extended gains in afternoon trading to be up more than 2% while the Dow Jones industrial average is also up sharply following stronger-than-expected US manufacturing data that has broken the recent chain of downbeat reports from America.

The Institute for Supply Management said its index of US factory activity rose to 56.3 in August from 55.5 in July. That was ahead of a consensus forecast for a reading of 53.0 in a Reuters poll of analysts.

The report – in which a reading over 50 denotes expansion and below 50 shows the sector is contracting – marked the 13th straight month of growth for manufacturing. It contrasts with other recent economic indicators that have fuelled a debate over whether the world’s largest economy is headed for a double-dip recession.

Still, looking forward the ISM report did suggest tougher times ahead for America’s factories. The new orders component of the survey fell to 53.1 in August, its lowest since June 2009.

For now though, stock markets are dwelling on the upside surprise in the headline activity index as well as news that hiring also picked up pace in August. The FTSE 100 is currently up 123 points, or 2.4%, at 5349 while on Wall Street the Dow Jones is up 230 points, or 2.3%, at 10244. Both indices were up before the data thanks to positive sentiment after strong economic indicators out of Australia and China.

James Knightley, economist at ING Financial Markets said the latest report from the US “adds to the uncertainty over the potential outcome of Friday’s payrolls report”, referring to the closely-watched monthly US government jobs numbers.

“Given the conflicting signals regarding the US economy, financial markets are ikely to remain choppy and nervous ahead of Friday’s figures. Payrolls are likely to be poor though given nearly 120,000 census workers have been laid off over the past month and state and local government job losses will add to the downside risks.

“Consequently, we continue to expect a weak recovery with limited inflation hreat that suggests further policy stimulus is looking increasingly likely.”

FTSE extends gains after rare US data surprise is a post from: Bad Credit Loans

Burger King has been hard hit by the global financial slowdown, with sales under pressure in the US from rising jobless numbers and declining consumer confidence

The global craze for mergers and acquisitions may be about to grab a takeaway, with speculation that Burger King has been in talks with a potential private equity buyers.

The 55-year-old chain has been owned by buyout specialists before: it was spun out of then owner Diageo in 2002 by Texas Pacific, Bain Capital and Goldman Sachs in a $1.5bn deal (£950m at the time). They floated the company four years later and still own just under a third of it. Burger King currently has 12,000 restaurants in more than 75 countries.

According to a report in the Wall Street Journal, Burger King is in talks with a number of potential buyers including Britain’s 3i Group. Burger King was unavailable for comment while a spokesman for 3i declined to comment.

Burger King has been hard hit by the global financial slowdown, with sales under pressure in the US from rising jobless numbers and declining consumer confidence. Last week the company said its worldwide sales this year were down 2.3% – compared with an increase of 1.2% last year. Sales in North America were down 3.9%. Bitter rival McDonald’s, however, has fared better, saying global sales in the second quarter were up 4.8%, with US sales up 3.7%. Burger King is currently valued at $2.26bn (£1.46bn).

UK-based 3i is an obvious possible partner for Burger King, having helped turn around other well known brands that had fallen on hard times including the Early Learning Centre, Ben Sherman and outdoor and camping gear retailer Millets. Its current portfolio includes Hobbs and Agent Provocateur, but its own major food chain is Mongolian hot pot chain Little Sheep.

The low valuation of many publicly quoted businesses, as a result of the ongoing volatility in global financial markets, has produced a flurry of deal-making in recent weeks.

London-listed automotive and industrial parts maker Tomkins was snapped up by a private equity consortium in a £2.9bn takeover yesterday. Mining group BHP Billiton, meanwhile, has made an audacious $39bn grab for Canada’s Potash Corp, while state-controlled Korean oil firm KNOC is after Dana Petroleum.

In the US, Intel has snapped up security software firm McAfee for $7.68bn while Dell and Hewlett-Packard are fighting over data storage firm 3Par.

Burger King can trace its roots back to a Florida-based franchise restaurant chain in 1953 called Insta-Burger King, but the name did not appear until two years later when it was bought out by Miami-based franchisees, David Edgerton and James McLamore.

Burger King could be snapped up by private equity firm is a post from: Bad Credit Loans

Institute for Policy Studies research shows US bosses who sacked most staff during recession earn more than their peers

The good times keep rolling for “slash and burn” managers in America. Bosses of the 50 US companies that sacked the most staff during the recession earned 42% more than their peers, according to research to be published today.

A report by the Washington-based Institute for Policy Studies (IPS) will conclude that US chief executives shared little of the pain felt further down their workforces as house prices slumped, consumer spending dried up and unemployment peaked at 10.2% last year.

The average leader of a Standard and Poor’s (S&P) 500 company in the US saw a modest fall in remuneration last year, down from $9.4m (£6.12m) in 2008 to $8.4m in 2009. But this was still 263 times the typical net pay of an American worker.

Those who took the most aggressive approach to cost-cutting often fared the best. The IPS found that at the 50 companies in the S&P 500 index which shed the most employees, average chief executive compensation was $12m.

The highest paid “layoff leader” was Fred Hassan, former head of drugs company Schering-Plough, who earned $49.7m, largely through a $33m golden parachute as he left following a merger with rival Merck. As a result of that tie-up, some 16,000 employees lost their jobs.

Sarah Anderson, director of the IPS’s global economy project, said that there was a perception that axing staff meant chief executives were “big, tough guys making tough decisions necessary to make their companies lean and mean”. But in some cases, she suggested, they were sacrificing long-term prosperity for short-term profits.

“You see really serious long-term consequences of layoffs. You get lower morale in the workforce which can turn into lower productivity over time. You have the cost of having to rehire and retrain people when things pick up,” she says. “While these CEOs are getting very well rewarded, and they’re getting short-term improvements in profit, there are long-term problems being stored up for the future.”

The study comes out just days before August unemployment figures that are forecast to show a drop of about 105,000 jobs in the US, keeping unemployment close to 10% and adding to pressure on the Obama administration to find a way out of the jobless morass. Peter Morici, a finance professor at the University of Maryland, described the unemployment situation as “an abysmal performance 14 months into a recovery from a deep recession”.

Other top-paid bosses who slashed jobs included Johnson & Johnson boss William Weldon who received $25.6m despite 8,900 layoffs, Hewlett-Packard’s former boss Mark Hurd who got $24.2m after 6,400 job losses and Walt Disney supremo Robert Iger who made $21.6m after 3,400 redundancies.

Joe Sorrentino, an expert at pay consultants Steven Hall & Partners in New York, pointed out that bosses can face difficult decisions in cutting workforces for the good of their companies: “Making decisions that are right for a company as a whole can, unfortunately, lead to job losses. That’s not a great outcome but it’s the reality at this point in the economy.”

America’s layoff leaders

Schering-Plough Fred Hassan $49.7m, 16,000 job losses

Johnson & Johnson William Weldon $25.6m, 8,900 job losses

Hewlett-Packard Mark Hurd $24.2m, 6,400 job losses

Walt Disney Robert Iger $21.6m,

3,400 job losses

IBM Samuel Palmisano $21.2m,

7,800 job losses

AT&T Randall Stephenson $20.2m, 12,300 job losses

Wal-Mart Mike Duke $19.2m,

13,350 job losses

Ford Alan Mulally $17.9m,

4,700 job losses

United Technologies Louis Chenevert $17.9m, 13,290 job losses

Verizon Ivan Seidenberg $17.5m, 21,308 job losses

Source: Institute for Policy Studies

Costcutting US bosses earn 42% more than rivals, says IPS research is a post from: Bad Credit Loans

The president has ended the war George Bush claimed was over in 2003, but does he have enough fight for the mid-terms?

Wait. Didn’t this war end once before? It did, at least rhetorically. Can you guess the date on which President George W Bush, crotch protruding before the eyes of the world, declared the end of major combat operations in Iraq?

It was well before they ended, which was today, in fact. But I invoke the image not only to chide Bush, but to make a point.

Presidents like to announce the ends of wars that can be put, as we say in America, in the “W” column. But Tuesday night in his prime-time Oval Office speech, Barack Obama could not say that the war in Iraq was a win. He could say only that it was over. If nothing else, making the announcement did permit him to remind Americans that he was keeping a promise he made to them as candidate, a point on which I thought he might have put just a bit more emphasis.

It was a better speech than his previous and only other Oval Office address, the one on the BP spill. Maybe that’s mostly because of context. He gave the BP speech while the oil was still gushing out. At least in this case, we’d all seen the footage of the tanks rolling away from Iraq and into Kuwait.

But I thought it was a bit more than just context. He had to say something about the divisions in the country over the war, and he had to acknowledge his own opposition to it. At the same time, a president can’t just up and say that a war wasn’t worth fighting, which would be interpreted as his saying that 4,427 people had died for nothing.

So, there was a line to walk, and it seemed to me he walked it well. Mentioning that he’d spoken to Bush that afternoon was effective – a suggestion that maybe we could put some of those divisions behind us.

Alas, many other divisions remain. The attempt to link the war’s end to the economy was less successful than the rhetoric about the war itself, for the simple reason that most Americans see no real link between the two. This points to yet another political failing of the Democrats. The war cost $1tn. That reads quickly and is only 10 characters. But read it again. A trillion is a thousand billion. That’s real money. And mostly paid for off the books.

This was one of the great scandals of the war. It did have a negative effect on the economy, and 98% of Americans have no idea because the Democrats didn’t make sure they knew. Obama mentioned it. But this wasn’t the place to drive home such a political point.

Perhaps the economic sections of the speech were intended to set the table for tougher language to come in the next two months as the campaign season gets into full swing. This speech was an occasion to try to lower temperatures. But as November approaches, he needs to raise them among his partisans, who are feeling utter despair right now. That will mean taking some of the points made politely in this speech and making them very impolitely. A question hanging over Washington right now is whether he has that fight in him.

And, by the way, Bush declared the war over on 1 May 2003. Bush declared it over. Obama actually ended it. That wouldn’t be a bad political line either.

Obama’s Iraq address | Michael Tomasky is a post from: Bad Credit Loans

Tax credits disguised the fundamental weakness of the US housing market. The reality reveals bleak prospects for growth

The howls of surprised economists were everywhere last week as the government reported on Tuesday that July had sharpest single-month plunge in existing home sales on record. The next day the commerce department reported that new home sales hit a post-war low in July.

All the economists who had told us that the housing market had stabilised and that prices would soon rebound looked really foolish, yet again. To understand how lost these professional error-makers really are, it is only necessary to know that the Mortgage Bankers Association (MBA) puts out data on mortgage applications every week. The MBA index plummeted beginning in May, immediately after the last day (30 April) for signing a house sale contract that qualified for the homebuyers’ tax credit.

It typically takes 6-8 weeks between when a contract is signed and a house sale closes. The plunge in applications in May meant that homebuyers were not signing contracts to buy homes. This meant that sales would plummet in July. Economists with a clue were not surprised by the July plunge in home sales.

What should be clear is that the tax credits helped to pull housing demand forward. People who might have bought in the second half of 2010, or even 2011, instead bought their home before the tax credit expired. Now that the credit has expired, there is less demand than ever, leaving the market open for another plunge in prices. The support the tax credit gave to the housing market was only temporary.

It is worth asking what was accomplished by spending tens of billions of dollars to prop up the market for a bit over a year with these tax credits. First, this allowed millions of people to sell their home over this period at a higher price than would have otherwise been the case. The flip side is that more than 5 million people bought homes at prices that were still inflated by the bubble. Many of these buyers will see substantial loses when they resell their house.

The banks also had a stake in this. The homebuyers’ tax credit prevented prices from declining as rapidly as would otherwise have been the case. This enabled millions of homeowners to sell their home at a price where they could pay off their mortgage. This made banks who could have been holding underwater mortgages very happy.

Of course, someone had to issue the mortgage to all those people who bought homes at prices that are still inflated by the bubble. The overwhelming majority of the mortgages issued in the last year and a half are insured by the government, either through Fannie Mae and Freddie Mac, or through Hud. So, taxpayers, not banks or private investors, are carrying the risk that further price declines will push these mortgages underwater.

The further plunge in house prices will have serious implications for the course of the recovery. By my calculations, the decline in house prices through the first half of 2009 eliminated $5-6tn of the $8tn of housing equity created by the bubble. Look to the further declines in the rest of this year to eliminate most or all of the remaining bubble equity.

The loss of this wealth will further dampen growth. This should drive home the fact that house prices, like the Nasdaq following the tech crash of 2000-2002, are not coming back. Homeowners will have to come to grips with this massive loss of wealth. While many commentators (no doubt, the surprised ones) complain that consumption is low, the reality is that consumption is still at an unusually high level relative to disposable income.

Furthermore, with a huge cohort of babyboomers approaching retirement with almost no wealth, there will be more need to save than ever. This need to save is accentuated by the plans of those in the Obama administration and the congressional leadership to cut social security.

This means that we should expect consumption spending to weaken sharply in the second half of 2010 and into 2011, as the savings rate rises into the 8-10% range, further slowing economic growth. This comes against a backdrop where final demand had only been growing at a 1.2% average rate over the last four quarters.

Final demand is GDP, excluding inventories. Growth was boosted over the last year by the restocking of inventories. This process is largely completed, which means that we should expect GDP growth to be pretty much equal to final demand growth going forward.

Starting with a 1.2% growth rate, then throwing in weaker consumption due to further house price declines, state and local government cutbacks, and the winding down of stimulus, it is questionable whether growth will even remain positive over the next four quarters. Given all these negative factors, it is very hard to construct a story showing the economy on a healthy growth path, even though many economists still seem to think it is. Of course, these economists were probably surprised by last month’s home sales data.

Home truths for complacent economists | Dean Baker is a post from: Bad Credit Loans

• Countries fear US heading for a double-dip recession
• Poor US employment figures expected on Friday

Financial markets around the globe fell today as investors faced a crucial week of data on the US economy.

The prospect of poor employment figures on Friday and a snapshot of the state of manufacturing on Wednesday has unnerved markets which fear the world’s biggest economy could be heading for a double-dip recession.

After an emergency meeting with bankers today, Japanese prime minister Naoto Kan said his country was preparing a new ¥920bn ($10.8bn) stimulus plan and the central bank had added ¥10 trillion in liquidity injections to help prop up its ailing economy.

Japan’s actions followed comments by US Federal Reserve chairman Ben Bernanke over the weekend in which he promised the US central bank “will do all it can” to secure an economic recovery.

But the markets were not convinced by the promises of central bankers. The Dow Jones Industrial Average was down 0.6% to 10,091 points by mid-session in New York, while the DAX index in Germany fell 0.6% to 5912 and France’s CAC 40 lost 0.6% to 3487. Britain’s markets were closed due to the Bank holiday.

Investors’ eyes are now fixed on Friday, when the US will release its monthly employment report, which is expected to show the economy lost 110,000 non-farm jobs in August.

Any weak figure will intensify pressure on Bernanke to expand the Fed’s already extensive programme of stimulus for the US economy.

“People are concerned policymakers don’t have further tools available – the real problem is final demand, creating demand in the economy to generate consumption and exports,” one fund manager said.

Central banks typically buy bonds and other assets in financial markets to generate growth and demand, but that would not be enough to ignite the global economy, investors warned. “Asset purchases will just increase liquidity, but there’s already plenty of liquidity in the banking system. The problem is demand,” the fund manager said. “It is not good enough to say we’ll do everything we can, people are sceptical.”

Despite the extra stimuli announced in Japan, the yen rose again against its counterparts, gaining 0.6% to ¥84.7 to the dollar. “While it is encouraging that the Bank of Japan seems to be moving in the right direction, the response from the central bank was underwhelming and came as a disappointment,” said Eric Viloria, currency strategist at Forex.com.

Japanese interest rates are already at 0.1%, while the US has indicated its key target rate for overnight loans between banks would remain in the zero-to-0.25% range “for an extended period,” leaving little room for further cuts. “We need more co-ordinated fiscal and monetary policy, but the members of the US Federal Open Market Committee don’t even agree,” the fund manager said. “If Bernanke was a dictator, he would be already cutting taxes.”

Volatility is expected to continue driving financial markets over the next few weeks, fund managers said. The US stock market rallied 1.7% on Friday following Bernanke’s comments about further intervention in the economy, but fell again today after the commerce department said that disposable incomes, or the money left over after taxes, dropped for the first time since January, trailing estimates.

Particularly weak employment figures will likely affect whether the Fed decides to introduce additional stimulus measures. At the moment, market consensus is that around 90,000 US jobs were lost in August, but that 26,000 were added, if government jobs on the census which have now come to an end are taken out of the equation.

In Europe, attention will also be on Spain, which is scheduled to sell between €3bn and €4bn of government bonds on Thursday – a sale that will indicate investors’ perception of risk in southern European economies.

“The best we can hope is that this is just a pause and that the recovery continues,” the fund manager said.

Bonds continued as the main beneficiary of the uncertainty, as the gloomy outlook increases chances that interest rates will not be raised to curb inflation.

German 10-year bonds rose, pushing their yield down by seven basis points to 2.13%, near last week’s record low of 2.09%. The yield of US 10-year Treasury bonds fell eight basis points to 2.5%.

The lower yields added concerns that central banks are running out of tools to manipulate the economy as they are already at record lows – central banks have pushed bond yields lower as they determine long-term interest rates, such as mortgages.

Oil prices fell for the first time in four days. Crude futures were 1% lower at $74.42 a barrel in New York. Gold traded at $1,237.40 an ounce, near a record of $1,266.50 in June, as investors fled equities to grab traditionally safer assets.

Global markets fall as investors are braced for poor US economic results is a post from: Bad Credit Loans