OPEC Defers Decision on Output Cut, Seeks $75 Oil (Update1)

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By Maher Chmaytelli and Ayesha Daya

Nov. 30 (Bloomberg) — OPEC deferred a decision on reducing production this year by two weeks to gauge the impact of earlier cuts, as it seeks to push oil prices back up to $75 a barrel.

Crude has dropped 62 percent from July’s record of $147.27 a barrel as the global recession erodes sales. Ali al-Naimi, the oil minister of Saudi Arabia, OPEC’s largest exporter and its de facto leader, said yesterday that $75 a barrel represents a “fair price” needed to support investment in new fields.

OPEC, which accounts for more than 40 percent of the world’s supply, will next meet in Oran, Algeria, on Dec. 17. In a statement after yesterday’s meeting in Cairo, the group warned demand will be “much lower” than expected a month ago. The cost of crude has continued to slide even after the group agreed last month to lower production by 1.5 million barrels a day.

“The way demand data continues to come out, especially from the U.S., suggests that they will have to cut,” said Raja Kiwan, a Dubai-based analyst at consultant PFC Energy.

Compliance with existing supply quotas is “not good enough,” based on current forecasts, said OPEC Secretary General Abdalla El-Badri. He also urged non-OPEC members Russia, Mexico and Norway to restrain supply, as they did a decade ago when prices slumped toward $10 a barrel.

The 11 OPEC states subject to output quotas will produce 27.8 million barrels a day in November, according to Geneva- based consultant PetroLogistics Ltd., in excess of their official limit of 27.3 million barrels a day.

‘Additional Action’

The Organization of Petroleum Exporting Countries pledged to take any “additional action” needed to stabilize the market in Oran, according to Chakib Khelil, the group’s president. Asked if OPEC would seek to lower output in Algeria, al-Naimi replied: “A cut is possible, we will have to see.”

The Saudi oil minister said there was a “good logic” for $75-a-barrel, backing earlier comments from Saudi King Abdullah who told Kuwaiti newspaper Al-Seyassah that this represents a “fair price.” Crude for January delivery traded at $54.43 a barrel in New York on Nov. 28.

OPEC abandoned an official price target almost four years ago and ministers’ expectations have changed throughout 2008 as crude rallied to a record $150 in New York in July, then fell below $50 this month. Ministers from Venezuela, Iraq, Algeria and Nigeria also said yesterday oil should cost at least $75.

Producers and drillers from Exxon Mobil Corp. to BP Plc are already suffering from falling prices. OPEC’s export revenue will be $979 billion in 2008, 9.6 percent less than expected a month ago, because of sinking crude prices, the U.S. Energy Department forecasts.

Outside Help

El-Badri called for outside help to halt the plunge in prices. “All non-OPEC should come and help, it is a big burden for OPEC,” he told reporters. As well as Russia, “the ones we know that have the capability to cut are Norway and Mexico.”

Russia’s energy minister is expected to attend the Algeria meeting, El-Badri said. His plea for help elsewhere may fall on deaf ears after Norway, the world’s fifth-biggest oil exporter, ruled out production cuts earlier this month. “I don’t see any scenarios with regards to that,” Norwegian Oil Minister Terje Riis-Johansen said in a Nov. 18 interview.

OPEC will likely lower supplies before the end of the year, according to 18 of 21 analysts surveyed by Bloomberg last week. About half of those thought an accord would be made in Cairo, while others expected a decision later. Twelve predicted the reduction will be at least 1 million barrels a day, more than is pumped by Qatar.

Cairo Meeting

Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s “consultative” meeting in Cairo that OPEC will still need to cut production by at least 1 million barrels a day by the end of the year.

OPEC called ministers together in Cairo yesterday rather than wait until its next scheduled December conference in Algeria, as the slowing world economy reduced global consumption faster than expected. In September, the group urged greater compliance with existing output limits.

The Cairo meeting, originally intended just for ministers from Arab nations, was expanded into a full meeting for all OPEC members, including countries like Venezuela, Iran and Angola.

OPEC members have a balancing act to perform as they strive to boost prices without overreacting in terms of production cuts and being blamed for exacerbating the economic slowdown.

Demand for oil may fall for the first time since 1983 next year, Merrill Lynch & Co. said, as the U.S., Europe and Japan face their first simultaneous recession since World War II.

Jakarta Meeting

Eleven years ago, OPEC members bickered over quotas as prices slid 28 percent in 10 months amid the onset of the Asian financial crisis. At a meeting in Jakarta in November 1997, they raised quotas, even as economic turmoil in Asia was slowing demand and prices fell another 44 percent by December 1998 to a low of $10.35 in New York.

OPEC’s 13 member nations include Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Indonesia is expected to leave the group at the end of the year.

To contact the reporter on this story: Maher Chmaytelli in Cairo at mchmaytelli@bloomberg.netAyesha Daya in Cairo at adaya1@bloomberg.net

Last Updated: November 30, 2008 03:48 EST

http://www.bloomberg.com/apps/news?pid=20601087&sid=aT0o8Klls6gk&refer=home

http://money.cnn.com/2008/11/27/news/newsmakers/john_templeton.fortune/index.htm

Remembering Sir John Templeton

A writer recalls a visit to the great contrarian investor as friends gather to celebrate his 96th birthday.

By Jessi Hempel, writer

Last Updated: November 28, 2008: 10:24 AM ET

Sir John Templeton

Why the government rescued Citi

More Videos

NEW YORK (Fortune) — If Sir John Templeton were alive today, he’d probably be snatching up stock. The billionaire investor made his biggest gains during the 20th century’s bleakest moments. His credo: “The time of maximum pessimism is the best time to buy.”

Templeton passed away in July, and on Nov. 29, - his 96th birthday - friends and family will gather to remember him at the Christ Church Cathedral in Nassau, where he lived for the last half of his life.

Sir John, as the Queen knighted him and his friends called him, launched the Templeton Growth Fund in 1954 and racked up gains of 15% annually over the 39 years that followed. After selling the fund to the Franklin Group in 1992 for $440 million, he launched a second career in philanthropy. He seeded a $1.5 billion endowment to support the scientific pursuit of spirituality, seeking answers to questions like “Does prayer cure illness?”

This question and others intrigued me, and so three years ago while writing for another publication, I flew down to the Bahamas to pay him a visit. According to his assistant, I was the last reporter to have an audience with him.

Sir John lived in a small box-like home that looked as if it had been plucked directly from antebellum Tennessee and dropped atop a golf course. Paint flaked from the pillars. The modest kitchen still had its original 1969 countertops and cabinets. And when I rang the bell, Sir John himself answered the door, greeting me warmly with the hint of a Southern drawl as he invited me in.

A contrarian to the end, Sir John made a career out of swimming against the tide. On the eve of World War II, when a nervous nation was selling stocks, Templeton borrowed $10,000 from a friend and bought a share in every stock on both New York exchanges worth less than a dollar. Only four of the 104 companies went out of business. After the war, he invested in Japan, and just as everyone else got into the market, he got out. In 1987 when the market crashed, Templeton went on a buying spree.

This unflappable spirit followed him into his second career as a philanthropist. We discussed this in his living room one afternoon. Along the back wall, French doors offered a view down to the golf course, the posh Lyford Cay Club and the sea beyond. Until recently, he’d taken a brisk power walk in the ocean each afternoon, wading out about three feet into the water and wearing a button-down dress shirt and a hat to protect him from the sun. At 92, he’d begun to use his afternoons for light naps, but his thinking continued to be sharp. We sat just inside, sipping black coffee from dainty yellow saucers while he explained his thoughts on giving. “What I’m financing is humility,” he told me.

His foundation had a somewhat controversial goal: he wanted to find the scientific proof for faith. A devout Presbyterian, he’d begun each day with prayer at the Templeton Funds office, but he also had a strong appreciation for the numbers-driven logic of investing. His charitable funds have been used for projects that investigate, for example, the impact that regular church attendance has on blood pressure. And the $1.5 million Templeton Prize for Progress Toward Research or Discoveries about Spiritual Realities has been awarded to everyone from Mother Teresa to physicist Freeman J. Dyson.

Even then, Sir John took an active role in grant making. Each morning, he drove his four-door Kia Opirus - which he told me had the same qualities as a high-end German luxury car but was a good deal cheaper - a few blocks down to his office, where he sat on a butterfly-upholstered couch to review proposals and take notes. He often made his own photocopies. When I called him at the office, he sometimes answered the phone himself. And he sent a steady stream of faxes - sometimes six in a day - bearing advice to his son, a former pediatric surgeon who serves as president of the foundation at its headquarters in Conshohocken, Penn.

As much as Sir John was gifted at picking stocks that garnered grand returns, he was uninterested in the fruits of his economic grains. He always flew coach. He abhorred debt and was a proponent of thrift - during the first years of his career, he saved 50 cents of every dollar he earned.

Remembering Sir John Templeton

A writer recalls a visit to the great contrarian investor as friends gather to celebrate his 96th birthday.

By Jessi Hempel, writer

Last Updated: November 28, 2008: 10:24 AM ET

Sir John Templeton

Why the government rescued Citi

More Videos

NEW YORK (Fortune) — If Sir John Templeton were alive today, he’d probably be snatching up stock. The billionaire investor made his biggest gains during the 20th century’s bleakest moments. His credo: “The time of maximum pessimism is the best time to buy.”

Templeton passed away in July, and on Nov. 29, - his 96th birthday - friends and family will gather to remember him at the Christ Church Cathedral in Nassau, where he lived for the last half of his life.

Sir John, as the Queen knighted him and his friends called him, launched the Templeton Growth Fund in 1954 and racked up gains of 15% annually over the 39 years that followed. After selling the fund to the Franklin Group in 1992 for $440 million, he launched a second career in philanthropy. He seeded a $1.5 billion endowment to support the scientific pursuit of spirituality, seeking answers to questions like “Does prayer cure illness?”

This question and others intrigued me, and so three years ago while writing for another publication, I flew down to the Bahamas to pay him a visit. According to his assistant, I was the last reporter to have an audience with him.

Sir John lived in a small box-like home that looked as if it had been plucked directly from antebellum Tennessee and dropped atop a golf course. Paint flaked from the pillars. The modest kitchen still had its original 1969 countertops and cabinets. And when I rang the bell, Sir John himself answered the door, greeting me warmly with the hint of a Southern drawl as he invited me in.

A contrarian to the end, Sir John made a career out of swimming against the tide. On the eve of World War II, when a nervous nation was selling stocks, Templeton borrowed $10,000 from a friend and bought a share in every stock on both New York exchanges worth less than a dollar. Only four of the 104 companies went out of business. After the war, he invested in Japan, and just as everyone else got into the market, he got out. In 1987 when the market crashed, Templeton went on a buying spree.

This unflappable spirit followed him into his second career as a philanthropist. We discussed this in his living room one afternoon. Along the back wall, French doors offered a view down to the golf course, the posh Lyford Cay Club and the sea beyond. Until recently, he’d taken a brisk power walk in the ocean each afternoon, wading out about three feet into the water and wearing a button-down dress shirt and a hat to protect him from the sun. At 92, he’d begun to use his afternoons for light naps, but his thinking continued to be sharp. We sat just inside, sipping black coffee from dainty yellow saucers while he explained his thoughts on giving. “What I’m financing is humility,” he told me.

His foundation had a somewhat controversial goal: he wanted to find the scientific proof for faith. A devout Presbyterian, he’d begun each day with prayer at the Templeton Funds office, but he also had a strong appreciation for the numbers-driven logic of investing. His charitable funds have been used for projects that investigate, for example, the impact that regular church attendance has on blood pressure. And the $1.5 million Templeton Prize for Progress Toward Research or Discoveries about Spiritual Realities has been awarded to everyone from Mother Teresa to physicist Freeman J. Dyson.

Even then, Sir John took an active role in grant making. Each morning, he drove his four-door Kia Opirus - which he told me had the same qualities as a high-end German luxury car but was a good deal cheaper - a few blocks down to his office, where he sat on a butterfly-upholstered couch to review proposals and take notes. He often made his own photocopies. When I called him at the office, he sometimes answered the phone himself. And he sent a steady stream of faxes - sometimes six in a day - bearing advice to his son, a former pediatric surgeon who serves as president of the foundation at its headquarters in Conshohocken, Penn.

As much as Sir John was gifted at picking stocks that garnered grand returns, he was uninterested in the fruits of his economic grains. He always flew coach. He abhorred debt and was a proponent of thrift - during the first years of his career, he saved 50 cents of every dollar he earned. He had a clear vision for his life, and described it this way: “To open people’s minds so no one will be so conceited that they think they have the total truth. They should be eager to learn, to listen, to research and not to confine, to hurt, to kill, those who disagree with them.”

His contrarian opinions on all matters - economic and spiritual - are greatly missed in these deeply unsettling times. 

First Published: November 28, 2008: 7:26 AM ET

His contrarian opinions on all matters - economic and spiritual - are greatly missed in these deeply unsettling times. 

First Published: November 28, 2008: 7:26 AM ET

http://www.marketwatch.com/News/Story/Story.aspx?column=Marsh+on+Monday

MARSH ON MONDAY

Joining the euro wouldn’t solve the UK’s problems

Commentary: Despite market turmoil, going it alone better for Britain

By David Marsh, MarketWatch

Last update: 12:01 a.m. EST Nov. 24, 2008

LONDON (MarketWatch) — Even for the UK, a country with a long post-war history of currency decline, sterling’s fall of around 22% on a trade-weighted basis since the beginning of the credit crisis in August 2007 is one of the most significant on record. So it is not surprising that some old questions have been gradually rising to the surface.

After 10 years of abstinence from the European Monetary Union, should the UK be seriously thinking about joining the euro club? Especially in view of the European Central Bank’s improved reputation as a crisis manager in the wake of the U.S.-originated financial crisis, could EMU represent a safe haven for the UK economy? Would it be wise for Britain to lash itself to the life raft of the euro to avoid the perils of drifting alone on a storm-tossed open sea? These are big questions. But the answer to all three is “No”.

Membership in the euro area would not solve Britain’s economic problems - and could make them worse.

The 16 years since the UK left the Exchange Rate Mechanism in 1992 have on the whole been a positive period for the UK economy, because Britain has benefited from flexibility of exchange and interest rates. If Britain had joined the euro when it started in 1999, interest rates in the UK would have been lower than they actually have been, and hence the credit-fuelled housing and spending boom - and the eventual correction - would have been even worse than they have turned out to be. Britain is traversing one of the most difficult economic periods of the past 100 years, but so are members of the euro club with misaligned currency and monetary conditions such as Italy, Spain and Ireland.

Unlike the members of EMU, Britain has the wherewithal to align its monetary policies with its own economic position, and this should prove a benefit in the coming 18 months to two year period of painful adjustment. I am therefore sticking to my view that - despite current turbulence - it is highly unlikely, for both political and economic reasons, that Britain will join the euro area in the period up to 2025. Over this period, the euro area is anyway likely to be subject to great change, and could even fragment or break up as the policy inconsistencies at its heart become increasingly apparent. So the question of UK membership - although something successive UK governments will have to keep under review - will look quite different in 15 years than it does now.

Critics of UK policy argue that sterling’s weakness could go into free-fall, with ruinous consequences for the British economy. Joining the euro, they allege, would put a floor under the exchange rate, allowing the Treasury and the Bank of England to defend the currency with lower interest rates than would otherwise be the case. This argument is however not valid. In contrast to previous foreign exchange market turbulence in the 1960s or the 1970s, the pound’s sharp fall will not lead to inflation, but is a vital means of adjusting the excessive current account deficit. The British recession will be sharp - but thanks to the pound’s decline it may turn out to be relatively short compared with the pain faced by some Continental economises

Bank of England interest rate cuts will continue in coming weeks, at a more aggressive pace than that followed by the European Central Bank, and this should be positive for economic adjustment. If international investors were seriously worried about Britain’s absence from EMU, they would be selling gilts and buying Bunds; in fact, the interest differential between 10-year UK and German government bonds has narrowed since August 2007 to around 50 basis points - while for most euro member economies it has widened (to 140 points for Greece, 100 for Italy, 95 for Ireland, 70 for Portugal, 60 for Belgium, 50 for Spain and Austria and 30 for France and the Netherlands). Especially in times of crisis, economic and monetary policy flexibility is of inestimable value. Throwing it overboard by joining the euro is not in Britain’s interest - neither now nor in the foreseeable future.

David Marsh is chairman of London and Oxford Capital Markets. The Marsh on Monday column appears in German in the newspaper Handelsblatt.

http://online.wsj.com/article/SB122791328588265155.html

• NOVEMBER 29, 2008

Some Consumers Say Wall Street Failed Them

By ELEANOR LAISE

With retirement accounts tumbling and millions of homeowners struggling to pay their mortgages, a realization is dawning on many Americans: The banks, brokerage firms, insurance companies and other players in the financial-services industry have failed them.

View Full Image

Richard Fleischman for The Wall Street Journal

Adam Gamradt sees buying opportunities in stocks but is dismayed by the financial-services industry.

Thirty years ago, a typical consumer had a fixed-rate mortgage, a life-insurance policy, a bank account and an employer-paid pension plan. Nowadays, that same consumer may have a payment option adjustable-rate mortgage, a 401(k) retirement-savings plan, a home-equity line of credit and perhaps even a health-savings account instead of traditional employer-sponsored health insurance.

In the process, risks previously borne by big banks and employers have been placed squarely on the shoulders of consumers. Individuals increasingly bear the risk of interest-rate fluctuations, rising health-care costs, stock-market gyrations and outliving their retirement savings.

Adam Gamradt, 31 years old, of Bloomington, Minn., believes the market slide has created a great opportunity to buy stocks, but he contributes only enough to his employer’s retirement-savings plan to get the full company match. That’s because he is dismayed by the plan’s pricey investment options and lack of information on total plan costs.

“If I’m going to buy a BMW for anybody, it should be me,” says Mr. Gamradt, an information-technology worker. “I wouldn’t exactly say the financial-services industry is at war with your average American consumer, but it’s d- close.”

The financial-services industry sold this personal-responsibility revolution by claiming that complex offerings like adjustable-rate mortgages and health-savings accounts would empower consumers to manage their ever-expanding portfolio of risks.

The new products created billions of dollars in fees that have powered Wall Street’s growth — even in recent years as the stock market stagnated. The financial sector’s share of total U.S. corporate profits jumped to 35% in 2007, up from 10% in the early 1980s, according to investment research firm BCA Research.

Now, of course, many of the products cooked up by Wall Street are exploding — and dragging down the financial-services industry with them. Whether the industry will return to record profit levels again is a question mark. If the public veers away from such products, the financial sector could shrink drastically.

In an era of few financial safety nets, many people are finding that one snafu can quickly become a complete personal-finance meltdown. Jackie Steffen, 45 years old, of Park Ridge, Ill., lost her house to foreclosure last year. She’d already taken roughly $10,000 in a loan and hardship withdrawal from her 401(k) in her struggle to cover the mortgage payments.

The foreclosure threatened college plans for her daughter, who was headed off to school that fall and needed a private loan to help cover the $41,000 annual cost. The loan was rejected because of the foreclosure, and Ms. Steffen had to ask her parents to co-sign it.

She’s now living with her parents and going through a divorce. “I just lost so much,” she says. What’s more, “I’m still paying for that [401(k) loan] and don’t even have the house to show for it.”

The theory that financial innovation would suddenly give ordinary consumers the ability to manage all of the risks once borne by big institutions “turned out not only to be false, but catastrophically false,” says Jacob Hacker, a political-science professor at the University of California, Berkeley, and author of the book “The Great Risk Shift.”

Complex Products

When the dot-com stock meltdown came, many retirement accounts were crushed and appetites for stocks severely diminished. Financial institutions responded by pushing products that gave consumers some exposure to stock-market movements but also offered complex and pricey guarantees as protection against market downturns.

Indexed universal life insurance was a poster child of the new complexity. In these contracts, interest credited to the account value was typically tied to a stock-market index like the Standard & Poor’s 500-stock index. There was generally a minimum guaranteed return — often 1% or 2% — but the upside was limited in a variety of ways. Dividends, which have accounted for a big chunk of stock-market returns over the long haul, were excluded from the index return calculation. And insurers could use a number of different methods to calculate the index return before applying the caps on gains.

Transfer of Risk

“You need a degree in financial math from MIT to fathom the depths” of such products, says James H. Hunt, who runs a life-insurance evaluation service in Concord, N.H.

After the dot-com bust, investors began pouring their money into houses. Wall Street’s seemingly insatiable appetite for mortgage investments added fuel to the fire, driving lenders to aggressively market risky products. Riskier loans were more profitable and, thus, more appealing to investors. Lenders didn’t worry about making high-risk loans because they weren’t holding the loans on their books. Just as with 401(k)s, much of the risk was transferred to individual consumers. With adjustable-rate mortgages, interest-rate risk is shifted from lenders to borrowers.

For consumers, however, adjustable-rate mortgages were packed with confusing and costly features. Payment-option ARMs, for example, which let borrowers choose from a variety of payment amounts each month, carried low “teaser” rates that were often in effect for only a month or less, adjusting monthly thereafter.

Since payments often remain low while rates are rising, borrowers can get deeper and deeper in debt. And if the loan balance grows to, say, 110% or 125% of the original principal, the low payment options can disappear and required payments can rise sharply.

“None of that is obvious from the papers,” says Kathleen Keest, senior policy counsel at the research and policy group Center for Responsible Lending. “If you look at the documentation for a payment option ARM, I defy 95% of people to understand what was going on.”

Jay Brinkmann, chief economist at the Mortgage Bankers Association, says the disclosures were adequate. Borrowers “did have access to the information. They just didn’t choose to avail themselves of it,” he says.

ARMs’ Downside

That’s little comfort to people like Thomas York. The 56-year-old leadership and communications trainer in Carlsbad, Calif., got a 30-year payment-option ARM in 2006. When he received his first billing statements, the payments and interest rate were far higher than he expected. He could afford only the lowest payment option, which didn’t even cover the interest accruing on the loan.

Mr. York stopped paying his mortgage in August, knowing that his monthly payment was about to roughly double, to $2,300. Now he owes at least $100,000 more than the value of the house, which he spent four years building himself in his spare time. His hopes of giving the home to the two children he raised with his ex-wife are slipping away.

“I would totally outlaw adjustable-rate mortgages,” Mr. York says. They “have destroyed people’s retirement, their incentive to own. I don’t want to own a house right now. That whole idea is just sickening to me.”

Write to Eleanor Laise at eleanor.laise@wsj.com

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

Op-Ed Columnist

Lest We Forget

By PAUL KRUGMAN

Published: November 27, 2008

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

Fred R. Conrad/The New York Times

Paul Krugman

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but the truth is that there were plenty of precedents, some of them of very recent vintage. Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved.

About those precedents: Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.

Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.

Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. Will the Fed’s ever more aggressive efforts to unfreeze the credit markets finally start getting somewhere? Will the Obama administration’s fiscal stimulus turn output and employment around? (I’m still not sure, by the way, whether the economic team is thinking big enough.)

And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.

For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.

So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now.

http://www.nytimes.com/2008/11/28/opinion/28krugman.html?em

http://www.reuters.com/article/newsOne/idUSN2636427520081126?sp=true

Citigroup bailout slammed by New Yorkers

Wed Nov 26, 2008 4:39pm EST

By Juan Lagorio

NEW YORK, Nov 26 (Reuters) - The bailout of Citigroup has made people in New York angrier than they were about any of the other government rescues of financial institutions this year.

In a random sample of people inside the Port Authority, the world’s busiest bus terminal, only one man backed the government decision to prop up the New York-based bank, even though it is a huge employer in the region.

All the rest are angry — even on the day before Thanksgiving .

“They were bailed out before, this is the second bailout, so what’s going on? Are they going to ask for another bailout soon?” asked Cheril Nichols, a 50-year-old nurse from New Jersey.

“It is wasteful, very wasteful,” said retiree William Dwyer, 70.

Earlier this week, the U.S. government announced an injection of $20 billion for Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and a plan to shoulder most of its potential losses on $306 billion of toxic assets, after the bank’s shares sank more than 60 percent in the previous week due to concern about its ability to survive.

The $20 billion of government capital comes after a $25 billion injection last month.

In effect, the government has pledged about $1,000 per American to guarantee the bank’s assets.

“This is not the right thing to do. They (the U.S. government) should help the people, not the big companies,” said Renu Malconi, 38, from New Jersey.

Citigroup has lost $20.3 billion in the last year and many analysts expect further losses because it owns many mortgage and other assets now worth far less than their original value.

Unlike Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz), which was forced to file for bankruptcy protection when the government rejected its pleas for help, Citigroup does business with millions of ordinary people every day, so emotions run higher about Citi.

In exchange for the bailout, Citigroup slashed its quarterly dividend and cannot raise it for three years without U.S. consent. But taxpayers want more sacrifices from the bank’s board and top management.

“It’s ridiculous. If I did as poorly as they did in my job, I would be out of the job, so why are they not accountable?” said Mike Delibero, an IT salesman.

The frustration on the streets of New York was echoed by two of New York’s major daily newspapers, The Wall Street Journal and The New York Post, which slammed the board of Citigroup on Tuesday with calls for all or many of its directors to quit or be removed.

The Post on Wednesday ran a series of letters from readers, all of them harshly criticizing the bailout and Citigroup’s former and current executives and board members.

High salaries, seven-figure bonuses and an agreement for the bank to pay $400 million to name the New York Mets baseball team’s new stadium Citi Field haven’t helped sentiment.

“If they are spending money on silly things, they should better keep it. The one thing I know is that it affects me, too,” said Hilda, 55, from New Jersey, who declined to give her last name.

After several calls, no Citigroup officials were available for comment. (Reporting by Juan Lagorio; Editing by Gary Hill)

© Thomson Reuters 2008 All rights reserved

Fed Risks ‘Spitting in the Wind’ With New Aid Pledges (Update3)

By Craig Torres and Scott Lanman

Nov. 26 (Bloomberg) — The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.

Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.

“We are sort of spitting in the wind,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Banks won’t be throwing a lot of loans out there when they fear — rationally — those loans may not be paid back.”

Policy makers aim to kick-start markets for loans to students, car buyers, credit-card borrowers and small businesses with a new $200 billion program. Backed in part by the Treasury, the Fed will become a new buyer in the market for consumer loans at a time when many traditional holders of the assets, such as off-balance sheet bank units, have collapsed or been dissolved.

Today, a Commerce Department report showed Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001. The Reuters/University of Michigan final index of consumer sentiment dropped to 55.3 in November, the lowest level since 1980.

Main Street

The announcement of the new efforts yesterday came amid rising criticism that officials were excessively focused on saving Wall Street firms, with the Citigroup Inc. rescue Nov. 23 the latest example. President-elect Barack Obama said repeatedly in the past two days he’ll compose a plan to help “Main Street” as well as the financial industry.

Obama and congressional Democrats have also pushed for a stronger response to the housing crisis. The Fed responded yesterday, invoking authority first granted in 1966 to buy $500 billion of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

Along with a $100 billion plan to buy the corporate debt of Fannie, Freddie and federal home loan banks, the step marks the central bank’s biggest foray into a type of quantitative easing. That’s an unorthodox monetary policy tool that goes beyond setting short-term interest rates. The central bank has already cut its benchmark rate to 1 percent.

Balance Sheet

“Rates are going to be kept down for a long time, the Fed’s balance sheet is going to be expanded for a long time,” said John Ryding, chief economist at RDQ Economics, New York. “It does, as we have argued, represent a very significant quantitative easing.”

Mortgage rates and yield premiums on Fannie and Freddie debt tumbled after the announcement. The average U.S. rate for a 30-year fixed mortgage ended at about 5.5 percent after starting the day at 6.38 percent, according to Bankrate Inc.

The spreads on most of Fannie’s and Freddie’s $1.7 trillion of corporate debt and $4.1 trillion of mortgage-backed bonds over comparable Treasuries tumbled to the lowest levels since early October. The cost to protect against defaults on corporate bonds and on securities backed by commercial mortgages also declined.

Excess Reserves

The question remains whether the lower rates will have much impact on the flow of credit and the economy. While the Fed has expanded its balance sheet by $1.3 trillion so far, banks have left much of the liquidity on deposit at the central bank itself, as so-called excess reserves. The surplus stood at $604 billion on Nov. 19.

Bank regulators have tried to cajole lenders, saying they “expect” them to lend, in a guidance letter issued Nov. 12. The Fed’s most recent quarterly survey of bank loan officers showed that 70 percent of domestic firms had tightened lending standards for their best mortgage borrowers in the third quarter, and 60 percent had raised standards on credit-card loans.

“The root of the problem is our securitization markets are non-functioning,” said Josh Rosner, managing director at New York research firm Graham Fisher & Co. “We have capital problems at the banks so they can’t take over.”

While officials yesterday contested claims that the Fed is undertaking quantitative easing, they acknowledged that the central bank’s new actions will result in another injection of funds into the system. Officials said their objective is to affect credit markets rather than to target money supply.

The Bank of Japan is the only major central bank to deploy quantitative easing in modern times, from 2001 to 2006. Current Governor Masaaki Shirakawa said in May that the policy “was very effective in stabilizing financial markets,” while at the same time it had “limited impact” in resolving Japan’s economic stagnation of the time because banks wouldn’t lend and companies wouldn’t borrow.

Fed Meeting

Fed officials next meet on Dec. 16-17, when economists anticipate they will cut their target rate for overnight loans between banks to 0.5 percent. The central bank expanded the meeting to two days, making it likely that the Federal Open Market Committee will explore the options for conducting policy with rates near zero percent.

“We can’t look back to recent history” as a guide for what to do, Mark Gertler, a New York University economics professor who has collaborated with Fed Chairman Ben S. Bernanke on research, said in a Bloomberg Television interview. “We really do have to make it up as we go along.”

Taking on Risk

Yesterday’s announcements continue the trend of the Fed and Treasury taking on more risk with public money, while private sector balance sheets contract. Earlier this week, the two agencies and the Federal Deposit Insurance Corp. offered a backstop for a $306 billion portfolio of Citigroup assets.

The new programs bring the estimated total government commitment to ease credit to about $8.5 trillion, with $3.17 trillion being used to date.

“It’s too early to tell whether the lending has increased or not,” David McCormick, Treasury undersecretary for international affairs, said in an interview with Bloomberg Television today. “We certainly expect that it will.”

Under the new Term Asset-Backed Securities Loan Facility, the Treasury will use taxpayer funds to protect the Fed against the first $20 billion of losses, or 10 percent, of $200 billion in exposure to AAA rated securitized consumer debt.

“I am willing to believe that these things that are rated AAA might have a maximum 10 percent loss if the assets behind them never changed,” said Ann Rutledge, a principal at R&R Consulting in New York, which specializes in structured finance. “The collateral in credit card asset-backed securities changes.”

Ratings may be harder to judge when credit quality is deteriorating. Also, the government has less information than issuers, who could back the bonds with assets that pose the most risk of declining quality, Rutledge said.

Officials yesterday said the risk of loss is minimal, and noted that the Fed will put haircuts on the value of the ABS that it takes on. Treasury Secretary Henry Paulson said the mortgage debt purchases are a “great investment for the taxpayer” because the government already stands behind Fannie and Freddie.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net

Last Updated: November 26, 2008 13:09 EST

http://www.bloomberg.com/apps/news?pid=20601068&sid=aqVbqmFMfB9k&refer=economy#

U.K. Consumer Confidence Stays Near Three-Decade Low, GfK Says

By Svenja O’Donnell

Nov. 28 (Bloomberg) — U.K. consumer confidence stayed close to the lowest level in more than three decades in November as gloom about the recession deterred spending, GfK NOP said.

An index of sentiment, based on a survey of 2,000 people between Nov. 7 and Nov. 16, rose one point from the previous month to minus 35. A gauge measuring the general economic situation in the past year rose one point to minus 71, still 39 points lower than in the same month last year.

Bank of England policy maker Timothy Besley said yesterday that the “big issue” for the British economy is to get banks to lend again. The seizure in credit markets and worsening prospects for economic growth has led consumer spending to drop and prompted the central bank to cut the benchmark interest rate this month to 3 percent, the lowest since 1955.

“U.K. consumers are still being battered by news about our poor economy in general and mounting concerns about job losses in particular,” Rachael Joy, a spokeswoman for GfK, said in a statement. “The dramatic cut in interest rates this month appears to have done little to improve sentiment so far, as U.K. consumers continue to fret over the impact of a looming recession.”

An index measuring Britons’ personal financial situation in the next year rose two points to minus 10, GfK said. Expectations for the general economic situation over the next 12 months rose one point to minus 36.

U.K. house prices fell for a 13th month in November as the financial crisis deterred homebuyers and banks rationed mortgages, Nationwide Building Society said yesterday. Besley said that consumers need to pay down debt and save more as the economy rebalances.

Credit Squeeze

Prime Minister Gordon Brown this week urged banks to free up credit as political pressure mounts for measures to force them to lend. U.K. consumer spending dropped the most since 1995 in the third quarter as gross domestic product contracted 0.5 percent, the Office for National Statistics said on Nov. 26. Unemployment jumped the most in 16 years last month.

The central bank will cut the benchmark interest rate to 2.25 percent on Dec. 4, according to the median forecast of 26 economists in a Bloomberg News survey.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

Last Updated: November 27, 2008 19:01 EST

http://www.bloomberg.com/apps/news?pid=20601087&sid=abXRnXtHrZCU&refer=home