Monday, January 26, 2009

Finance Crisis Claims 70,000 Jobs In One Day

Finance crisis claims 70 000 jobs in one day

By David Obey
NEW YORK, UNITED STATES Jan 26 2009 16:28

Companies forecast almost 70 000 job cuts in a single day as the rampant crisis born in the banking sector struck workers in factories and offices across the globe and brought down a government on Monday.

The financial catastrophe claimed one of its biggest casualties yet as Iceland's Prime Minister Geir Haarde announced the resignation of his government after months of protests over its handling of the economic crisis.

And shortly after United States President Barack Obama warned of a downturn that could become "dramatically worse", several huge companies announced a fresh avalanche of cuts.

In New York, construction equipment giant Caterpillar said it planned 20 000 job cuts worldwide to cope with plunging sales and US telecom operator Sprint Nextel announced 8 000 cuts -- 14 percent of its staff.

Japan's top 12 carmakers expect to cut a total of 25 000 jobs between now and the end of March to cope with an industry slump, a survey by Jiji Press concluded on Monday.

Dutch banking and insurance group ING announced 7 000 job cuts and a deal for the Dutch state to assume 80 percent of the risk on a €27,7-billion portfolio of troubled assets.

Dutch electronics giant Philips said it would eliminate 6 000 jobs.

Pfizer Inc, which on Monday announced that it would be buying rival drug maker Wyeth in a $68-billion deal, said it would slash more than 8 000 jobs as it prepares for an expected revenue crash when its cholesterol drug Lipitor loses patent protection in November 2011.

British Prime Minister Gordon Brown insisted that the crisis, which has forced his government to intervene to shore up banks, should give rise to "a new global order".

"As some want, we could close our markets -- for capital, financial services, trade and for labour -- and therefore reduce the risks of globalisation," he said, according to the text of a speech issued by his office.

"Or we could view the threats and challenges we face today as the difficult birth-pangs of a new global order -- and our task now as nothing less than making the transition through a new internationalism to the benefits of an expanding global society."

Nowhere is the transition likely to be more painful than in the labour market, as the slowdown forces struggling enterprises around the world to slash their payrolls.

The announcements by the two Dutch companies came ahead of confirmation that Europe's second-biggest steelmaker, Indian-owned Corus, said it would cut more than 3 500 jobs around the world, most of them in Britain.

Workers arriving early on Monday were gloomy about their prospects.

"People feel gutted. I have already had to take a 10 percent pay cut," said 45-year-old Douglas Mayhill, a worker at a Corus plant in Port Talbot, southern Wales.

"I was told on Friday I have a choice -- either accept a 10 percent pay cut or take redundancy -- that is no choice."

The US Congress was meanwhile due to begin debate this week on Obama's $825-billion stimulus Bill designed to haul the US economy out of a paralysing recession.

In his first presidential radio address at the weekend, Obama raised the spectre of double-digit unemployment and a massive erosion of family incomes if Congress did not act on the stimulus Bill.

"If we do not act boldly and swiftly, a bad situation could become dramatically worse," he said.

European shares rallied on Monday, however, with sharp gains in the banking sector on positive news from British group Barclays, whose share price surged more than 75 percent on unexpectedly strong profit expectations, analysts said.

The deepening recession pushed the price of gold, seen as a safe haven in times of stress, up to $906 an ounce, the highest level for three and a half months. -- Sapa-AFP

Source: Mail & Guardian Online
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Obama faces bipartisan test on stimulus

By Edward Luce in Washington
January 26 2009 21:40

Barack Obama faces an unexpectedly early test on Tuesday of whether he can govern as a bipartisan president when he meets Republican lawmakers to try to roll back the growing tide of conservative hostility to his $850bn stimulus plan.

Republican leaders have become increasingly strident in their opposition to the plan, which they claim is stuffed with spending on Democratic special interests and contains little in the way of genuine stimulus. Mr Obama has portrayed the vote, which is expected to take place in the House of Representatives as early as this week, as a critical test of whether he can govern from the centre.

Unless he comes up with a new incentive for Republicans to change their position, Mr Obama’s bipartisan aspirations could go up in smoke before he has completed a week in office.

“It looks like the Republicans have decided to take on Obama sooner rather than later,” says Doug Schoen, a leading Democratic pollster.

“It is a low-risk strategy. If the stimulus fails, Republicans can claim they were right all along. If it works, then they were fulfilling their role as the loyal opposition.”

Nevertheless, observers are taken aback by the harsh tone of Republican opposition to the bill at this early stage in Mr Obama’s presidency – particularly given his willingness to make compromises over its content. At the risk of alienating the liberal wing of the Democratic party, Mr Obama conceded $275bn (€208bn, £187bn) in tax cuts even before he was sworn in.

Most economists say spending is a more efficient form of stimulus since a large share of tax cuts are put away in savings. But Republicans point to a report by the non-partisan Congressional Budget Office which says only a fraction of the spending in the bill would feed into the economy during 2009.

In a scathing 20-point critique on Monday, John Boehner, the House Republican leader, singled out $650m in spending on digital television coupons, $50m in funding for the National Endowment for the Arts and $200m to upgrade the National Mall in Washington – “including $21m for sod” – which he said made a mockery of the exercise.

“Rather than working with Republicans on a proposal that lets families, small businesses, entrepreneurs and the self-employed keep more of what they earn . . . it seems congressional Democrats are prepared to barrel ahead with the same-old, same-old – more and more aimless spending,” he said in a statement.

Mitch McConnell, the Republican Senate leader, was equally dismissive: “Everybody at the state level has been making their list and checking it twice and we’re going to end up with some very embarrassing expenditures,” he told Fox News. “You’re going to see a lot of mob museums and water slides [pork barrel items].”

Even without Republican support, Mr Obama is likely to get large majorities in favour of the stimulus in both chambers of Congress. Mr McConnell, who has 41 Republican senators, which enables him to block legislation since Democrats require 60 votes to shut off debate, has said he would not filibuster against the bill.

But the early deterioration in rhetoric could bode ill for the Obama administration’s hopes of returning to Congress within the next few weeks to request much larger assistance, possibly up to $1,000bn, in new emergency funds to shore up the US banking system.

“The Republicans should vote against this stimulus because it isn’t really a stimulus,” says David Frum, a leading conservative commentator. “They will have to look separately at any new Tarp [Troubled asset relief programme] request and treat it on its merits.”

Mr Obama, who promises that a majority of the stimulus spending would come on stream in the next 18 months, has signalled that there are limits to his bipartisan patience. He told Republicans last week to stop listening to Rush Limbaugh, the conservative talk radio commentator, who commands a large following among grassroots conservatives. Mr Limbaugh sarcastically describes Mr Obama as the “Great Unifier”.

Copyright The Financial Times Limited 2009

JANUARY 26, 2009, 3:04 P.M. ET

Caterpillar to Cut 20,000 Jobs as Downturn Worsens

Wall Street Journal

The global economic picture continued to darken as Caterpillar Inc. said it would lay off 20,000 employees while projecting steep declines in its sales and profit in the coming year.

Caterpillar is encouraging dealers to cut back on inventories, which has led to order cancellations.
Caterpillar's dire outlook comes amid a sharp slowdown in economic growth around the world.

The world-wide infrastructure and commodities boom that powered the Peoria, Ill., company's growth over the last five years–helping Caterpillar more than double its annual revenue between 2002 and 2007–has collapsed, as roads, bridges, high-rises and other projects have been delayed or suspended.

Caterpillar said its 2009 total sales would be $40 billion, give or take 10%. That contrasts with Chief Executive Jim Owens' prediction last year that the company would approach $60 billion in annual sales by 2010. Mr. Owens last March had predicted that the company's earnings per share would rise at an annual rate of 15% to 20% through 2012.
Sets Cuts at Illinois Plant

For the fourth quarter, Caterpillar's earnings per share dropped 28% from a year earlier to $1.08, as Caterpillar's net income dropped 32% to $661 million. Total sales rose 6% to $12.9 billion.

Caterpillar shares were off sharply after the announcement.

Of the 20,000 workers Caterpillar plans to shed this year, about 4,000 will be full-time production employees. Another 8,000 temporary workers or contract workers will be furloughed, and some 7,500 support and management employees will be cut loose through layoffs or voluntary departures. Thousands of employees still on the job will be subjected to short-term layoffs and shortened work-weeks as the company ratchets down production at several of its plants.

Amid a deepening U.S. housing and broader economic slump in the last two years, the company relied on overseas sales of its earth-moving machinery, particularly highly profitable giant machines and engines for large construction, mining and energy-related projects.

Orders were so robust that production bottlenecks at some plants raised costs, restrained profit and slowed production. But as the global economy shifted downward last year, the company in December said it would fire 800 people at a plant in Illinois that makes small engines, the first time Caterpillar had offloaded workers on a large scale since early this decade.

Write to Ilan Brat at

JANUARY 26, 2009, 4:22 P.M. ET

Iceland's Coalition Government Collapses


Iceland's government collapsed Monday, days after its prime minister called for early elections amid popular anger over a financial crisis that has gutted a once-flourishing economy.

Prime Minister Geir Haarde announced Monday that he and his cabinet would resign immediately. The move came after his Independence Party failed to come to terms with the Social Democrats, its main partner in Iceland's coalition government. Mr. Haarde was due Monday afternoon to present his resignation to Iceland's president.

Mr. Haarde was working to form a new government, his spokesman said, but Social Democrat leaders were demanding a fresh face.

"The government's actions in the last weeks and months were not swift enough," Foreign Minister Ingibjorg Solrun Gisladottir, the leader of the Social Democrats, said Monday, according to Agence France-Presse.

It is far from clear who will run Iceland until elections scheduled for May. Ms. Gisladottir proposed a fellow Social Democrat, Johanna Sigurdardottir, but Mr. Haarde's spokesman said the Independence Party—which has a plurality of seats in parliament--is determined not to hand over the prime minister's office.

That could open the door for the Independence Party's second-in-command, Thorgerdur Katrin Gunnarsdottir, currently education minister.

Iceland's president, who holds a largely ceremonial post, has authority to designate a person responsible for forming a government.

Iceland becomes the second European nation to lose its government in the global crisis -- Belgium's resigned last month after a scandal involving aid to a fallen bank. It is perhaps the world's hardest hit: Last fall, three big banks -- virtually the entire banking system -- collapsed, and the island's currency went into freefall.

The twin currency and banking crises have caused a startlingly swift reversal of fortune for Icelanders, per capita once one of the world's wealthiest people. Today, inflation and unemployment are soaring, debt is mounting and the banking sector that provided cushy jobs and fueled a consumption boom has vanished.

Anger at Iceland's leaders has been palpable for months. Protests in front of the parliament that began last fall drew crowds of thousands that quickly turned raucous—pelting the parliament building with eggs and rolls of toilet paper, and displaying effigies of Mr. Haarde.

Up until last week, Mr. Haarde had been defiant, saying Iceland—which has accepted a $2.1 billion bailout from the International Monetary Fund—could not afford political chaos as it tries to rebuild its economy.

But Friday, he said his doctors had discovered a tumor of the esophagus, and that he would call for early elections in May and stand down as the party's chief. Leaders of the protests said that wasn't enough. Demonstrations continued over the weekend. By Monday, the coalition had broken and Mr. Haarde faced open criticism from his partners.

At the root of Iceland's troubles was a outsized banking system, which grew wildly overseas and built up foreign liabilities many times the size of Iceland's economic output. When the credit crunch struck, the banks faced difficulty making payments, and Iceland's central bank didn't have the foreign currency needed to bail them out.

Write to Charles Forelle at

The Stimulus Time Machine

Wall Street Journal Commentary

That $355 billion in spending isn't about the economy

The stimulus bill currently steaming through Congress looks like a legislative freight train, but given last week's analysis by the Congressional Budget Office, it is more accurate to think of it as a time machine. That may be the only way to explain how spending on public works in 2011 and beyond will help the economy today.

According to Congressional Budget Office estimates, a mere $26 billion of the House stimulus bill's $355 billion in new spending would actually be spent in the current fiscal year, and just $110 billion would be spent by the end of 2010. This is highly embarrassing given that Congress's justification for passing this bill so urgently is to help the economy right now, if not sooner.

And the red Congressional faces must be very red indeed, because CBO's analysis has since vanished into thin air after having been posted early last week on the Appropriations Committee Web site. Officially, the committee says this is because the estimates have been superseded as the legislation has moved through committee. No doubt.

In addition to suppressing the CBO analysis, Democrats have derided it. Appropriations Chairman David Obey (D., Wis.) called it "off the wall," never mind that CBO is now run by Democrats. Mr. Obey also suggested that it would be a mistake to debate the stimulus "until the cows come home." We'd settle for a month or two, so at least the voters can inspect the various Congressional cattle they're buying with that $355 billion.

The stimulus bill is also a time machine in the sense that it's based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the "stimulus" claim is based on something called the Keynesian "multiplier," which is that each $1 of spending the government "injects" into the economy yields 1.5 times that in greater output. There's little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we'd all live in paradise.

The problem is that the money for this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government "injects," it must take $1 away from someone else -- either in taxes or by issuing a bond. In either case this leaves $1 less available for private investment or consumption. Mr. Barro wrote about this way back in 1974 in his classic article, "Are Government Bonds Net Wealth?", in the Journal of Political Economy. Larry Summers and Paul Krugman must have missed it.

The government spending will be a net stimulus only if its $1 goes to more productive purposes than those to which private investors would have put that same $1. There are some ways we may want the government to spend money -- on national defense, say -- but that doesn't mean it's a stimulus.

A similar analysis applies to the tax cuts that are part of President Obama's proposal. In contrast to the spending, at least the tax cuts will take effect immediately. But the problem is that Mr. Obama wants them to be temporary, which means taxpayers realize they will see no permanent increase in their after-tax incomes. Not being fools, Americans may either save or spend the money but they aren't likely to change their behavior in ways that will spur growth. For Exhibit A, consider the failure of last February's tax rebate stimulus, which was a bipartisan production of George W. Bush and Mr. Summers, who is now advising Mr. Obama.

To be genuinely stimulating, tax cuts need to be immediate, permanent and on the "margin," meaning that they apply to the next dollar of income that an individual or business earns. This was the principle behind the Kennedy tax cuts of 1964, as well as the Reagan tax cuts of 1981, which finally took full effect on January 1, 1983.

If the Obama Democrats can't abide this because it's a "tax cut for the rich," as an alternative they could slash the corporate tax to spur business incentives. The revenue cost of eliminating the corporate tax wouldn't be any more than their proposed $355 billion in new spending, and we guarantee its "multiplier" effects on growth would be far greater. Research by Mr. Obama's own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3.

As for all of that new spending, CBO will release an updated analysis this week. And we anticipate that the budget analysts will in the interim have discovered that much more of that $355 billion will somehow find its way to "shovel-ready" projects that the Obama Administration can start building before the crocuses bloom. But in the real world, the CBO's first estimate is likely to prove closer to the truth.

The spending portion of the stimulus, in short, isn't really about the economy. It's about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The "stimulus" is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.

Apart from the inevitable waste, the Democrats are taking a big political gamble here. Congress and Mr. Obama are promoting this stimulus as the key to economic revival. Americans who know nothing about multipliers or neo-Keynesians expect it to work. The Federal Reserve is pushing trillions of dollars of monetary stimulus into the economy, and perhaps that along with a better bank rescue strategy will make the difference. But if spring and then summer arrive, and the economy is still in recession, Americans are going to start asking what they bought for that $355 billion.


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