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European Bank Cuts Rate, but Signals It Has Limits

May 3, 2013 by Leave a Comment

For now, at least, the bank remains unwilling or unable to wield the more powerful weapons that many economists say are needed to jolt the Continent out of recession. Although the big fear last year that the euro zone might break apart has receded, the danger now could be prolonged stagnation like that which has plagued Japan for most of the last two decades.

Even the traditionally conservative Bank of Japan has become bolder lately, aggressively buying government bonds to try to double the supply of money in circulation and spur growth. Such a step would be unthinkable for Mr. Draghi, who is hemmed in by the bank’s narrower mandate and the historically rooted inflation fears of Germany, the euro zone’s wealthiest and most politically powerful member.

The bank’s Governing Council, meeting in Bratislava, reduced its benchmark interest rate to 0.5 percent from 0.75 percent. But that move was widely seen as mostly symbolic, to avoid the impression that the bank and Mr. Draghi were doing nothing as the euro zone recession threatens to engulf countries, like Germany, that have previously been spared.

The central bank also extended its promise to provide banks with as much cheap cash as they need through 2014, and said it was exploring ways to use the European Union’s house bank to stimulate lending to small businesses.

Intriguingly, Mr. Draghi raised the possibility of imposing a “negative rate” on the deposits that banks routinely park at the central bank, essentially charging banks to store their money. That might discourage lenders from hoarding cash rather than lending. But it could have unintended consequences. For example, banks might store huge amounts of paper bills as a low-risk alternative to central bank vaults.

Mr. Draghi insisted that the rate cut, which takes effect May 8, would stimulate growth, especially now that the economic slump that has afflicted Spain and Italy for more than a year is spreading north to countries like Germany, Austria and Finland. Anticipating skepticism, he urged reporters “not to underestimate the impact” of the rate cut and other measures at his news conference on Thursday, under a crystal chandelier in an ornate building that houses the Slovak Philharmonic. It was one of the central bank’s twice-a-year meetings in the capital of one of its member countries.

Not only is the central bank avoiding Japanese-style shock therapy, but it remains far from pursuing any equivalent of the so-called quantitative easing that the United States Federal Reserve Board and the Bank of England have used to stimulate their economies.

“The bright minds in the Eurotower are still working hard to come up with a new magic bullet,” Carsten Brzeski, an economist at ING Bank, said in a note to clients, referring to the central bank’s headquarters in Frankfurt. “In the meantime, the only thing Draghi found in his tool kit was an old tool and a chill pill to keep markets happy in the waiting room.”

Under the euro zone’s political structure as a loose confederation, the European Central Bank does not have the monolithic power of the Fed, Bank of England or Bank of Japan. Even if Mr. Draghi and some others on the 23-member Governing Council wanted to do more to spur growth, they are hamstrung by a charter that obliges the bank to defend price stability above all else and forbids it from providing financing to governments.

Mr. Draghi has at times been willing to stretch that mandate. Last summer, for example, he promised to buy government bonds in unlimited amounts to control borrowing costs. His expression of resolve has been enough to keep speculators at bay and tamp down the interest rates on Spanish and Italian debt, without any actual bond purchases.

Mr. Draghi also must contend with the politics of the central bank’s Governing Council, which includes the heads of all 17 national central banks in the euro zone. Germany, in particular, remains staunchly opposed to bond buying or other aggressive measures to stimulate growth, for fear of inflation.

Article source: http://www.nytimes.com/2013/05/03/business/global/03iht-euro03.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Books of The Times: Nation Goes on Its Merry Way to Ruin

June 28, 2011 by Leave a Comment

The authors are forthright in their intentions. They are angry about the “outsized ambition, greed, and corruption” that led to “economic Armageddon,” as the book’s subtitle puts it. They view the actions that prompted the meltdown as reprehensible and regret that few of the perpetrators have been held accountable.

In a direct writing style familiar to those who follow Ms. Morgenson’s Sunday “Fair Game” column, the authors piece together the rapid rise in high-risk mortgages and the swift collapse of the complex financial scaffolding that supported them. Ms. Morgenson joined The Times in 1998 after working at Forbes, Money and Worth magazines and won a Pulitzer Prize in 2002 for her coverage of Wall Street. She also worked as a broker at Dean Witter. Mr. Rosner is a partner at Graham Fisher Company, an independent research firm, and worked for many years at Oppenheimer Company.

Drawing on their deep expertise, the authors ably trace the legal and regulatory changes that stoked the unsustainable housing boom. With a few exceptions, the book focuses more on policy and power than on personalities, and it illuminates several small decisions that later had huge, unintended consequences. For example, a modification in the handling of bundled loans, approved by the international Basel Committee on Banking Supervision in 2001, more than any other factor, “opened wide the floodgates for the mortgage securities mania,” the authors write.

The book begins in 1994 with President Bill Clinton’s kicking off a public-private partnership to extend homeownership to more Americans. At that time 64 percent of Americans owned their homes; within a decade the percentage would rise to nearly 70. Yet an idea that sounded so appealing would soon be exploited by institutions and individuals who detected the potential for astounding profits.

Ms. Morgenson and Mr. Rosner finger the usual suspects: subprime mortgage lenders, credit-rating agencies, investment banks, politicians, the Federal Reserve.

But the institution to which the authors devote the most ink is Fannie Mae, the government-supported enterprise created in 1938 to make home loans more accessible. And the person they hold most accountable is someone whose role in the “mortgage maelstrom” has until now “escaped scrutiny”: James A. Johnson, Fannie Mae’s chief executive from 1991 to 1998. Mr. Johnson was the “anonymous architect of the public-private homeownership drive that almost destroyed the economy in 2008,” the authors assert. “He was especially adept at manipulating lawmakers, eviscerating regulators and leaving taxpayers with the bill.”

The description of Mr. Johnson’s role is damning — and although the account lacks his perspective, it is thoroughly supported through scores of interviews with academics, government officials and industry executives, some of whom are granted anonymity. While Mr. Johnson didn’t respond to interview requests over five months, according to the authors, they overcome this obstacle with impressive use of public records and secondary sources, carefully attributed in the text or described in a two-page “Notes on Sources.” Still, more specific references in endnotes would have strengthened the book’s authority, and in some places would have improved the narrative’s flow.

“Reckless Endangerment” will never be mistaken for summer beach reading, but the authors explain the minutiae clearly, pausing often to explain a dense financial concept or to inject a clarifying metaphor. Lax regulation is effectively likened to “allowing the lead-footed drivers to set speed limits.” Less effective is a comparison of Wall Street’s hope for profits from subprime lenders to “Elmer Fudd envisioning a duck à l’orange dinner when stalking Daffy Duck.”

A particular strength of this book is the number of doubters the authors unearthed: the unsung government analysts, public lawyers and private researchers who dared to question policy decisions and stand up to the formidable “housers,” as the true believers in government subsidies for home ownership are called.

The reader has a sickening sense of missed opportunity as these prophets are ignored or, worse, vilified, by those in a position to halt the mania. When a Congressional Budget Office researcher in 1995 reveals the multibillion-dollar extent of the government’s subsidy to Fannie Mae and its brother institution, Freddie Mac (and that one-third of these benefits never reached borrowers), he suggests that “Congress may want to revisit the special relationship.” Unable to assail the merits of his analysis, outraged Fannie Mae executives resorted to ad hominem attacks, calling budget office officials “digit-heads” and “economic pencil brains.”

One of the doubters was Mr. Rosner himself, who in a 2001 report warned about the potential for economic ruin for American consumers as they took on more and more home debt. Washington regulators met his 30-page paper “with a dismissive silence,” the authors say.

Unlike some whodunits, “Reckless Endangerment” has no tidy ending. Millions of homes remain in foreclosure, high unemployment persists, and, the authors say, Congress failed to pass truly corrective legislation when it had the chance. Although Ms. Morgenson and Mr. Rosner hope that shining a light into the dark corners of this “economic Armageddon” might prevent another one, they sadly conclude that something similar “most certainly” will happen again.

Pam Luecke is the Donald W. Reynolds professor of business journalism at Washington and Lee University in Lexington, Va.

Article source: http://feeds.nytimes.com/click.phdo?i=7e30259cd647f4e9e175f40ea30fc91d

Filed Under: Economy News Tagged With: , ,

Uneven Growth for Film Studio With a Message

June 6, 2011 by Leave a Comment

In Hollywood, doing both turns out to be more complicated than you might think.

Participant Media, the film industry’s most visible attempt at social entrepreneurship, turned seven this year without quite sorting out whether a company that trades in movies with a message can earn its way in a business that has been tough even for those who peddle 3-D pandas and such.

“The Beaver,” Participant’s latest picture, is a flop. A mental health-themed drama with Mel Gibson in the lead, it has taken in less than $1 million at the domestic box office since opening early last month, though it cost about $20 million to make, and was backed by a vigorous effort to build a following among those who treat depression.

Despite accolades — Participant took 11 Oscar nominations in 2006, and films like “The Cove” and “An Inconvenient Truth” later became winners — nothing from the company has approached blockbuster status. The biggest ticket-seller among its films — it has produced about 30 — was “Charlie Wilson’s War” in 2007. A star-packed tale about the unintended consequences of America’s past dealings with Afghanistan, it took in just $66.7 million in domestic theaters.

And Participant’s owner, the eBay co-founder Jeffrey S. Skoll, is still pouring in money. In an interview, Mr. Skoll put the amount he has invested at “hundreds of millions to date, with much more to follow.”

Yet Mr. Skoll last week described his growing enterprise — which also publishes books, produces television programs, has a wide Internet presence through its TakePart social action network, and owns a major stake in Summit Entertainment — as only the beginning of a media empire that he and his partners expect to surpass eBay in terms of impact, if not profit.

“This is the very early stage, as far as I’m concerned,” said Mr. Skoll, who joined Participant’s chief executive, James G. Berk, in a broad discussion of their experience in an industry in which many players share their commitment to social causes, but only rarely have tried to build a business around their views.

Ted Leonsis, with his indie-minded SnagFilms, and Philip Anschutz, with his family-oriented Walden Media, have both made forays into film-related social entrepreneurship. But neither has matched Mr. Skoll’s attempt to penetrate the studio system by financing and producing a broad range of pictures that are intended to set off not just ticket sales, but social and political action campaigns.

In the past, those have aimed to pressure senators into ratifying the New Start arms control treaty (via “Countdown to Zero”) or to press for reauthorization of the Violence Against Women Act (with “North Country”).

Mr. Skoll and Mr. Berk spoke in a conference room on the third floor of their new quarters in Beverly Hills. The offices, Mr. Berk said, are made entirely of recycled material — the carpet comes from old tires, but the look is stylish and green. From the second floor, Mr. Skoll operates philanthropies to which he has donated, by his count, about $1.5 billion.

Eventually, Mr. Skoll said, Participant is expected to become self-sustaining, though both expansion and the soft performance of some films have kept it from making a profit to date.

In strictly financial terms, said Mr. Berk — who was previously the chief executive of Gryphon Colleges, Fairfield Communities, and Hard Rock Cafe International — Participant’s film business appears to perform “just above the median” for similar size companies, thanks to a slight edge in home entertainment sales. Those are helped by long, intensive campaigns that urge like-minded activists to rally for years around message films like “An Inconvenient Truth,” the global warming documentary.

In measuring its success, Mr. Berk added, Participant sometimes resorts to an unusual standard: On losers, the company assesses whether Mr. Skoll could have exerted more impact simply by spending his money philanthropically.

By that measure, “Waiting for Superman,” about the failures of public education, was a hit, Mr. Berk said. It had just over $6 million in worldwide ticket sales, but managed to put the issue of teacher competence into what he calls “the pool of worries” for millions who were caught up in a fierce discussion of the film’s premise, that failing children are hindered by union-protected teachers.

Article source: http://feeds.nytimes.com/click.phdo?i=1c7ed61078839c02decb5f401f8a8125

Filed Under: Business News Tagged With: , ,