Australian Financial Review
PUBLISHED: 28 Jan 2012
Anna Bernasek New York
What’s on Wall Street’s mind right now? It seems to be regulation. Listen to any banker in the US lately and it sounds like regulation is killing them. But take a look at the evidence.
US banks have just reported earnings for 2011 and, at first glance, there is some cause for concern. Acknowledged leader Goldman Sachs’s net income was cut in half in 2011, compared with the previous year. Bank of America, the biggest bank by assets, barely broke even. Without the benefit of a tax provision, BoA would have lost money.
But digging a little deeper into recent numbers tells another story. Those regulations may not be hurting US banks as much as bankers would like you to believe.
Take a look at the strongest big bank, JPMorgan Chase. Its head, Jamie Dimon, has been an outspoken critic of regulations. Since last summer he has openly feuded with global financial regulators about new international capital standards.
Dimon reiterated his criticism of tighter bank rules at JPMorgan’s earnings announcement last week. “Regulatory policy is completely contradictory to government objectives,” he said.
In particular, Dimon singled out two areas of regulation he believes are bad: bank capital rules and restrictions on trading.
But if regulations are hurting so much, why are JPMorgan’s earnings so strong? For the full year, JPMorgan reported a record profit of $US19 billion. That’s up a healthy 9 per cent from the previous year. But it’s also about 25 per cent higher than in 2006 and 2007, when the market was sizzling and today’s regulations weren’t even on the radar.
To be fair, JPMorgan is bigger than it was in 2007 and has to maintain more capital. But other measures of profitability show the bank is not far from boom-time levels. Pre-tax earnings were 28 per cent of revenue, only a shade less than in 2006-07. In this new era, it is turning out results comparable to its best years.
Dimon may have a point on some regulatory details, but in the big picture he’s not getting hurt. For a well capitalised giant such as JPMorgan, it’s clearly possible to thrive under the new rules.
The picture is not the same at the other big banks. Look at Citigroup, for example. According to its latest figures, Citigroup’s profitability is about half what it was during the boom. But the bank’s profitability fell off a cliff in 2007 when its assets and loans problems came to light. That was well before the new regulations kicked in the following year.
For the past two years, Citigroup has turned out steady and growing profits. The fact that they are about half what they were in 2006 probably says more about the bank’s irresponsible practices from the year 2000 on, than about any recent regulatory burdens.
Then there’s BoA, the asset leader. It seems to have some operational and legacy asset problems as opposed to regulatory constraints. The disastrous acquisitions of Countrywide and, to a lesser extent, Merrill Lynch continue to take their toll.
BoA actually showed paper profits in 2008 and 2009, the worst years for its big-bank peers. But throughout 2010 and again in 2011 BoA printed red ink. That doesn’t look like a regulatory problem, especially compared with JPMorgan’s strong results under the very same rules.
So what about the best of the investment banks? How are they faring?
Like Citigroup, Goldman Sachs’s profits have fallen by half. Unlike Citigroup, though, in Goldman’s case the drop is clearly related to regulation. Remember that, to save its skin during the 2008 crisis, Goldman converted from an investment bank to a commercial bank. That brought a whole new set of capital requirements, which more or less directly explain the drop in profitability.
It’s a simple matter of leverage. In the boom era, Goldman’s leverage was about 27 times its equity. Today that leverage is closer to 13 times, essentially cut in half. Investment bankers may make noises about restrictions on proprietary trading and other issues, but it’s no coincidence that profits have dropped in lock-step with leverage.
Morgan Stanley’s numbers tell a similar tale. Profits for 2011 were off 27 per cent versus 2006, while leverage dropped from 32 times to 12 times. Adjusted for leverage, Morgan Stanley seems even healthier than in 2006. There’s just no sign of regulatory strangulation in Morgan Stanley’s numbers.
While everybody misses the profits, the investment banks’ leverage wasn’t healthy for the financial system. At 27 times leverage, it doesn’t take much of a setback to put a company in intensive care. And it is an integral part of the global banking system, then watch out, everyone’s at risk.
On balance, new regulations are not putting banks out of business. What’s more, the financial world is a safer place for it.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. Her book The Economics of Integrity was published in 2010.
Saturday, January 28, 2012
Saturday, January 21, 2012
Fed pushes Congress for Housing Policy Action
Financial Review
Published January 21, 2012
Anna Bernasek, New York
US Federal Reserve chairman Ben Bernanke this month sent Congress a report on the housing market urging more policy action. Since then, a rising chorus of Fed officials has reinforced Bernanke’s message in speeches around the country.
Despite “green shoots” in some parts of the American economy, the Fed remains concerned about the effects of continued weakness in the housing sector. Just how big a problem is the housing market?
Housing prices have fallen on average about 33 per cent from the peak in 2006. The last time home prices fell anywhere near that much was during the 1930s. And by some measures at least, the current crash in housing prices is even worse than what happened in the Great Depression. According to the S&P/Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 per cent from 1929 to 1933.
As a result of the recent decline in prices, $US7 trillion in household wealth simply vanished, drastically reducing consumer spending. Today the value of all housing assets is about $US14 trillion. It was close to $US21 trillion at the peak.
Falling home prices have a big economic effect due to leverage. A significant fall can wipe out a home owner’s equity and eat away the value of the bank’s mortgage. Analysts estimate that a 10 per cent fall is the typical threshold for those pernicious effects. With home prices falling three times as much, the impact has been unprecedented.
Lots of people are desperate. The Fed estimates that 12 million borrowers owe more on their mortgages than their homes are worth. That represents about one in five mortgages in the US.
In Florida, Nevada and Arizona, where prices have fallen more than the national average, as many as half of all mortgage borrowers owe the banks more than their homes could be sold for.
It all adds up to a whopping $US700 billion in aggregate negative equity, according to the Fed. To put that another way, it would take a 5 per cent increase in prices just to absorb that shortfall, without any gains going to home owners.
About 3.4 million borrowers with negative equity, amounting to $US275 billion, are late or have stopped making mortgage payments. While the remaining 8.6 million or so are still paying, they might stop at any time. That’s a continuing risk for US banks.
Negative equity creates a series of headaches for borrowers. For starters, banks won’t approve refinancing for borrowers with negative equity so they can’t take advantage of record low interest rates when they need it most. Worse still, it ties borrowers to homes and locations that might not offer the best job prospects so it creates a vicious cycle of falling prices, more negative equity and reduced economic prospects. And to top it off, the worst price declines tend to occur where the job market is not terribly strong.
Although the decline in home prices mostly occurred between 2007 and 2009, more recently home prices have begun falling again. As of October, the S&P/Case-Shiller index of property values in 20 cities showed a decline of 3.4 per cent from the previous year.
What worries the Fed is that it has already used its main tool, interest rates, to try to stimulate the housing market, with little visible effect. Mortgage rates are at record lows, with a typical 30-year mortgage priced under 4 per cent. Yet that seems to have had little impact on boosting demand, which would help home prices.
It seems that the banks aren’t eager to lend. The Fed believes there may be a permanent shift under way in the availability of mortgage credit as banks introduce tighter lending restrictions. Americans who would like to refinance their mortgages or buy properties are finding they simply can’t get a loan.
Mortgage applications are at their lowest level in 12 years and the Fed forecasts that home-loan borrowing in 2012 will decline to its lowest level in 15 years.
If the Fed is correct, new lending standards will further burden the housing market as demand is held back while supply continues to flood the market.
The Fed acknowledges that it lacks a silver bullet to end the housing crisis but it has urged Congress to take three steps.
Since rental markets are strengthening, the Fed has asked Congress to reduce barriers to converting foreclosed properties to rental units.
Next, the Fed wants Congress to reduce obstacles blocking people from getting credit.
And finally, the Fed wants Congress to encourage banks to make loan modifications rather than pursuing foreclosures, which are costly and put more pressure on home prices.
The Fed’s recommendations should come as a welcome relief. They rely on rule changes rather than spending money.
So far, though, the response has been lukewarm at best. More than a few Republican members of Congress have told the Fed it has no business trying to affect the housing sector.
For the sake of the economy, let’s hope Bernanke doesn’t give up too easily.
Published January 21, 2012
Anna Bernasek, New York
US Federal Reserve chairman Ben Bernanke this month sent Congress a report on the housing market urging more policy action. Since then, a rising chorus of Fed officials has reinforced Bernanke’s message in speeches around the country.
Despite “green shoots” in some parts of the American economy, the Fed remains concerned about the effects of continued weakness in the housing sector. Just how big a problem is the housing market?
Housing prices have fallen on average about 33 per cent from the peak in 2006. The last time home prices fell anywhere near that much was during the 1930s. And by some measures at least, the current crash in housing prices is even worse than what happened in the Great Depression. According to the S&P/Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 per cent from 1929 to 1933.
As a result of the recent decline in prices, $US7 trillion in household wealth simply vanished, drastically reducing consumer spending. Today the value of all housing assets is about $US14 trillion. It was close to $US21 trillion at the peak.
Falling home prices have a big economic effect due to leverage. A significant fall can wipe out a home owner’s equity and eat away the value of the bank’s mortgage. Analysts estimate that a 10 per cent fall is the typical threshold for those pernicious effects. With home prices falling three times as much, the impact has been unprecedented.
Lots of people are desperate. The Fed estimates that 12 million borrowers owe more on their mortgages than their homes are worth. That represents about one in five mortgages in the US.
In Florida, Nevada and Arizona, where prices have fallen more than the national average, as many as half of all mortgage borrowers owe the banks more than their homes could be sold for.
It all adds up to a whopping $US700 billion in aggregate negative equity, according to the Fed. To put that another way, it would take a 5 per cent increase in prices just to absorb that shortfall, without any gains going to home owners.
About 3.4 million borrowers with negative equity, amounting to $US275 billion, are late or have stopped making mortgage payments. While the remaining 8.6 million or so are still paying, they might stop at any time. That’s a continuing risk for US banks.
Negative equity creates a series of headaches for borrowers. For starters, banks won’t approve refinancing for borrowers with negative equity so they can’t take advantage of record low interest rates when they need it most. Worse still, it ties borrowers to homes and locations that might not offer the best job prospects so it creates a vicious cycle of falling prices, more negative equity and reduced economic prospects. And to top it off, the worst price declines tend to occur where the job market is not terribly strong.
Although the decline in home prices mostly occurred between 2007 and 2009, more recently home prices have begun falling again. As of October, the S&P/Case-Shiller index of property values in 20 cities showed a decline of 3.4 per cent from the previous year.
What worries the Fed is that it has already used its main tool, interest rates, to try to stimulate the housing market, with little visible effect. Mortgage rates are at record lows, with a typical 30-year mortgage priced under 4 per cent. Yet that seems to have had little impact on boosting demand, which would help home prices.
It seems that the banks aren’t eager to lend. The Fed believes there may be a permanent shift under way in the availability of mortgage credit as banks introduce tighter lending restrictions. Americans who would like to refinance their mortgages or buy properties are finding they simply can’t get a loan.
Mortgage applications are at their lowest level in 12 years and the Fed forecasts that home-loan borrowing in 2012 will decline to its lowest level in 15 years.
If the Fed is correct, new lending standards will further burden the housing market as demand is held back while supply continues to flood the market.
The Fed acknowledges that it lacks a silver bullet to end the housing crisis but it has urged Congress to take three steps.
Since rental markets are strengthening, the Fed has asked Congress to reduce barriers to converting foreclosed properties to rental units.
Next, the Fed wants Congress to reduce obstacles blocking people from getting credit.
And finally, the Fed wants Congress to encourage banks to make loan modifications rather than pursuing foreclosures, which are costly and put more pressure on home prices.
The Fed’s recommendations should come as a welcome relief. They rely on rule changes rather than spending money.
So far, though, the response has been lukewarm at best. More than a few Republican members of Congress have told the Fed it has no business trying to affect the housing sector.
For the sake of the economy, let’s hope Bernanke doesn’t give up too easily.
Saturday, January 14, 2012
Drug profits are hard to swallow
The Financial Review
PUBLISHED: 14 Jan 2012
Anna Bernasek New York
On New Year’s Eve, John Capano, an off-duty federal agent, went to his local pharmacy in the middle-class suburb of Seaford, on Long Island, New York, to pick up some prescriptions for himself and his cancer-stricken father.
What seemed like a perfectly mundane Saturday afternoon errand ended his life. A gunman entered Charlie’s Family Pharmacy demanding painkillers and cash.
After the robber left, Capano tried to apprehend him and shot him in the leg before the pair became embroiled in a scuffle. A retired police lieutenant and an off-duty New York City police officer were next to arrive. In the confusion, Capano was shot dead and so was the robber.
A pharmacy robbery in broad daylight is not supposed to happen in the quiet suburbs of Long Island. Seaford is the kind of place to which people moved to get away from all that.
And while much of the public’s attention has focused on the tragedy of the mistaken shooting, the incident at Seaford highlights the disturbing country-wide increase in abuse of prescription drugs. That has fuelled a rise in crime – and bumper profits for pharmaceutical companies cashing in on the epidemic.
The number of deaths from prescription painkillers soared from about 4000 in 1999 to 15,000 in 2008, the Centres for Disease Control and Prevention report.
That’s still less than half the number of road fatalities in the United States in a typical year. But while road deaths have been declining, deaths from prescription drugs have been increasing at an alarming rate.
The Drug Abuse Warning Network says 86,000 emergency department visits in 2009 were associated with the non-medical use of hydrocodone, among the most abused of all the prescription painkillers. That compares with 19,000 visits in 2000.
Prescription drugs are second only to cannabis as the most abused class of drug in the US.
Perhaps most disturbing of all, as drug abuse in the US extends from illegal street drugs to prescription painkillers, pharmaceutical companies are only too eager to find new ways to meet this growing demand.
Four companies – Zogenix, Purdue Pharma, Cephalon and Egalet – say they are developing a potentially more potent form of hydrocodone that could be 10 times stronger than existing medicines. Zogenix plans to file an application for its product with the US Food and Drug Administration early this year.
Hydrocodone is used in combination with a non-addictive painkiller called acetaminophen. Hydrocodone is an opiate from the same family as morphine, heroin, oxycodone, codeine and methadone. These drugs are highly addictive and people taking them on a regular basis often need to step up the dose to provide the same effect.
If you don’t count the tragedy, that makes for a very effective business model.
Pharmaceutical companies argue that a pure form of hydrocodone will help control pain for people with liver problems, as acetaminophen can be toxic to the liver.
Some doctors are sceptical. They say there is little medical need for stronger painkillers and argue that the profession already has the tools at hand to manage pain effectively.
The market for prescription opiates is big business, and estimated to be $US10 billion a year in the US. The number of people who have taken hydrocodone for non-medical reasons is thought to be close to 25 million, a 2009 National Survey on Drug Use and Health found. That’s nearly 10 per cent of the population.
So far, the abuse of hydrocodone and oxycodone seems to be an American phenomenon. The International Narcotics Control Board reports that the US consumes 99 per cent of the world’s hydrocodone and 83 per cent of its oxycodone. The discrepancy may be the result of loopholes in US law.
As it now stands, patients get up to five automatic refills of hydrocodone compared with one for oxycodone.
Another factor is the growing supply and widespread availability of hydrocodone. The Drug Enforcement Administration (DEA) wrote in a recent report that every age group had been affected by easy access to hydrocodone and the perceived safety of those products by medical prescribers.
In the US, the DEA sets quotas for the amount of addictive painkillers pharmaceutical companies can make. So government agencies have approved the big increase in supply of recent years.
The increasing trend of prescription drug abuse results from many factors: a medical culture that promotes pills over other solutions, ineffectual laws, a ready supply of dangerous products – and big profits.
Washington puts the cost of drug trafficking and drug abuse at $US215 billion a year. The human costs are even higher.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York.
PUBLISHED: 14 Jan 2012
Anna Bernasek New York
On New Year’s Eve, John Capano, an off-duty federal agent, went to his local pharmacy in the middle-class suburb of Seaford, on Long Island, New York, to pick up some prescriptions for himself and his cancer-stricken father.
What seemed like a perfectly mundane Saturday afternoon errand ended his life. A gunman entered Charlie’s Family Pharmacy demanding painkillers and cash.
After the robber left, Capano tried to apprehend him and shot him in the leg before the pair became embroiled in a scuffle. A retired police lieutenant and an off-duty New York City police officer were next to arrive. In the confusion, Capano was shot dead and so was the robber.
A pharmacy robbery in broad daylight is not supposed to happen in the quiet suburbs of Long Island. Seaford is the kind of place to which people moved to get away from all that.
And while much of the public’s attention has focused on the tragedy of the mistaken shooting, the incident at Seaford highlights the disturbing country-wide increase in abuse of prescription drugs. That has fuelled a rise in crime – and bumper profits for pharmaceutical companies cashing in on the epidemic.
The number of deaths from prescription painkillers soared from about 4000 in 1999 to 15,000 in 2008, the Centres for Disease Control and Prevention report.
That’s still less than half the number of road fatalities in the United States in a typical year. But while road deaths have been declining, deaths from prescription drugs have been increasing at an alarming rate.
The Drug Abuse Warning Network says 86,000 emergency department visits in 2009 were associated with the non-medical use of hydrocodone, among the most abused of all the prescription painkillers. That compares with 19,000 visits in 2000.
Prescription drugs are second only to cannabis as the most abused class of drug in the US.
Perhaps most disturbing of all, as drug abuse in the US extends from illegal street drugs to prescription painkillers, pharmaceutical companies are only too eager to find new ways to meet this growing demand.
Four companies – Zogenix, Purdue Pharma, Cephalon and Egalet – say they are developing a potentially more potent form of hydrocodone that could be 10 times stronger than existing medicines. Zogenix plans to file an application for its product with the US Food and Drug Administration early this year.
Hydrocodone is used in combination with a non-addictive painkiller called acetaminophen. Hydrocodone is an opiate from the same family as morphine, heroin, oxycodone, codeine and methadone. These drugs are highly addictive and people taking them on a regular basis often need to step up the dose to provide the same effect.
If you don’t count the tragedy, that makes for a very effective business model.
Pharmaceutical companies argue that a pure form of hydrocodone will help control pain for people with liver problems, as acetaminophen can be toxic to the liver.
Some doctors are sceptical. They say there is little medical need for stronger painkillers and argue that the profession already has the tools at hand to manage pain effectively.
The market for prescription opiates is big business, and estimated to be $US10 billion a year in the US. The number of people who have taken hydrocodone for non-medical reasons is thought to be close to 25 million, a 2009 National Survey on Drug Use and Health found. That’s nearly 10 per cent of the population.
So far, the abuse of hydrocodone and oxycodone seems to be an American phenomenon. The International Narcotics Control Board reports that the US consumes 99 per cent of the world’s hydrocodone and 83 per cent of its oxycodone. The discrepancy may be the result of loopholes in US law.
As it now stands, patients get up to five automatic refills of hydrocodone compared with one for oxycodone.
Another factor is the growing supply and widespread availability of hydrocodone. The Drug Enforcement Administration (DEA) wrote in a recent report that every age group had been affected by easy access to hydrocodone and the perceived safety of those products by medical prescribers.
In the US, the DEA sets quotas for the amount of addictive painkillers pharmaceutical companies can make. So government agencies have approved the big increase in supply of recent years.
The increasing trend of prescription drug abuse results from many factors: a medical culture that promotes pills over other solutions, ineffectual laws, a ready supply of dangerous products – and big profits.
Washington puts the cost of drug trafficking and drug abuse at $US215 billion a year. The human costs are even higher.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York.
Saturday, January 7, 2012
When the world sneezes...
The Financial Review
PUBLISHED: January 7, 2012
Anna Bernasek New York
As street sweepers clean up after the revelry in Times Square, it’s time to think about what’s in store for America. An election campaign is under way, of course. But for the American economy a lot will depend on what happens elsewhere. Three major global trends are affecting the nation.
The carbon rush
Persistent high energy prices are driving the global frenzy to develop new carbon sources. In the US, there is a spectacular boom in oil and gas drilling as new technology – hydraulic fracturing, or “fracking” – opens up new resources.
Touching 38 out of the 50 states, a mining boom on this scale hasn’t occurred in generations. In the past year alone, the number of drilling rigs in the US rose by 313 to 2007, the highest level since the 1980s and four times greater than in the 1990s. Experts believe it is the start of a great new era in American oil and gas production.
James Hackett, chairman and CEO of one of the world’s largest oil and gas companies, Anadarko Petroleum, predicted late last year that North American oil production could double in the next 25 years.
Hackett has reason to be optimistic. In November, Anadarko announced what could turn out to be the single biggest oil and gas field discovered in the US. Based on preliminary findings, the company believes it has found between 500 million and 1.5 billion barrels of oil, natural gas liquids and natural gas in shale beneath the Wattenberg field in north-east Colorado. Only a few billion-barrel fields have ever been found in the US.
Like a good old-fashioned gold rush, the drilling boom is exciting investors and boosting local economies. In North Dakota, for instance, there’s no sign of the great recession. Unemployment is 3.5 per cent, compared with the national average of 8.6 per cent.
But there’s a dark side to the boom. Fracking threatens local water supplies, and growing oil supply undermines efforts to develop alternative energy sources and combat global warming.
And that may be more urgent than ever. According to the Global Carbon Project, emissions of carbon dioxide from fossil-fuel burning jumped almost 6 per cent in 2010. On a tonnage basis, that was the largest increase in carbon emissions ever recorded.
The debt wave
A wave of debt has washed over governments and consumers. With debt markets now global, one region’s problem affects everyone.
After the 2008 US financial crisis, debt problems now engulf Europe. Buoyed by cheap money, runaway property markets in China or elsewhere could be next to collapse.
In the US, consumers are still working off debt as the government struggles with record deficits. So far economic growth has been too slow to make a significant difference and, as the US muddles along, it remains vulnerable to what happens in Europe and China.
It seems Europe is all but certain to enter recession this year and growth in China is expected to slow as the housing boom cools.
In Europe, ill-conceived austerity measures could keep its economies mired in stagnation for years.
It’s much harder to assess the Chinese situation. Property price increases in China have been similar to those seen in Japan in the late 1980s and in the US in the late 1990s and early 2000s. In cities such as Shanghai and Beijing, house prices rose by more than 30 per cent a year.
In response, the Chinese government has introduced measures, including raising interest rates, to take some froth out of the market. Whether the housing bubble turns into a full-blown banking crisis or not, it adds to uncertainty and has the potential to create more volatility in global financial markets.
So while the US is digging itself out of its own debt crisis, the crisis in Europe and a potential crisis in China may only prolong America’s economic problems.
Social unrest
Scenes reminiscent of the Arab Spring are playing out around the world. Public protests have ignited in cities as diverse as Cairo and Oakland, California.
While there are different reasons why people around the world have taken to the streets – the latest Russian protests sparked by election fraud; the Occupy Wall Street protests focused on income inequality and a lack of economic opportunity – much of the unrest has something in common. Weak employment and stagnant wages fuel desire for systemic change.
Little serious effort has been made to address the concerns of protesters. Here and abroad a generation of young people is at risk of losing their chance at a middle-class life, suggesting we’re likely to see more unrest.
According to the International Labour Organisation, the change in the risk of social unrest in the past five years has been greatest in advanced countries, followed by the Middle East and then Africa.
In an open society such as the US, it’s possible for public demonstration to be channelled into constructive change. But social unrest is a dangerous and unpredictable force. And by the time a nation is faced with significant and prolonged social unrest, it’s a sure bet the government hasn’t done its job. Happy New Year!
PUBLISHED: January 7, 2012
Anna Bernasek New York
As street sweepers clean up after the revelry in Times Square, it’s time to think about what’s in store for America. An election campaign is under way, of course. But for the American economy a lot will depend on what happens elsewhere. Three major global trends are affecting the nation.
The carbon rush
Persistent high energy prices are driving the global frenzy to develop new carbon sources. In the US, there is a spectacular boom in oil and gas drilling as new technology – hydraulic fracturing, or “fracking” – opens up new resources.
Touching 38 out of the 50 states, a mining boom on this scale hasn’t occurred in generations. In the past year alone, the number of drilling rigs in the US rose by 313 to 2007, the highest level since the 1980s and four times greater than in the 1990s. Experts believe it is the start of a great new era in American oil and gas production.
James Hackett, chairman and CEO of one of the world’s largest oil and gas companies, Anadarko Petroleum, predicted late last year that North American oil production could double in the next 25 years.
Hackett has reason to be optimistic. In November, Anadarko announced what could turn out to be the single biggest oil and gas field discovered in the US. Based on preliminary findings, the company believes it has found between 500 million and 1.5 billion barrels of oil, natural gas liquids and natural gas in shale beneath the Wattenberg field in north-east Colorado. Only a few billion-barrel fields have ever been found in the US.
Like a good old-fashioned gold rush, the drilling boom is exciting investors and boosting local economies. In North Dakota, for instance, there’s no sign of the great recession. Unemployment is 3.5 per cent, compared with the national average of 8.6 per cent.
But there’s a dark side to the boom. Fracking threatens local water supplies, and growing oil supply undermines efforts to develop alternative energy sources and combat global warming.
And that may be more urgent than ever. According to the Global Carbon Project, emissions of carbon dioxide from fossil-fuel burning jumped almost 6 per cent in 2010. On a tonnage basis, that was the largest increase in carbon emissions ever recorded.
The debt wave
A wave of debt has washed over governments and consumers. With debt markets now global, one region’s problem affects everyone.
After the 2008 US financial crisis, debt problems now engulf Europe. Buoyed by cheap money, runaway property markets in China or elsewhere could be next to collapse.
In the US, consumers are still working off debt as the government struggles with record deficits. So far economic growth has been too slow to make a significant difference and, as the US muddles along, it remains vulnerable to what happens in Europe and China.
It seems Europe is all but certain to enter recession this year and growth in China is expected to slow as the housing boom cools.
In Europe, ill-conceived austerity measures could keep its economies mired in stagnation for years.
It’s much harder to assess the Chinese situation. Property price increases in China have been similar to those seen in Japan in the late 1980s and in the US in the late 1990s and early 2000s. In cities such as Shanghai and Beijing, house prices rose by more than 30 per cent a year.
In response, the Chinese government has introduced measures, including raising interest rates, to take some froth out of the market. Whether the housing bubble turns into a full-blown banking crisis or not, it adds to uncertainty and has the potential to create more volatility in global financial markets.
So while the US is digging itself out of its own debt crisis, the crisis in Europe and a potential crisis in China may only prolong America’s economic problems.
Social unrest
Scenes reminiscent of the Arab Spring are playing out around the world. Public protests have ignited in cities as diverse as Cairo and Oakland, California.
While there are different reasons why people around the world have taken to the streets – the latest Russian protests sparked by election fraud; the Occupy Wall Street protests focused on income inequality and a lack of economic opportunity – much of the unrest has something in common. Weak employment and stagnant wages fuel desire for systemic change.
Little serious effort has been made to address the concerns of protesters. Here and abroad a generation of young people is at risk of losing their chance at a middle-class life, suggesting we’re likely to see more unrest.
According to the International Labour Organisation, the change in the risk of social unrest in the past five years has been greatest in advanced countries, followed by the Middle East and then Africa.
In an open society such as the US, it’s possible for public demonstration to be channelled into constructive change. But social unrest is a dangerous and unpredictable force. And by the time a nation is faced with significant and prolonged social unrest, it’s a sure bet the government hasn’t done its job. Happy New Year!
Subscribe to:
Posts (Atom)
