Bernanke signals U.S. central bank will move to stave off a recession

Jan 11, 2008 04:30 AM

Michael Grynbaum
New York Times

Washington–U.S. Federal Reserve Board chair Ben Bernanke sent a strong signal yesterday that the central bank will lower interest rates again this month as it attempts to stave off a recession.

Bernanke said the downturn in the credit and housing markets posed substantial risks to economic health and predicted that consumer spending and overall growth would slow in 2008.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke said in a speech in Washington.

Calling monetary policy the "Fed's best tool" for regulating the economy, Bernanke said that "additional policy easing may well be necessary" to maintain growth levels as consumer spending and home values face a steep decline next year.

His remarks lifted the expectations of investors that Fed officials will lower the overnight lending rate by as much as half a point at their next policy meeting on Jan. 29 and 30. Stock markets rallied after the remarks were released, erasing morning losses but quickly falling back. The Standard & Poor's 500-stock index closed up 11.2 points, or 0.79 per cent, to 1,420.33 and the Dow Jones industrials showed an increase of 117.78 points to 12,853.09.

Investors typically cheer rate cuts, which grease the wheels of the economy by making it easier for banks and businesses to lend to consumers and one another. But Bernanke's starkly negative forecast for 2008 may have trumped investors' short-term hopes by raising the spectre of a long-term slowdown in spending.

Some analysts have expressed concern that rising core inflation would hinder the Fed's ability to lower rates, even amid the current financial turmoil. In his remarks, Bernanke acknowledged that the Fed was closely monitoring inflation levels and that a flare-up in prices would reduce its ability to stimulate growth through monetary policy.

But he appeared more focused on the coming risks to overall growth, and he said that the Fed would be "prepared to act in a decisive and timely manner" to maintain economic stability.

He cited high oil prices, plummeting home prices and the struggling stock market as factors that "seem likely to weigh on consumer spending as we move into 2008."

A lacklustre employment report in December, which showed the unemployment rate rising by 0.3 of a percentage point, also appeared to give the chair pause. He called the report disappointing and noted that the labour market had previously been a source of stability amid a difficult economic situation.

"It would be a mistake to read too much into any one report," Bernanke said. "However, should the labour market deteriorate, the risks to consumer spending would rise."

The Fed has tried to counter the credit crunch by starting a system of anonymous auctions, which allow banks to borrow money from the government without the stigma of appearing desperate for credit. Bernanke said the new program, known as the Term Auction Facility, has been successful and "may thus become a useful permanent addition to the Fed's toolbox," pending a public vetting.

Economist predicts $1.50 a litre for gasoline

Economist predicts $1.50 a litre for gasoline TheStar.com - Business - Economist predicts $1.50 a litre for gasoline

TARA WALTON/TORONTO STAR

Jeff Rubin, chief economist at CIBC World Markets, says oil can only go up.

CIBC's Jeff Rubin says crude will hit $150 U.S. a barrel within 4 years

January 11, 2008

Tyler Hamilton
Energy Reporter

Maverick economist Jeff Rubin, who is at the top of his game these days, says Canadians shouldn't be surprised to see gasoline at $1.50 a litre and oil at $150 (U.S.) a barrel within the next four years – possibly much sooner.

Oil depletion from existing fields is outpacing new supply, argues the chief economist of CIBC World Markets, and what supply the International Energy Agency and other tracking bodies are optimistically counting on involves complex and costly "mega-projects" that are likely to see major delays.

And this, according to a CIBC report released yesterday, doesn't even account for the unpredictable: escalating geopolitical tensions and extreme weather events.

"What we don't appreciate is that the oil-sands delays (we've seen) are not a unique story. It's happening in the very fields where the world is expecting to get its future supply," Rubin told the Toronto Star.

"Don't think of today's prices as a spike. Don't think of them as a temporary aberration. Think of them as the beginning of a new era."

The impact on the Canadian dollar will also be felt, he said. "Notwithstanding what's happening to the dollar now, if oil goes to $150 and the Canadian oil sands become the marginal barrel of oil (the dollar) is going up."

It wouldn't be Rubin's first break-from-the-pack forecast. For more than a decade the 53-year-old economist has sparked controversy by calling economic outcomes that most of his peers have dismissed as long shots.

He supports the peak oil theory and believes we've already passed the peak in conventional production. He sees carbon priced at $30 a tonne and a continental cap on emissions within three years. And he says if we're serious about fighting climate change, consumers should face higher energy prices to spark meaningful conservation.

Sometimes he nails it. He correctly predicted in 2000 that oil would average $50 by mid-decade and, two years ago, was right when he said oil would hit $100 by the end of 2007 (though Goldman Sachs made the prediction a year earlier).

Rubin also suggested back in 2005 the Canadian dollar was on its way to parity with the greenback, and last June predicted it would happen before year's end. It did.

"I think my calls have been pretty good," said Rubin, who first grabbed the spotlight in 1989 when he went against the grain and correctly predicted a collapse in the Toronto real estate market.

But sometimes his calls have fallen flat.

In 1992, Rubin forecast an economic recovery from the 1990-'91 recession and for several years nothing much happened. And in 1995 he called for more aggressive cuts to the federal deficit, only to backtrack a year later and blame the deficit payoff for sluggish economic growth.

More recently, he predicted the S&P/TSX composite index would hit 15,000 by the end of 2007, but reality came nowhere close. And now he is locked into a prediction it will reach 16,200 by the end of this year at a time when the economy is slowing.

He stands by it.

"The TSX call isn't looking good right now, but we'll see if that's a one-quarter head fake," he said, adding that merger and acquisition activity in the energy sector will carry his prediction.

David Detomasi, a professor of international business at Queen's School of Business, called Rubin's track record "pretty good" but calls his oil analysis a "bit of an exaggeration."

"We should get a moderation in the price, because we're getting a bit more of a build-up in the system," said Detomasi, pointing out that $60 a barrel is a more realistic long-term projection. Many economists, expecting oil demand to drop alongside a U.S. economic slowdown, also see the price falling. "I'm not saying prices will drop significantly, but they ought to drop," he said.

Though he admitted a lot could happen by 2012. "There are quite a few ifs, ands and buts between now and $150."

Sticking his neck way out

Hot

In 1989, amid a booming real-estate market, Rubin predicted the ensuing big tumble in prices.

In late 2000, he said the Canadian dollar would fall to about 61 cents (U.S.) over the next year or so; the loonie bottomed at 61.79 cents in January 2002.

Two years ago, he predicted $100 per barrel oil by the end of 2007. It topped $99 last November and then hit $100 last week.

Not so hot

In May 2000, he said the Canadian dollar was on a "path to extinction" and later predicted the Canadian economy could be (U.S.) "dollarized."

In late 2002, he predicted $18 to $20 oil for 2003. Oil prices stayed around or above $30.

In April 2004, he predicted the Canadian dollar would retreat to 72 or 73 cents (U.S.) by year-end. It ended the year at 83 cents.

---

The path to $150 oil

Economist Jeff Rubin offers some of the particulars behind his oil-price prediction:

Supply delay: Delays and cost overruns on complex "mega-projects" in Kazakhstan, Venezuela, Nigeria and Canada will delay new oil production. This will result in 5 million barrels a day less oil than the International Energy Agency is expecting between 2008 and 2012.

Other deep-water and oil-sands projects, which account for virtually all increases in global oil production, are facing technical and financial challenges. Production timelines between now and 2012 are "far too optimistic," based on an analysis of nearly 200 new projects.

Supply depletion: Accelerating "cliff-like" depletion at existing oil fields will add to the problem. Conventional oil production has apparently peaked at 2005 levels of 67 million barrels a day. This rapid depletion, combined with delays in new projects, will mean supply will only increase by 3 million barrels a day by 2012, well below the IEA's "10 million barrel" projection.

Skyrocketing demand: Oil consumption is soaring in places like China, India and Russia. More importantly, it's soaring in the world's largest oil-producing countries themselves. These countries will take what they need and then export the rest, where developed countries must compete on the market against China and India for the leftovers. Chinese and Indian consumers, many having never owned a car before, are more likely to tolerate higher prices than OECD countries such as Canada and the United States.

The final analysis: $150 oil within four years and skyrocketing pump prices. "I think it's going to mean people are going to travel less, and use their cars less," Rubin says. "Transport costs are going to be more and more important in defining trade patterns."

Merrill and Citi scramble for offshore help

Jan 11, 2008 04:30 AM Joe Bel Bruno
Associated press

NEW YORK–Two of the biggest names on Wall Street are scrambling again to secure major cash infusions from foreign governments to offset billions of dollars in losses from risky subprime mortgage securities, analysts said yesterday.

Citigroup Inc. and Merrill Lynch & Co., the top U.S. bank and largest brokerage house, are facing potentially $25 billion (U.S.) worth of losses when they report earnings results next week.

Both companies – led by new CEOs eager to make their mark – are expected to turn overseas for another injection of capital.

Wall Street's biggest banks and brokerages have been lining up investments from foreign governments to cushion against losses from bad investments in subprime mortgages, which are made to people with less-than-stellar credit, or in securities backed by subprime mortgages.

Sovereign wealth funds, which are investment pools backed by governments, already have invested about $27 billion in Merrill, Citi, Switzerland's UBS AG and Morgan Stanley.

The fact Merrill and Citi are going back for seconds indicates the credit crisis might be taking a bigger toll on Wall Street than initially expected.

"The bottom line is that their losses are much more sizable than first thought, and they need capital to shore up their balance sheet," said Richard Bove, an analyst with Punk Ziegel & Co. "It's why they're out there looking for more.''

Spokespeople for Citi and Merrill did not immediately return calls seeking comment.

The search for more foreign cash infusions by Citigroup and Merrill was disclosed yesterday by The Wall Street Journal.

This time, Citi is said to be looking for about $10 billion worth of capital, the Journal said. Abu Dhabi's state-run investment fund in November agreed to buy a 4.9 per cent stake in the bank for $7.5 billion.

Merrill Lynch is looking to arrange up to $4 billion of new capital, most likely from a Middle Eastern government, the Journal said. The brokerage previously secured a $4.4 billion investment from Singapore's state-run Temasek Holdings.

"Writedowns and losses will continue to mount," Goldman Sachs analyst William Tanona said in a research report, adding that getting more money from sovereign funds will be "capital raising for some, preservation for others."

Citi's board was expected to meet on Monday to discuss cutting the bank's dividend in half. Though the bank has denied speculation about cutting the dividend, analysts said it could save about $5 billion.

Layoffs at both Citi and Merrill also have been bandied about Wall Street during the past few weeks.

Staff reductions, along with the sale of non-core assets, are among ways analysts believe Citi CEO Vikram Pandit and Merrill CEO John Thain can shore up balance sheets.

Both institutions have said they expect big writedowns, but analysts now think the losses might be bigger than originally anticipated. Citigroup, right before ousting CEO Charles Prince, projected an $11 billion writedown – though some say it could be as high as $20 billion.

Merrill Lynch did not make any predictions about how much it might write off during the fourth quarter, though analysts project it could be up to $11.5 billion. Stan O'Neal, the former CEO, was ousted shortly after the company took an $8.4 billion writedown.

Global banks have booked almost $110 billion of writedowns since last year because of bad bets on subprime mortgage securities, and the ensuing credit crisis.

The additional foreign investment could provoke more scrutiny in Washington, depending on its size. Generally, passive ownership stakes that don't include board seats or other levers of control and that are below 10 per cent don't require approval by a federal government panel that reviews foreign investment for security concerns.

Christopher Dodd, the Democratic U.S. senator from Connecticut and chair of the Senate banking committee, said yesterday he supports foreign investments in the U.S. "so long as they do not compromise our national security or pose a threat to our economic stability."

The committee may hold hearings on the subject later this year, a Senate aide said. The aide spoke on condition of anonymity because she wasn't authorized to speak on the record on the subject.

Dodd's committee spearheaded legislation last year that strengthened the foreign investment review process. The action came after several high-profile deals, including a planned investment in U.S. port operations by a Dubai government-owned company, sparked major controversy.

Shares of Merrill Lynch rose $1.55, or 3.07 per cent, to $52.03, while Citi added 62 cents to close at $28.11 on the New York Stock Exchange yesterday.