Finance news

Federal Reserve Bank of San Francisco President Janet Yellen said the prospect that policy makers will leave the benchmark U.S. interest rate near zero for the next several years is “not outside the realm of possibility.”

“We have a very serious recession, we have a 9.4 percent unemployment rate,” and inflation possibly falling further below the Fed’s preferred level, she told reporters yesterday after a speech in San Francisco. Given the recession’s severity, “we should want to do more. If we were not at zero, we would be lowering the funds rate.”

Yellen’s comments go beyond those made by other policy makers after a June 23-24 meeting, when they said the federal funds rate will likely stay at “exceptionally low levels” for “an extended period.” They have held the rate, also known as the overnight lending rate between banks, at between zero and 0.25 percent since December.

The Fed “did succeed in averting a full-blown meltdown,” Yellen said in the speech to the Commonwealth Club of California. Nevertheless, the threat of another financial shock, such as one from falling commercial real-estate prices, is “high on my worry list.”

Yellen said the U.S. economy may be about to “turn the corner” and reiterated her expectation that the recession will end later this year.

“Right now, we’re like a patient in intensive care whose condition has stabilized and whose fever is just starting to come down,” Yellen said in the speech. “We’re just completing the sixth quarter of recession, but the pace of decline has slowed markedly” and “confidence in the financial system is slowly returning.”

Hundred-Year Flood

The 62-year-old bank chief, who votes on monetary policy this year, compared the financial crisis to “a hundred-year flood: a disaster of the highest order which has put us on continuous emergency footing.”

“I expect that we will turn the growth corner sometime later this year, but I am not optimistic that the economy will spring back to normal anytime soon,” she said. Unemployment will “remain painfully high for several more years.”

The world’s largest economy has lost 6 million jobs since December 2007, the start of the deepest recession in 50 years.

Under Chairman Ben S. Bernanke, the central bank has doubled its balance sheet and created unprecedented emergency programs to unclog credit markets.

Recent Data

While recent data indicate a smaller pace of decline in some areas of the economy, such as housing and new construction, joblessness is climbing and the increasing cost of residential loans is impeding new lending cheap payday loans. The unemployment rate reached 9.4 percent in May and new mortgage lending is at a 13-year low.

Rising mortgage rates may “place a drag on a still very sick housing market,” while increasing oil prices may hurt the recovery, Yellen said in her speech. Still, the fiscal stimulus and a rebound in consumer demand and housing construction will probably prompt a revival in economic growth, she said.

“We’ve seen encouraging signs lately that the economy is poised to turn the corner,” the bank president said. “Our major banks have made excellent progress in establishing the capital buffers needed to continue lending even through a downturn that is more serious than we anticipate. But they are still nursing their wounds and credit will remain tight for some time to come.”

Predominant Risk

As for inflation, the “predominant risk” is that it will “be too low, not too high, over the next several years,” Yellen said. Inflation excluding food and energy may fall to about 1 percent over the next year and remain below 2 percent, with an unlikely possibility of turning into deflation if the economy fails to recover soon, she said.

Another Fed district bank president, Charles Evans of Chicago, told reporters in London today that he also sees inflation falling “a bit from where we are now.”

The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007, has led to $1.47 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.

The Fed “won’t hesitate” to withdraw the record stimulus it has put in place, when necessary, Yellen said. “If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery.”

Responding to audience questions after her speech, Yellen said China’s concern about the value of the dollar “is logical” given the country’s holdings in Treasuries.

China’s call for the creation of a reserve currency other than the dollar is “not practical at the current time,” and more of a “long-term” idea, she said.

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U.K. consumer confidence increased to the highest level in 14 months in June as shoppers became more optimistic that the recession is past its worst, GfK NOP said.

An index of sentiment rose 2 points to minus 25, the strongest result since April 2008, the market researcher said in an e-mailed statement today in London. The gauge of confidence about the economic outlook for the next year climbed 8 points to minus 8.

Unemployment claims rose less than economists forecast in May, and business surveys have indicated that the economic slump is starting to abate. Bank of England officials say that the credit squeeze threatens to delay a recovery and data yesterday showed net mortgage lending rose at the slowest pace since records began in 1993.

“Confidence still remains fragile as uncertainty about the strength of any recovery and an increase in unemployment all mean that consumers remain wary,” Rachael Joy, an analyst at GfK, said in the statement.

Four out of five indexes used to compile the confidence report rose on the month, including measures reviewing and predicting personal finances and the general economic situation. The only decline was on the gauge showing the climate for major purchases, which fell four points to minus 26 cheapest personal loan rates. GfK questioned 2001 people from June 12 to June 21.

Unemployment Claims

Claims for jobless benefits rose in May by 39,300, a third less than economists forecast, the smallest increase since July last year. The broader unemployment measure using International Labor Organization standards increased to the highest since November 1996 in the three months through April.

The Bank of England kept the key interest rate at a record low of 0.5 percent this month and reiterated its program to stoke economic growth by buying 125 billion pounds ($207 billion) of bonds with newly created money. Deputy Governor Charles Bean told lawmakers that the worst of the economic contraction may be past and consumer spending has been “more resilient than one might have expected.”

At the same time, Governor Mervyn King said he feels “more uncertain now than ever” on the strength of the economic recovery as officials work to resolve problems in the banking system. He affirmed forecasts that the economy won’t return to growth on an annual basis until the second half of 2010.

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South African credit probably rose at the slowest pace in more than four years in May as banks tightened lending conditions and consumers curbed spending, a survey showed.

Growth in borrowing by households and companies eased to an annual 8.1 percent from 8.7 percent the month before, according to the median estimate of 13 economists surveyed by Bloomberg. The Reserve Bank will publish the data at 8 a.m. tomorrow.

Banks, including Standard Bank Group Ltd., Africa’s biggest lender, and Absa Group Ltd., the country’s largest retail bank, are granting fewer loans as consumers default on payments. Manufacturers and miners have also scaled back investment after the global economic recession curbed export demand.

“Banks remain strict in their lending criteria as they wait for non-performing loans to peak,” Gina Schoeman, an economist at Macquarie First South Securities in Johannesburg, said in a note to clients. “Until this loosens up, credit growth will remain in single digits.”

The Reserve Bank has cut its benchmark interest rate by 4.5 percentage points to 7.5 percent since December to spur consumer spending and pull the economy out of its first recession in 17 years. The bank left the repurchase rate unchanged on June 25, concerned that rising energy costs will keep inflation above the 3 percent to 6 percent target range.

The second-quarter consumer confidence survey, published by First National Bank and the Bureau for Economic Research tomorrow, will give further indication of consumer spending comprehensive car insurence. Vehicle sales, which plunged 34.7 percent in May from a year ago, will be published by an industry body on July 2.

Trade Deficit

South Africa’s trade deficit probably widened to 2 billion rand ($252 million) in May from 1.5 billion rand in the previous month, according to the median estimate of nine economists surveyed by Bloomberg. The South African Revenue Services is scheduled to publish the data at 2 p.m. tomorrow.

Kagsio Securities will release the June Purchasing Managers Index on July 1. The index gained for the first time in four months in May to 37.3.

In corporate news, Naspers Ltd., Africa’s largest media company, will report annual income tomorrow. The company said on June 18 that per-share earnings, excluding one-time items and goodwill amortization, climbed as much as 10 percent.

The FTSE/JSE Africa All Share index fell for a third week, dropping 0.4 percent to 22,308.28. Lonmin Plc, the world’s third-biggest platinum producer, fell 7.6 percent, the biggest decline of the top 40 companies on the stock exchange. ArcelorMittal South Africa Ltd., Africa’s biggest steelmaker, declined 6.8 percent.

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Stocks rallied Thursday, finding momentum after a week of choppy trading, as investors scooped up a variety of shares hit in the recent selloff — including commodity, consumer, homebuilding and tech issues.

The Dow Jones industrial average (INDU) gained 172 points, or 2.1%. The Dow rose as much as 190 points earlier in the afternoon.

The S&P 500 (SPX) index gained 19 points, or 2.1%, and the Nasdaq (COMP) added 37 points, or 2.1%.

Stocks have dipped over the last week as the more than 3-month old rally lost steam. But that selloff seemed to draw new buyers Thursday, thanks in part to strong demand for Treasury’s $27 billion 7-year note auction, which sent bond yields lower. A rally in commodities and some end-of-quarter buying also helped.

"Having been down for over a week and giving back more than 5% of the move, with the end of the quarter approaching, people are stepping in," said Ted Weisberg, NYSE floor trader at Seaport Securities.

Stocks were mixed Wednesday after the Federal Reserve kept short-term rates near zero and said the pace of the recession is slowing, but didn’t say much else.

In particular, investors may have been looking for the central bank to announce an expansion of a program meant to keep spiking bond yields in check. Worries that rising bond yields — tied to mortgage rates — could derail a recovery has put some caution into the stock market after a 3-month rally that lifted the S&P 500 index 40% off of 12-year lows.

May personal income and spending reports are due in the morning from the Commerce Department, before the start of trading. The revised reading on consumer sentiment from the University of Michigan is also due, but it’s not usually a market mover.

Ben Bernanke: The Federal Reserve Chairman told a House committee that he did not pressure Bank of America (BAC, Fortune 500) CEO Ken Lewis to complete his firm’s purchase of Merrill Lynch, as Lewis testified two weeks ago. Bernanke also denied having asked former Treasury Secretary Henry Paulson to act on his behalf.

Company news: Gains were broad based Thursday, with 29 out of 30 Dow issues rising, led by IBM (IBM, Fortune 500), Boeing (BA, Fortune 500), United Technologies (UTX, Fortune 500) and oil components Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500).

Dow component Bank of America (BAC, Fortune 500) was unchanged as the hearing about its purchase of Merrill Lynch created some investor concern payday loan lenders.

Bed Bath & Beyond (BBBY, Fortune 500) reported higher quarterly earnings late Wednesday that topped expectations, as cost cutting countered the impact of slowing demand. Shares gained 9.5% in active Nasdaq trading Thursday.

A number of other retailers rose too, including Home Depot (HD, Fortune 500) and Lowe’s (LOW, Fortune 500).

Homebuilder Lennar (LEN) reported a larger-than-expected quarterly loss versus a year ago and a smaller-than-expected drop in revenue. However, the company reported a rise in new home sales and orders versus the first quarter, sending its shares up 17.5%.

Toll Brothers (TOL), Centex (CTX, Fortune 500) and KB Home (KBH) were among the other gainers in the sector.

Market breadth was positive. On the New York Stock Exchange, winners topped losers by four to one on volume of 1.23 billion shares. On the Nasdaq, advancers topped decliners four to one on volume of 2.27 billion shares.

Economy: The number of Americans filing new claims for unemployment rose 15,000 to 627,000 last week, surprising economists who thought claims would fall to 600,000.

Continuing claims, a measure of Americans receiving benefits for a week or more, rose to 6,738,000, after dropping in the previous week.

Another government report showed the first-quarter gross domestic product growth shrank at a slower pace than initially thought. GDP shrank at an annual rate of 5.5% versus the initially reported 5.7% decline. Economists expected no change.

Bonds: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.54% from 3.68%. Treasury prices and yields move in opposite directions.

Other markets: In global trade, Asian markets ended higher and European markets ended lower.

U.S. light crude oil for August delivery rose $1.56 to settle at $70.23 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery rose $5.10 to settle at $939.50 an ounce.

In currency trading, the dollar gained versus the euro and fell against the yen.

Have you exhausted your unemployment benefits? We want to hear about your experiences. E-mail your story to realstories@cnnmoney.com and you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here. 

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Consumer spending probably rose in May for the first time in three months as Americans gained confidence the recession was easing, economists said ahead of reports today.

Purchases increased 0.3 percent after falling 0.1 percent in April, according to the median forecast of 76 economists surveyed by Bloomberg News. Other figures may show a gauge of consumer sentiment rose in June for the fourth straight month.

Government efforts to restore the flow of credit and prop up incomes are making it possible for consumers to spend even as unemployment climbs to levels last seen in the 1980s. The loss of wealth caused by the worst housing slump in seven decades will prompt households to keep rebuilding savings, indicating an economic recovery will be slow to develop.

“People are feeling a little more comfortable trying to resume a normal life and are starting to gradually increase spending,” said John Herrmann, president of Herrmann Forecasting in Summit, New Jersey. “The second-half outlook is definitely better. We’re beginning to pull out of the recession.”

The Commerce Department’s spending report is due at 8:30 a.m. in Washington. Economists’ estimates in the Bloomberg survey ranged from no change to a 0.6 percent increase.

The report is also projected to show incomes rose 0.3 percent in May, the second straight gain. The increase is likely to be much larger after accounting for one-time social security payments linked to the government’s stimulus plan, said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who forecast a 1.5 percent jump in incomes for last month.

Sentiment Improves

At 10 a.m., Reuters/University of Michigan figures may show the index of consumer sentiment rose to 69, the highest level in nine months, from 68.7 in May, according to the Bloomberg survey median. Estimates ranged from 67 to 70. The reading would match preliminary figures issued earlier this month.

The Standard & Poor’s retailer supercomposite stock index has gained 42 percent since March 9 on growing optimism the worst of the spending slump is over payday loan.

Consumer spending, which accounts for about 70 percent of the economy, rose in the first quarter at a 1.4 percent rate after falling in the last half of 2008 by the most since 1980, according to revised figures from Commerce yesterday. The economy shrank at a 5.5 percent annual rate from January to March, the revisions also showed.

“Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth and tight credit,” Fed officials said in a statement this week. “The pace of economic contraction is slowing.”

Projected Drop

Purchases may drop at a 0.6 percent annual rate this quarter before growing again in the second half of the year, according to economists surveyed by Bloomberg this month.

Job losses are one reason for the projected decline. The unemployment rate, which reached a 25-year high of 9.4 percent last month, probably rose to 9.6 percent in June, economists predicted ahead of the government’s monthly jobs report due next week. The rate may climb to 10 percent by year-end, according to the survey.

Still companies like Hertz Global Holdings Inc. are among those seeing an improvement. The second-largest U.S. rental-car company yesterday forecast it will return to profit in the second quarter, after declines in business and consumer travel triggered two consecutive quarters of losses.

“Our car rental demand in the U.S. and Europe has stabilized,” Chairman and Chief Executive Officer Mark Frissora said in a statement. Summer peak reservations are “better-than- anticipated.”

Other retailers report Americans aren’t splurging. Kroger Co., the U.S. grocery chain that also operates Ralphs and Food 4 Less stores, said lower-priced store brands drew customers, helping lift first-quarter profit by 13 percent.

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Convicted Ponzi scammer Bernard Madoff will probably spend the rest of his life in jail.

On June 29, Judge Denny Chin of the U.S. District Court in New York sentences the 71-year-old. The maximum sentence is 150 years in a federal prison, based on Madoff’s guilty plea to 11 criminal counts, including fraud, money laundering, perjury, false filing with the Securities and Exchange Commission, and other crimes.

Madoff’s lawyer, Ira Lee Sorkin, has requested a 12-year sentence, based on his calculations that Madoff has "an approximate life expectancy of 13 years."

Sorkin, in a letter to Chin released Tuesday, asked the judge to consider a sentence "short of effective life imprisonment" based on the "non-violent nature" of Madoff’s crimes, his "voluntary surrender" and "full acceptance of responsibility."

But legal experts expressed doubts that Madoff would receive a sentence short enough for him to outlive his time in the slammer.

"[The Ponzi scheme’s] effect on society was widespread," said Ken Rubinstein, asset protection lawyer with the New York firm Rubinstein & Rubinstein. "Its effect on individual victims was economically and psychologically catastrophic. I can’t see how any judge would sentence him for any period that would be less than his remaining lifespan."

Victims of Madoff’s scheme have appealed to Judge Chin for a sentence that would insure Madoff stands no chance of getting out. Leonard Forrest of Port St. Lucie, Fla., wrote to the judge that Madoff "deserves at best to spend the rest of his life in prison just as we will spend the rest of our lives in financial ruin and emotional and physical devastation."

Given the severity of Madoff’s crimes, legal experts believe his victims will probably get their wish. Thus far, federal investigators have identified 1,341 investors in Madoff’s firm, with losses exceeding $13 billion, and they’re not done tallying up the damage.

Generally, pending sentences carry a minimum-to-maximum range. But in Madoff’s case, the list of legal offenses is so severe that there is no mandatory minimum sentence listed in legal documents filed by the Justice Department.

In its sentencing guidelines, Justice explained how Madoff accumulated "offense levels" based on the severity of his crimes, taking into account the number of his victims, the amount of money that was stolen, the extensive and international nature of his crimes, and other factors affordable ohio health insurance.

"The [prosecutors’] goal here is to make sure that Bernard Madoff never sees the light of day," said William Sullivan, a former federal prosecutor and a partner at Winston & Strawn in Washington, specializing in white collar crime. "This man will do life in prison."

Through his crimes, Madoff tallied up an "offense level" of 54, far exceeding the requirements for a life sentence.

"The life sentence begins at [the offense level of] 43," said Sullivan. "But Bernie found a way to go literally off the charts."

This doesn’t leave any room to argue for a shorter sentence that could conceivably set him free later in life, Sullivan said.

Madoff has been locked up in the Metropolitan Correctional Center in Manhattan since March 12, when he pleaded guilty to masterminding the largest Ponzi scheme of all time. He orchestrated the scheme through his firm, Bernard L. Madoff, which he founded in 1960.

A Ponzi scheme uses fresh investments from unsuspecting investors to make payments to more mature investors, to create the false appearance of legitimate returns. In reality, Madoff admitted in court that he did not invest the money and did not buy securities for 13 years. Prosecutors believe that Madoff’s scheme started earlier than that, originating "at least as early as the 1980s," according to federal documents.

On June 17, according to CNN sources, Madoff met for three hours with the top watchdog of the SEC, an agency that has come under intense criticism for not detecting his scheme earlier. This led to some speculation that Madoff was trying to make a deal in exchange for information — perhaps for a shorter sentence.

Madoff’s lawyer Sorkin declined to comment on the meeting, and would not confirm that it had occurred.

Ken Springer, former special agent of the FBI, certified fraud examiner and president and founder of Corporate Resolutions Inc., an investigations and consultant firm, said that Madoff won’t be able to shorten his sentence, based on the severity of his crime.

"I don’t think he’s going to get out of jail," said Springer. "But is he trying to deflect something from his family? It may be just simply to protect the apartment [owned by his wife Ruth.] But it’s a little late to go to confession." 

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The U.S. government’s Aaa credit rating “remains solid,” said Pierre Cailleteau, managing director of sovereign risk at Moody’s Investors Service.

“Although the U.S. is losing altitude in the Aaa range, it is starting from a very strong base,” Cailleteau, who is chief international economist at Moody’s, said in Tokyo today. The economy is resilient enough to recover and the government is committed to raising taxes and cutting spending, he said.

The Congressional Budget Office projects the federal budget shortfall will reach a record $1.85 trillion this year as President Barack Obama tries to spend his way out of the worst recession in at least five decades. Obama has committed to reining in the budget deficit once a recovery is under way.

New York-based Moody’s last month affirmed the top credit rating for the U.S., saying it’s supported by “a diverse and resilient economy, strong government institutions, high per- capita income, and a central position in the global economy cheap cash advance.”

Cailleteau said the dollar’s status as the world’s reserve currency won’t change soon. The U.S. economy has shrunk less than others including Germany and France even though it was at the center of the global financial crisis, the economist said.

The U.K. is also well placed to manage its debt, Cailleteau said. Standard & Poor’s lowered the U.K.’s rating outlook to “negative” from “stable” in May.

Cailleteau said it may take a decade for governments around the world to repair their finances after increasing spending to prop up their economies amid the global recession. Japan’s economic rebound is likely to be sluggish, he said.

Thomas J. Byrne, senior vice president of Moody’s, said at the same gathering that Japan’s Aa2 credit rating is consistent with the midterm outlook for the government’s finances.

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Congress will take a second shot at the derivatives industry after its decision nine years ago to forgo regulations led to a $592 trillion market that brought financial firms to their knees.

Using President Barack Obama’s regulatory overhaul proposal last week as a foundation, Senate Banking Committee Chairman Christopher Dodd is holding a hearing today on how to rein in a market that grew almost seven-fold since 2000 and complicated government efforts to assess the risk of banks’ interconnected trading when credit markets froze two years ago.

Lawmakers will field ideas from those who want to move all derivatives trades to monitored exchanges as well as from regulators seeking authority over dealers and an analyst who says some contracts should be banned. Members, who exempted private derivatives from oversight in 2000, are targeting the financial instruments after American International Group Inc. needed a $182.5 billion U.S. bailout because of credit-default swap trades on mortgage-linked securities.

“One of the key underlying problems in the whole lead-up to the meltdown was too much leverage, too little capital or too little collateral,” Mark Halverson, a staff director for Senate Agriculture Committee Chairman Tom Harkin, said in an interview.

Harkin, an Iowa Democrat, is pushing his own legislation that would require all over-the-counter derivatives trades be cleared through a regulated exchange. Such an arrangement would subject the contracts to margin and collateral requirements. Harkin, who endorsed Obama’s proposal to move some trades to an exchange and regulate all dealers, still plans to press forward.

Key Player

“I was pleased that the proposal begins to get a handle on the freewheeling derivatives markets that many economists name as a key player in causing the recent economic downturn,” Harkin said in a June 17 statement.

The economy’s longest recession since the 1930s was triggered when credit markets froze in August 2007 after banks such as Lehman Brothers Holdings Inc. found they couldn’t determine the value of trades linked to mortgage bonds.

Trading in credit-default swaps should be banned, Christopher Whalen, managing director of Institutional Risk Analytics in Hawthorne, California, said in prepared testimony for today’s Senate hearing. Regulators are too cozy with the banks in the market to be counted on to make changes, he said.

“The views of the existing financial regulatory agencies, and particularly the Federal Reserve Board and Treasury, should get no consideration from the committee since the view of these agencies are largely duplicative of the views of JPMorgan Chase & Co. and the large OTC dealers,” he said in the remarks.

Hedge Funds

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. Credit- default swaps were created initially as a way for banks to hedge their risk from loans. They became a popular vehicle for hedge funds, insurance companies and other asset managers to speculate on the quality of debt or on the creditworthiness of companies because they were often easier and cheaper to trade than bonds.

Citadel Investment Group LLC Chief Executive Officer Kenneth Griffin, whose $11 billion hedge fund may be forced to hold capital to back its trades linked to interest-rate swaps and credit-default swaps under the proposed regulations, is also scheduled to testify today free business cards. Griffin, 40, wasn’t available to comment before the hearing.

Obama’s proposal would require standardized over-the- counter derivatives contracts to be guaranteed by clearinghouses. The administration also set as a goal that standardized contracts be “executed on exchanges and other transparent trading venues.”

Other over-the-counter derivatives transactions would have to be registered in trade repositories so regulators would be aware of the activity. All trades in the market would face increased capital requirements.

Dodd’s Support

The Obama plan doesn’t say how much of the over-the-counter market would be moved through clearinghouses, only that if any contract had been accepted by a clearinghouse, it would be required to be cleared. Nor does the plan spell out what would define a standardized contract.

Dodd “expects that efforts will be made to expand on the president’s proposal during the committee’s work,” said Kirstin Brost, a spokeswoman for the committee.

It’s a second chance for Congress, whose 2000 exemption helped the market swell to $684 trillion by June 30, 2008, from about $100 trillion in 2000, according to Bank for International Settlements data. Credit-default swaps outstanding ballooned almost 100-fold within seven years to top $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.

Source of Contagion

The Obama administration said in its regulatory proposal that derivatives “became a major source of contagion through the financial sector during the crisis,” instead of dispersing risk as intended.

Banks such as JPMorgan are already subject to capital requirements through their federal regulator. Unregulated hedge funds, energy companies and other corporations “whose activities in those markets create large exposures to counterparties” could also be required under Obama’s plan to set aside cash and collateral to back trades.

“Any of the world’s largest hedge funds would be viewed as systemically important, and I’d forecast the Fed would include them among the financial players they’d keep an eye on under these new regulations,” said Darrell Duffie, a finance professor at Stanford University’s Graduate School of Business in California.

Thick, Resilient Enough

JPMorgan is the largest user of over-the-counter derivatives, with $87.4 trillion in notional value last year, more than the next two largest, Bank of America Corp. and Citigroup Inc., combined, according to the Office for the Comptroller of the Currency.

Treasury Secretary Timothy Geithner, speaking to reporters last week, cited AIG as an example of a large derivatives dealer that sold credit-default swaps and didn’t have enough capital to make good on its positions when the contracts moved against the company.

“The important thing to do is to make sure there’s enough capital against the commitments firms write, whatever form they take,” Geithner said. “A centerpiece of our reform proposal is to make sure those shock absorbers, which are central, vital to the basic stability of the system in the future, are thick enough, strong enough, resilient enough.”

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Chancellor of the Exchequer Alistair Darling, signaling a clash with Prime Minister Gordon Brown over spending, said the U.K. government must make tough decisions to curb the budget deficit.

“We must live within our means,” Darling told bankers at the annual Mansion House dinner in London last night. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

Darling’s call came as Brown emphasized the need to lift spending and protect state-funded schools and hospitals. With an election due in the next year, the prime minister sees government support for the economy as a dividing line with the Conservative opposition, which says he can’t afford it.

Britain expects the biggest budget shortfall in the Group of Seven nations as the worst recession since World War II curbs tax receipts, forcing the Treasury to raise a record 220 billion pounds ($330 billion) from investors. Darling’s comment is aimed at appeasing Standard & Poor’s, which has threatened to scrap Britain’s top-notch credit rating without clear action on debt.

“The economics is giving the message that the deficit needs to come down, but the politics suggest they won’t be doing it,” said Philip Shaw, chief economist at Investec Securities in London. “The fiscal profile is unsustainably high despite the fact that there is a plan to bring it down.”

Dividing Lines

Brown and his Cabinet ally Ed Balls, the education secretary, are pushing for higher spending as the centerpiece of the election campaign. Brown told the GMB union earlier this week that the ruling Labour Party had to “fight as we’ve never fought before” for well-funded public services.

In Parliament yesterday, Brown said “capital expenditure will grow until the year of the Olympics” in 2012, appearing to overrule the Treasury’s budget plan. Darling in April estimated investment on capital projects including new hospitals and railroads will decline to 26 billion pounds in 2012 from 44 billion pounds in the current fiscal year.

“His statement to Parliament that capital spending will grow until 2012 is just plain dishonest,” said George Osborne, a Conservative lawmaker who speaks on finance. “The truth is that real spending will have to be cut whoever is elected.”

Further signs of a different emphasis have also come from Balls who this week told BBC Radio Five Live spending on health and schools will rise “in real terms” after 2011. Darling said he wouldn’t “set in stone detailed spending plans for individual departments five years ahead.”

Taxes for the Rich

Darling also suggested that businesses and the rich may have to pay more tax, saying that “those most able to bear the burden” will “make the greatest contribution” to stabilizing the public finances paydayloans.

He said he was “fully aware” of the need to keep tax rates “competitive” after increasing the top rate of tax for high earners to 50 percent.

Money raised from selling nationalized banks and other state assets will be used to pay down debt, reducing the need for higher taxes to curb the deficit, Darling said. For now, that debt will continue to rise to protect the economy.

“To attempt to balance the books now, simply by cutting spending across the board, would choke off the recovery, he said. “It would be sheer madness.”

Slower spending and tax increases are almost unavoidable, whichever party takes office after the next election, given that the budget deficit is forecast by the Treasury at 12.4 percent of gross domestic product in the current fiscal year, the most in the G-7.

King’s View

Bank of England Governor Mervyn King added his voice to those warning the government about its debt burden, which will more than double to 1.4 trillion pounds by 2014.

“Five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis,” King said at a speech alongside Darling. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced.”

The government in April said it will reduce net investment by 40 percent over the three years starting April 2011, while increasing day-to-day spending by 0.7 percent in real terms. That compares with 3 percent gains each year between 2004 and 2008. The Conservatives say that higher debt servicing costs and inflation will mean cuts in real terms.

‘Credibility Problem’

“Darling is right that the government needs to address the deficit,” Martin Weale, director of the National Institute of Economic and Social Research. “I am not sure that the government has a credibility problem, but it may develop one.”

Earlier yesterday, two former chancellors who served in Conservative governments said Britain’s debt load may be a drag on the recovery.

Nigel Lawson, who served as chancellor under Conservative Prime Minister Margaret Thatcher from 1983 to 1989, told the BBC that “the public finances are the most appalling mess” and are “a real threat to this country.”

Norman Lamont, the finance minister from 1990 to 1993 said in a speech in London, “Unless you clean up the balance sheets completely of banks, a recovery takes a very long time and recession is more protracted.”

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Chancellor of the Exchequer Alistair Darling, signaling a clash with Prime Minister Gordon Brown over spending, said the U.K. government must make tough decisions to curb the budget deficit.

“We must live within our means,” Darling told bankers at the annual Mansion House dinner in London last night. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

Darling’s call came as Brown emphasized the need to lift spending and protect state-funded schools and hospitals. With an election due in the next year, the prime minister sees government support for the economy as a dividing line with the Conservative opposition, which says he can’t afford it.

Britain expects the biggest budget shortfall in the Group of Seven nations as the worst recession since World War II curbs tax receipts, forcing the Treasury to raise a record 220 billion pounds ($330 billion) from investors. Darling’s comment is aimed at appeasing Standard & Poor’s, which has threatened to scrap Britain’s top-notch credit rating without clear action on debt.

“The economics is giving the message that the deficit needs to come down, but the politics suggest they won’t be doing it,” said Philip Shaw, chief economist at Investec Securities in London. “The fiscal profile is unsustainably high despite the fact that there is a plan to bring it down.”

Dividing Lines

Brown and his Cabinet ally Ed Balls, the education secretary, are pushing for higher spending as the centerpiece of the election campaign. Brown told the GMB union earlier this week that the ruling Labour Party had to “fight as we’ve never fought before” for well-funded public services.

In Parliament yesterday, Brown said “capital expenditure will grow until the year of the Olympics” in 2012, appearing to overrule the Treasury’s budget plan. Darling in April estimated investment on capital projects including new hospitals and railroads will decline to 26 billion pounds in 2012 from 44 billion pounds in the current fiscal year.

“His statement to Parliament that capital spending will grow until 2012 is just plain dishonest,” said George Osborne, a Conservative lawmaker who speaks on finance. “The truth is that real spending will have to be cut whoever is elected.”

Further signs of a different emphasis have also come from Balls who this week told BBC Radio Five Live spending on health and schools will rise “in real terms” after 2011. Darling said he wouldn’t “set in stone detailed spending plans for individual departments five years ahead.”

Taxes for the Rich

Darling also suggested that businesses and the rich may have to pay more tax, saying that “those most able to bear the burden” will “make the greatest contribution” to stabilizing the public finances cash advance no faxing.

He said he was “fully aware” of the need to keep tax rates “competitive” after increasing the top rate of tax for high earners to 50 percent.

Money raised from selling nationalized banks and other state assets will be used to pay down debt, reducing the need for higher taxes to curb the deficit, Darling said. For now, that debt will continue to rise to protect the economy.

“To attempt to balance the books now, simply by cutting spending across the board, would choke off the recovery, he said. “It would be sheer madness.”

Slower spending and tax increases are almost unavoidable, whichever party takes office after the next election, given that the budget deficit is forecast by the Treasury at 12.4 percent of gross domestic product in the current fiscal year, the most in the G-7.

King’s View

Bank of England Governor Mervyn King added his voice to those warning the government about its debt burden, which will more than double to 1.4 trillion pounds by 2014.

“Five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis,” King said at a speech alongside Darling. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced.”

The government in April said it will reduce net investment by 40 percent over the three years starting April 2011, while increasing day-to-day spending by 0.7 percent in real terms. That compares with 3 percent gains each year between 2004 and 2008. The Conservatives say that higher debt servicing costs and inflation will mean cuts in real terms.

‘Credibility Problem’

“Darling is right that the government needs to address the deficit,” Martin Weale, director of the National Institute of Economic and Social Research. “I am not sure that the government has a credibility problem, but it may develop one.”

Earlier yesterday, two former chancellors who served in Conservative governments said Britain’s debt load may be a drag on the recovery.

Nigel Lawson, who served as chancellor under Conservative Prime Minister Margaret Thatcher from 1983 to 1989, told the BBC that “the public finances are the most appalling mess” and are “a real threat to this country.”

Norman Lamont, the finance minister from 1990 to 1993 said in a speech in London, “Unless you clean up the balance sheets completely of banks, a recovery takes a very long time and recession is more protracted.”

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Filed under: economics by Finance Boss
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