Too Many Public Works Built on Rosy Scenarios: Virginia Postrel
Illustration by Adam Hayes
“Infrastructure” may be one of the least glamorous words in the English language, but with the right touch the concrete and steel of roads, bridges, tunnels, dams and railroads can look as alluring as a movie star. Witness the sleekly seductive illustrations produced for today’s California High-Speed Rail Authority or the midcentury pictures of effortlessly flowing superhighways, a genre that reached its apotheosis in Walt Disney’s “Magic Highway U.S.A.” in 1958.
This glamorizing extends not just to imagery but also to forecasts. Project promoters routinely overstate benefits and understate costs -- and not just a little bit.
“Cost overruns in the order of 50 percent in real terms are common for major infrastructure, and overruns above 100 percent are not uncommon,” Bent Flyvbjerg, a professor of major program management at the University of Oxford’s Said Business School, writes in the Oxford Review of Economic Policy. “Demand and benefit forecasts that are wrong by 20-70 percent compared with actual development are common.”
To draw these conclusions, Flyvbjerg analyzed results from 258 projects in 20 countries over 70 years, the largest such database ever compiled. Like the “stars without makeup” features in celebrity tabloids, his research provides a disillusioning reality check. “It is not the best projects that get implemented, but the projects that look best on paper,” Flyvbjerg writes. “And the projects that look best on paper are the projects with the largest cost underestimates and benefit overestimates, other things being equal.”
Flyvbjerg got curious about forecasts when, as a young professor in Denmark, he watched the Great Belt rail tunnel, connecting Scandinavia with continental Europe, go “terribly wrong,” with long delays and cost overruns of 120 percent. “I began to wonder not only why that was the case, but also whether it was common or not for that to happen,” he recalls in a telephone conversation. (The tunnel opened in 1997.)
Finding no comprehensive data available, he assembled his own -- and found that the big picture looked very much like the little one. “It’s very common to have cost overruns in big construction projects,” he says. “It’s the norm. It’s not the exception.”
On average, urban and intercity rail projects run over budget by 45 percent, roads by 20 percent, and bridges and tunnels by 34 percent.
And the averages tell only part of the story. Rail projects are especially prone to cost underestimation. Seventy-five percent run at least 24 percent over projections, while 25 percent go over budget by at least 60 percent, Flyvbjerg finds.
By comparison, 75 percent of roads exceed cost estimates by at least 5 percent, and 25 percent do so by at least 32 percent.
California Dreaming
Promoters of rail and toll-road projects also tend to substantially overstate future use, making those projects look more appealing to whoever is footing the bill. Rail projects attract only about half the expected passengers, on average, while in new research still in progress, Flyvbjerg finds that toll roads (including road bridges and tunnels) fall 20 percent short. (Non-toll roads also miss their traffic projections, but their errors go in both directions.)
Rail-ridership predictions are especially over- optimistic in the U.S., where the average gap between expectations and reality is 60 percent, compared with 23 percent in Europe. So a back-of-the-envelope calculation would suggest that California High-Speed Rail can expect to carry only 15.6 million passengers a year by 2035, rather than the 39 million projected.
Using the average cost overrun, California should also expect to spend almost $8 billion, rather than the estimated $5.5 billion, for the project’s first 100-mile (161-kilometer) leg from Borden to Corcoran, the “train to nowhere” in the Central Valley. Raising the estimate by the average overrun, however, means that you still have a 50 percent chance of spending even more.
As the toll roads suggest, overruns aren’t unique to government projects. Even privately built chemical- processing plants suffer from similar, though less drastic, underestimates of cost and overestimates of capacity. As many a Dilbert comic strip has pointed out, salespeople often close a deal by promising more than they can deliver.
So why do these mistakes happen again and again?
Project managers often blame a combination of bad luck, unexpected delays and changes of plan -- the same things that inflate the costs of remodeling your bathroom, only on a grand scale.
It’s true that planners change their minds. “They decide to have higher safety standards,” Flyvbjerg says, “or higher environmental standards, so the cost of the project goes up. Often you will find that the geology of the project was not well covered. So when you start digging, you find things in the ground that you didn’t expect, and the costs go up.”
But a smart project manager should anticipate the unanticipated and adjust the budget accordingly. Professionals, after all, generally have far more experience than the average homeowner. They know the sorts of things that can go wrong.
“It’s nothing new that geology is difficult,” Flyvbjerg says. “We know that geology is difficult. No matter. It’s ignored in project after project. Therefore, the problem is not geology itself but the fact that we disregard geology.”
Bias of Optimism
A charitable explanation is that promoters are starry- eyed and suffer from what psychologists call optimism bias. But it’s suspicious that forecasters rarely seem to learn, even over decades of experience. Alas, contractors, local governments and other advocates have strong incentives to underplay costs and exaggerate benefits to sell their services or attract funding.
“Some forecasts are so grossly misrepresented that we need to consider not only firing the forecasters but suing them, too -- perhaps even having a few serve time,” Flyvbjerg writes in his Oxford Review of Economic Policy article.
Even with his gloomy findings, Flyvbjerg is an optimist. “Things don’t have to be like this,” he says. “It’s not like the weather. It’s a human artifact that we are producing, and hence we can do differently.”
He would like to see better incentives -- punishment for errors, rewards for accuracy -- combined with a requirement that forecasts not only consider the expected characteristics of the specific project but, once that calculation is made, adjust the estimate based on an “outside view,” reflecting the cost overruns of similar projects. That way, the “unexpected” problems that happen over and over again would be taken into consideration.
Such scrutiny would, of course, make some projects look much less appealing -- which is exactly what has happened in the U.K., where “reference-class forecasting” is now required. “The government stopped a number of projects dead in their tracks when they saw the forecasts,” Flyvbjerg says. “This had never happened before.”
Unfortunately, the world’s biggest infrastructure projects, including the recently opened high-speed rail line between Beijing and Shanghai, are subject to no such checks, or even to scholarly examination. Flyvbjerg has been trying for years to get data on project costs in China, to no avail. “Their data are simply not reliable,” he says. He quotes an unidentified Chinese colleague who said, “If the party says there’s no cost overrun, there’s no cost overrun.”
No wonder promoters look so longingly at China. There, infrastructure glamour is the law.
Debt-Limit Shuffle Buys Time for 'Something Big’
Debt-Limit Shuffle Buys Time for 'Something Big’: Caroline Baum
Faced with an Aug. 2 drop-dead date for raising the $14.3 trillion debt limit and encumbered with two parties that don’t play well together, President Barack Obama did what any president would do: He called a White House summit. (Answers b, “appoint a czar,” and c, “create a commission,” are incorrect in this instance.)
The invitations went out to the leaders of both parties for yesterday’s powwow, “a unique opportunity to do something big” about the budget deficit, according to Obama.
Unique? Big? Congress has raised the debt limit 10 times in 10 years. It’s not even unique for one party to hold the ceiling hostage to partisan demands.
As for big, I would bet on something smaller: an agreement based on budgetary sleight of hand (spending cuts on paper) and political horse-trading, including concessions by Republicans on revenue increases, that falls short of addressing runaway entitlement spending and an inefficient, loophole-ridden tax code that retards growth and saps government revenue.
As recently as last week, Obama was focused on closing tax loopholes for “millionaires and billionaires”; now Social Security is on the table. Republicans, who previously refused to utter “tax increases,” have indicated a willingness to eliminate some tax preferences as part of a deficit-reduction deal that would raise the debt ceiling. (Lobbyists must be lining up to advise on which tax breaks to protect.)
Time to Motivate
Summit participants called the meeting “constructive.” (Translation: No one walked out.) Still, some lawmakers claim there’s not enough time to hammer out something big before Aug. 2, which is when the U.S. will default on its debt, according to Treasury.
Debt default is unthinkable, unlikely and unanticipated, judging by the miniscule 3.15 percent yield on the 10-year Treasury note.
It certainly was no surprise Congress would exceed its borrowing authority sometime this spring or summer. And yet, lawmakers never find the motivation to address the deficit in a meaningful way until they run out of time to do it.
What if they had more time? The truth is, they can have it if they want it.
In a June 30 paper, Veronique de Rugy and Jason Fitchner, senior research fellows at George Mason University’s Mercatus Center in Arlington, Virginia, outline steps Treasury can take to meet its financial obligations and prevent a technical default until the end of the fiscal year on Sept. 30, and possibly longer.
Budgetary Brinkmanship
First, based on Congressional Budget Office estimates, tax revenue of $2.2 trillion in fiscal 2011 will cover the $214 billion of interest on the debt, the authors write. Technical default averted. Tax revenue is sufficient to cover Social Security, Medicare and Medicaid outlays as well, de Rugy and Fitchner write.
Second, the Treasury secretary can take “extraordinary actions,” such as suspending investment in government pension funds and the Social Security Trust Fund -- something Timothy Geithner has been doing since the public debt hit the statutory limit in May.
Third, Treasury can use cash on hand, including $113.5 billion of nonrestricted cash, or sell assets, such as gold, foreign currency or assets acquired under the Troubled Asset Relief Program. Such sales won’t yield enough to cover all the bills, but Treasury can prioritize what payments to make.
“Oh, and by the way, they can always cut spending,” de Rugy told me by e-mail after walking me through the budgetary accounting on the phone.
Debt Limit Distraction
This is hardly a desirable solution. Yet if time is what negotiators really need to produce “something big,” Geithner can give it to them.
That said, the debt limit will have to be increased.
“There is no budget out there, including Paul Ryan’s, that alleviates the need for a debt-ceiling increase,” de Rugy said.
Although this game of chicken over the debt limit is preoccupying those in Washington and in the news media, it really isn’t the issue.
“The tragic part is that, if we didn’t have a debt limit, we’d still have a problem,” said Douglas Holtz-Eakin, former director of the Congressional Budget Office and now president of the American Action Forum, a Washington think tank.
That problem is the growing gap between what the U.S. government has promised to pay retirees and what it collects in taxes. The public doesn’t want its benefits touched. Nor does it want to pay higher taxes.
The implication? Some brave souls in Washington are going to have to do what’s right even if the voters think it’s wrong.
So to all those senators and representatives who claim time is running out to do “something big,” the Treasury can buy you some time. You need to get serious about the “big.”
Obama’s Economic Policies Suffer Without Moral Guide
Obama’s Economic Policies Suffer Without Moral Guide: Ron Klain
Photographer: Evan Sung
The science of economics rests on the idea that we are rational actors seeking to maximize our wealth. Economic policy making, similarly, seeks to maximize the financial well-being of the people affected by the policy, subject to distributional concerns. Policy makers presume that their constituents, collectively, prefer economic measures that, collectively, enrich them.
These assumptions, however, overlook the importance that people place on noneconomic values and morality in assessing policies. That blind spot has been the cause of one of the primary disconnects between policy makers and the American public over the past two years.
Take, for example, policies related to home-foreclosure prevention. Assume that on a block of 10 houses, two are about to be foreclosed; assume that for the eight remaining homeowners, the value of their homes will fall $50,000 each because of their proximity of the foreclosed homes. If $40,000 of mortgage relief to each of the two delinquents would prevent the foreclosures, then each of the eight others on the block, at a cost of $10,000 per solvent homeowner, could subsidize such aid, and in doing so, retain $50,000 in equity in their homes.
Economically, the plan is a winner. Everyone comes out ahead: The families facing foreclosure get to keep their homes, and their solvent neighbors see the value of their houses preserved at a small cost.
Who could be against such a plan?
Almost everyone, it would seem. From the start of the Great Recession, various government policies to provide debt relief to homeowners facing foreclosure have been hugely unpopular with voters. With some exceptions, Americans see underwater homeowners as people who lived beyond their means, irresponsibly indulged themselves and deserve to bear the consequences.
Although we now associate the Tea Party with a general opposition to government spending, it was mortgage-relief policies that were the target of the seminal rant by the CNBC commentator Rick Santelli in February 2009 that is credited with getting that movement off the ground: “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?”
A striking aspect of the conservative backlash against the administration’s mainstream economic policies -- from using federal money to keep teachers on the job, to saving the domestic auto industry, to investing in job-creating public works projects -- is how much the opposition’s arguments have been based on morality and values, not economic considerations. Sure, critics offer facts and figures to challenge these policies, but the most potent weapons have been values-laden attacks about borrowing from the future, being irresponsible about spending, and failing to hold the profligate responsible for the consequences of their ways. Even direct beneficiaries of the president’s policies have pressed these moral critiques.
Criticism From Left
Conservatives aren’t the only ones who have leveled morality-based attacks against the administration’s economic policies. When, after the 2010 midterm elections, President Barack Obama (emulating Franklin Roosevelt after the 1938 contests), pivoted to more pro-business economic policies, the objections on the left were largely cast in moral terms.
That is, the attack against the new administration approach isn’t really about whether a more pro-business stance will help create jobs, or expand the economy -- rather, it reflects the moral outrage of progressives over the administration’s refusal to punish key figures or institutions for their role in causing the 2008 financial collapse. This sentiment was recently expressed by Frank Rich in New York magazine, where he argued that “what haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression.”
‘Original Sin’
Thus, while some progressives directly question the economics behind the administration’s view that more pro- financial sector policies will boost confidence and help spur growth, Rich’s essay is tellingly headlined “Obama’s Original Sin,” clearly a moral critique and not an economic one.
Caught between the moralists on the right and those on the left (who are oddly united in their criticism of the bank rescue under the Troubled Asset Relief Program, for example) is a set of Obama economic policies that have helped our country try to overcome some very difficult challenges, even if they by no means finished the job. Although the administration needs to do more, as I have argued previously, any objective analysis would concede that it arrested a precipitous slide from recession to depression, avoided potentially catastrophic collapses of many state and local governments in 2009, saved the financial industry from calamity, turned around the auto industry, and provided a vital kick-start to nascent industries that will be creating jobs in the next decade.
So why aren’t these policies more popular?
One reason is that the country remains mired in very tough times -- as last week’s jobs report illustrated -- and economic policies aren’t going to gain much acclaim when the news remains grim.
But that alone doesn’t explain the lack of support. After all, the unemployment rate at this same point in the Reagan administration was significantly higher than the most recent number under Obama (10.1 percent compared with 9.2 percent), yet Reagan’s economic policies were more popular than Obama’s.
Part of the explanation is that the president and his economic team eschew moral rhetoric when addressing economic policies -- and reject that sort of thinking when formulating them. Yes, economic policy making should mostly be about maximizing growth and improving well-being for as many people as possible. But moral notions of accountability, fairness, consequences and responsibility do need to be part of the mix, in formulating and articulating policy.
Judgment of Voters
It isn’t surprising that an administration that states its policies solely in economic terms will be judged by the economic results. A president who also takes account of moral and value considerations is less vulnerable to the vicissitudes of statistics in building and maintaining support for his policies.
President Bill Clinton offers a precedent. He paired rational economic policies with a moral guide star: a focus on help for people who “worked hard and played by the rules.” For example, Clinton’s policies were less generous to welfare recipients, but they included a major boost for the working poor, via an unprecedented increase in the Earned Income Tax Credit.
He expanded college access, but as an earned opportunity -- with help for those who committed to national service, or who met academic standards under the HOPE scholarship -- as opposed to an entitlement.
In good economic times and bad (and there were some bad times under Clinton, too), this emphasis on values helped rally support for his economic policies.
Obama would be well served by adding more of this moral element to his economic policy making and rhetoric as he enters the last stretch of the debt-ceiling fight and pivots to the 16 months before Election Day 2012.
He cannot guarantee (or even rely on) better economic times between now and then. But he can give us all a crisp sense of whom he is fighting for and the values that guide his policies, and he can insist that moral standards of conduct need to be enforced even if they don’t meet immediate economic ends.
TSA’s Forced Indignities Don’t Make Us Safer
TSA’s Forced Indignities Don’t Make Us Safer: Jeffrey Goldberg
Illustration by Victor Kerlow
And now, two stories about the thrill of American air travel today. The subject of our first story is 24-year-old Olajide Oluwaseun Noibi, a Nigerian- American who was once enrolled as an engineering student at the University of Michigan. The subject of our second story is 95- year-old Lena Reppert, a terminally ill cancer patient.
On June 24, Noibi boarded a Los Angeles-bound Virgin America flight at New York’s Kennedy International Airport, FBI officials said, by using someone else’s boarding pass. Days later, he unsuccessfully attempted to board a Delta Air Lines flight from Los Angeles to Atlanta using a boarding pass for a flight that departed the day before, also in someone else’s name. When police searched Noibi’s bag, they discovered 10 other boarding passes, none of which bore his name.
Reppert was traveling with an authentic boarding pass, but she almost missed her flight from Florida to Michigan last month because Transportation Security Administration officials decided they couldn’t clear her through security. The reason? A suspicious anomaly in her adult diaper, which was discovered during a pat-down.
Reppert, who was traveling home to die in the company of her family, uses a wheelchair and could not pass through either an X-ray machine or the full-body scanner -- one of the very expensive machines now installed in many airports that can peer through your clothing and take pictures of your genitals.
Because the TSA could not reassure itself about the nature of the alarming anomaly, Reppert’s daughter wheeled her mother (her dying mother, let me repeat) to a bathroom, where, in the interest of securing the American homeland, she removed the diaper. Reppert was patted down again, and then allowed to pass through security. She flew home without the protection of a diaper, or the benefit of underwear.
Behavioral Profiling
I’m not one to automatically assume that the diaper and its owner were harmless, simply because they appeared to have been harmless. I once watched an obese nun in a wheelchair board a plane, and I suspected at that moment that she could have been the ne plus ultra of clandestine al-Qaeda operatives. Unlikely, yes, but terrorists can be clever.
If Reppert had been profiled -- not racially, but through behavioral observation and a background check -- it wouldn’t have been necessary to order off her diaper. And the U.S. government, if it really applied itself, could probably ascertain whether the owner of a soiled diaper posed a threat without profiling her, and without humiliating her. But since the airport-security system is not interested in people, but in the things they possess, it was necessary to suspect that Reppert was a terrorist until proved otherwise.
The Pat-Down
I’m writing this column aboard a flight from Detroit to Amsterdam. I first entered the TSA matrix for this trip at Reagan National Airport. As is my practice, I opted out of the body imager and asked for a pat-down. I do this in part because I don’t trust the government’s assurances that the radiation emitted by the machines is harmless. And also because I don’t enjoy raising my hands like a mugging victim inside a radioactive box so a government agent can look at me naked.
During this pat-down, the TSA agent, while running his hands carefully up my leg, came across a small bump near my left knee. He asked me to describe the nature of the bump. I told him it was a benign cyst. (I realize I’m oversharing, but there’s a purpose to this story.) The agent called over a supervisor. The supervisor questioned me about the cyst. The supervisor and the agent then discussed the cyst. This has happened to me at two other checkpoints. My dermatologist is much less interested in this cyst than is the Department of Homeland Security. Eventually, the supervisor ruled that the cyst (or, I should say, “alleged cyst”) was too small to be a threat to a commercial airliner.
An Experiment
Three years ago, as an experiment, I carried aboard airliners objects such as knives, Hezbollah flags, matches from hotels in Peshawar and Beirut, and box-cutters, in addition to my benign cyst. I was never caught. It’s not hard to sneak banned objects on planes. (You should see the size of my toothpaste -- gargantuan.)
As part of this experiment, which I wrote about originally for the Atlantic, I collaborated with security expert Bruce Schneier to see whether we could penetrate TSA checkpoints carrying fake boarding passes. Schneier manufactured these passes on his home computer. We didn’t attempt to board airplanes with these passes, but they did get us through security without delay.
Which brings me back to the intrepid Mr. Noibi. At roughly the same time the TSA was humiliating Lena Reppert and her family, the TSA was itself being humiliated by Noibi, who seemed to beat the system because the TSA, almost 10 years after the Sept. 11 attacks, still has no way to ascertain at its checkpoints whether a boarding pass is genuine.
A Brighter Idea
The TSA’s defenders argue that the agency is more nimble than ever technologically, and they point to the new body- imaging machines as proof that its agents are equipped to discover weapons and explosives hidden under clothing. Except for one thing. The Obama administration announced last week that terrorists may be trying to carry surgically implanted bombs onto commercial flights. The body-imaging machines can’t see beneath the skin. So these machines are now officially irrelevant, thanks to the surgical innovators of al-Qaeda. The TSA is in a losing battle.
So here’s a brighter idea: The government could recognize that it’s impossible to screen passengers (and cargo) for every type of banned material. If a terrorist plot has gone undiscovered by the world’s intelligence agencies, by the U.S. military, by the Federal Bureau of Investigation and by local law enforcement, the chance is high that the plotters are also more sophisticated than the TSA. It’s better to accept some level of risk, minimize the TSA’s ever more intrusive disruptions to American life, and redirect some of its enormous budget to agencies that can eliminate terrorist plots before they mature to the point that conspirators are boarding planes.
The Noibi case shows that the TSA hasn’t proved it can secure our airports. And the Reppert scandal suggests that we pay, in dignity and privacy, far too high a price for security that is entirely symbolic.
Stocks, Euro, Pare Losses, Italy Bonds Gain
Stocks, Euro Pare Losses, Italy Bonds Gain
The euro dropped to as little as $1.3837, the lowest since March 11. Photographer: Chris Ratcliffe/Bloomberg
July 12 (Bloomberg) -- David Bloom, global head of currency strategy at HSBC Holdings Plc, talks about the outlook for the euro during the region's sovereign debt crisis. He speaks with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)
July 11 (Bloomberg) -- Liu Yang, chairwoman of Atlantis Investment Management Ltd., talks about mainland China and Hong Kong stocks. Liu, who also discusses China's economy, talks with Rishaad Salamat, John Dawson, and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)
July 12 (Bloomberg) -- Louise Cooper, an analyst at BGC Partners, talks about contagion risk in the euro zone and its impact on bonds and equities. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Global stocks trimmed declines, a day after the biggest selloff since March, and the euro pared losses after Italy and Greece sold debt and European governments worked to halt the region’s credit crisis.
The MSCI All-Country World Index fell 0.7 percent at 10:56 a.m. in New York, recovering from an earlier plunge of as much as 1.4 percent. The Standard & Poor’s 500 Index slipped 0.1 percent after futures on the gauge tumbled as much as 1.8 percent before U.S. exchanges opened. The euro was down 0.2 percent at $1.3964 after slumping as much as 1.4 percent. Italian bonds reversed losses, sending 10-year yields down 15 basis points to 5.53 percent. Sugar and zinc led gains in the S&P GSCI Index of commodities as it reversed early losses.
Riskier assets rebounded as Luxembourg Finance Minister Luc Frieden said selective default on Greek debt is not an option envisioned by euro-region finance ministers, while European Union Economic and Monetary Affairs Commissioner Olli Rehn said officials reached agreement that investors should play a role in a second bailout of Greece. EU President Herman Van Rompuy said he didn’t rule out calling an emergency summit on the debt crisis, even as no decision has been taken yet.
“There’s some stabilization taking place in the market, perhaps driven by rumors of European leader meeting later this week,” said Tim Hartzell, who oversees about $350 million as chief investment officer for Houston-based Sequent Asset Management. “The long-term situation is going to take a lot time to correct, there’s just too much debt. We will be servicing debt globally instead of consuming and that’s not good for equities.”
Earnings Season
Alcoa Inc. (AA), the largest U.S. aluminum producer, swung between gains and losses after second-quarter profit excluding certain items of 32 cents a share missed the 33-cent average estimate of 14 analysts surveyed by Bloomberg.
Alcoa unofficially started the earnings season in the U.S. after exchanges closed yesterday. Others reporting this week include JPMorgan Chase & Co., Citigroup Inc. and Google Inc. S&P 500 profits are forecast to have grown 13 percent in the quarter, the smallest increase in two years, according to data compiled by Bloomberg.
Cisco Systems Inc. (CSCO), the largest networking-equipment company, rallied 2.5 percent for the biggest gain in the Dow Jones Industrial Average. The company may cut as many as 10,000 jobs, or about 14 percent of its workforce, to revive profit growth, according to two people familiar with the plans.
Moving Averages
The S&P 500 is trading near the level of 1,316 that represents the convergence of the index’s mean price over the last 50 and 100 days, data compiled by Bloomberg show. Moving averages are cited by analysts who use price charts as points where buying may pick up or selling snowball as investors reconsider past decisions. The gauge’s 200-day level is 1,274, based on intraday swings.
Almost $1 trillion was wiped off the value of global equities yesterday while Italy’s 10-year yield jumped more than 40 basis points in two days and the Treasury yield dropped to the lowest this year. The link between sovereign risk and bank risk is potentially “explosive,” and in Italy it poses an “element of fragility,” European Central Bank Executive Board member Lorenzo Bini Smaghi said yesterday in Milan.
Greece Strategy Talks
European finance chiefs cast about for a strategy to halt Greece’s debt crisis as the contagion spread to Italy. The 17 euro governments pledged to flesh out a new master plan “shortly” after nine hours of talks yesterday. The meetings resumed today with all 27 EU finance ministers plotting a response to the release of bank stress tests later this week.
Spanish bonds erased declines, with the yield on the 10- year note decreasing 14 basis points to 5.89 percent. The Irish 10-year yield rose 22 basis points to the highest since before the euro was introduced in 1999, while the Greek 10-year yield slipped 25 basis points, after rising earlier. The yield on the German bund reversed earlier declines.
Italy sold 6.75 billion euros of treasury bills in its first auction since borrowing costs began soaring amid contagion from the Greek debt crisis. The Treasury in Rome said it sold the one-year bills, meeting its target, at an average yield of 3.67 percent. That compares with a yield of 2.147 percent when similar securities were last sold on June 10. Demand for the debt was 1.55 times the amount sold, compared with 1.71 times at the June auction.
Greece Bill Sale
Greece sold 1.625 billion euros of 182-day bills, the nation’s debt agency said. Investors bid for 2.88 times the securities offered, the Public Debt Management Agency said. Belgium’s borrowing costs for 12-month treasury bills rose to the highest level in more than 2 1/2 years as demand fell in the sale of 1.07 billion euros of the bills.
The U.S. sells $32 billion of three-year notes today, the first of three offerings totaling $66 billion.
The euro recovered losses after weakening as much as 1.5 percent against the Swiss franc, falling to a record low of 1.15533. The Dollar Index, which tracks the U.S. currency against those of six trading partners, was little changed after a two-day rally. The New Zealand dollar declined against all 16 of its most-traded peers monitored by Bloomberg, sliding 1.4 percent against the U.S. currency.
The Markit iTraxx SovX Western Europe Index of government credit-default swaps retreated from a record, slipping nine basis points to a mid-price of 282.
European Stocks
About seven shares declined for every two that gained in the Stoxx Europe 600 Index, which pared its loss to 0.7 percent after slumping as much as 2.7 percent. Banks in the gauge recovered, trading little changed after the group earlier slumped to a two-year low. Thomas Cook Group Plc (TCG), Europe’s second-largest tour operator, plunged 29 percent after cutting its full-year profit forecast.
The MSCI Emerging Markets Index retreated 1.7 percent. The Hang Seng China Enterprises Index tumbled 3.7 percent, the most since May 2010, after Moody’s Investors Service said some Chinese companies are engaging in potentially risky business practices. The Bombay Stock Exchange Sensitive Index dropped 1.7 percent as Infosys Ltd., India’s second-largest software exporter, forecast sales that missed analysts’ estimates.
The S&P GSCI index of commodities was little changed, reversing a 1.4 percent slide. Cotton dropped 4 percent and Brent crude oil slipped 1 percent for the biggest declines among 24 materials, while sugar rallied 4.3 percent and zinc increased 1.5 percent for the biggest gains.
Oil futures for August delivery rose 0.5 percent to $95.59 a barrel on the New York Mercantile Exchange after earlier dropping below the 200-day moving average for front-month prices.
Obama Seeks Grand Bargain on Deficit
Obama Seeks Grand Bargain on Deficit
President Barack Obama pauses during a news conference in the Brady Press Briefing Room at the White House in Washington, D.C., on July 11, 2011. Photographer: Joshua Roberts/Bloomberg
July 12 (Bloomberg) -- Al Hunt, executive editor at Bloomberg News, discusses President Barack Obama's comments on U.S. debt-reduction talks. More negotiations are scheduled between Obama and congressional leaders at the White House this afternoon. Hunt speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)
July 12 (Bloomberg) -- Senator Jeff Sessions of Alabama, the senior Republican on the Senate Budget Committee, talks about the prospects for a compromise agreement on reducing deficits and raising the $14.3 trillion federal debt ceiling before the government exhausts its borrowing authority on Aug. 2. He speaks with Megan Hughes on Bloomberg Television's "In the Loop." (Source: Bloomberg)
July 12 (Bloomberg) -- Timothy Bitsberger, managing director at BNP Paribas and a former assistant secretary for financial markets at the U.S. Treasury, talks about the outlook for bipartisan U.S. deficit-reduction negotiations and the impact on Treasuries. Bitsberger speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 12 (Bloomberg) -- Tad DeHaven, a budget analyst at the Cato Institute, talks about U.S. budget talks and the need to cut spending to reduce the deficit. DeHaven speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 11 (Bloomberg) -- Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods Inc., discusses prospects for political compromise on reducing the U.S. federal deficit and raising the debt ceiling. Gardner speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 11 (Bloomberg) -- U.S. Representative Chris Van Hollen of Maryland, the senior Democrat on the House Budget Committee, talks about the negotiations between President Barack Obama and congressional leaders on reducing the government deficit and raising the debt limit. Van Hollen speaks on Bloomberg Television's "InBusiness with Margaret Brennan." (Source: Bloomberg)
July 11 (Bloomberg) -- Mortimer Zuckerman, chief executive officer of Boston Properties Inc., discusses President Barack Obama's role in federal deficit plan negotiations and the outlook for the U.S. economy. Zuckerman, speaking with Betty Liu on Bloomberg Television's "In the Loop," also talks about News Corp.'s Rupert Murdoch discontinuing his News of the World newspaper following a phone-hacking scandal. (Source: Bloomberg)
July 11 (Bloomberg) -- Douglas Holtz-Eakin, president of the American Action Forum and a former director of the Congressional Budget Office, and Maya MacGuineas, president of the Committee for a Responsible Federal Budget, talk about the U.S. debt ceiling and budget policy. They speak with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
July 12 (Bloomberg) -- David Walker, chief executive officer of Comeback America Initiative and a former U.S. comptroller general, talks about the outlook for political compromise on reducing the federal deficit and raising the debt ceiling. Walker, speaking with Betty Liu and Lizzie O'Leary on Bloomberg Television's "In the Loop," also discusses Treasury Secretary Timothy Geithner's role in deficit negotiations. (Source: Bloomberg)
U.S. President Barack Obama, second right, meets with House Majority Leader Eric Cantor, a Republican from Virginia, left, House Minority Leader Nancy Pelosi, a Democrat from California, second left, House Speaker John Boehner, a Republican from Ohio, center, and Senate Majority Leader Harry Reid, a Democrat from Nevada, right, after a news conference in the Brady Press Briefing Room at the White House in Washington, D.C., U.S. Photographer: Alex Wong/Pool via Bloomberg
The top Senate Republican attacked the credibility of President Barack Obama’s efforts to forge a “grand bargain” of spending cuts and tax increases, saying the president himself was an obstacle to an agreement on the debt.
Senator Mitch McConnell and other Republican leaders said Obama is putting an expansion of government ahead of the goal of reaching a bipartisan accord to cut the U.S. deficit. He said Democrats’ “smoke and mirrors” proposals prevented the type of $4 trillion deficit reduction that Obama is seeking.
“As long as this president is in the Oval Office, a real solution is unattainable,” McConnell of Kentucky said on the Senate floor today in his toughest comments about the negotiations since bipartisan talks began.
Obama has pressed Republican leaders to seek bigger deficit savings than the range between $2 trillion and $2.5 trillion they have targeted and to compromise on their opposition to tax increases. The two parties are in talks aimed at raising the $14.3 trillion U.S. debt ceiling before Aug. 2, the date when the government is projected to exhaust its borrowing authority.
“Now is the time to deal with these issues,” Obama said at a White House news conference yesterday. “If not now, when?”
The parties are divided over taxes and entitlement programs. In addition to rebuffing Democratic calls for more tax revenue, Republicans are pushing to cut programs such as Medicare and Social Security. The White House has indicated a willingness to consider savings including an increase in the Medicare-eligibility age as part of a larger deal.
‘Something Big’
“I was one of those who had long hoped we could do something big for the country,” McConnell said. “But in my view the president has presented us with three choices: smoke and mirrors, tax hikes, or default. Republicans choose none of the above.”
McConnell’s criticism was echoed by House Speaker John Boehner, an Ohio Republican, who said the “president talks a good game, but when it comes to actually putting these issues on the table and making decisions, he can’t quite pull the trigger.”
McConnell held a private meeting with Senate Republicans to get their views on the negotiations at the White House scheduled to resume at 3:45 p.m. today.
In yesterday’s negotiating session, Obama rejected a Republican presentation on spending cuts discussed in earlier talks led by Vice President Joe Biden, a Democratic official said. Obama said the total -- which a Democratic official put at $1.7 trillion -- fell short of his goal and the threshold Republicans set for a debt-limit increase large enough to carry the nation through the 2012 elections, another Democrat said.
Letter From Chamber
The U.S. Chamber of Commerce, the Business Roundtable and other organizations today released a letter to Obama and Congress urging action “to raise the debt ceiling as expeditiously as possible.”
The letter, which the chamber said was signed by 470 chief executives, supports long-term efforts to reduce federal deficits while saying that failure to increase the government’s borrowing authority “would create uncertainty and fear, and threaten the credit rating of the United States.”
House Democrats met this morning to review the bigger deal that Obama is offering to Republicans even as aides said the Medicare and Social Security compromises Obama has been willing to consider are largely moot given that Republicans refusal to engage on revenue. Democrats said the debt negotiations have become so strained, it may take Wall Street and business groups stepping in with a warning to force an agreement.
‘Impending Danger’
“We certainly would hope that the Chamber of Commerce would step up,” said House Democratic Caucus Chairman John Larson of Connecticut. “We have heard from Wall Street but I think they have to be more vociferous and more present in terms of the looming, impending danger.”
U.S. stocks were little changed, after the biggest two-day drop since March for the Standard & Poor’s 500 Index. The S&P index dropped 0.1 percent to 1,318.70 at 10:49 a.m. in New York. The Dow lost 5.18 points, or less than 0.1 percent, to 12,500.58.
Yields on benchmark Treasury 10-year notes were little changed after surging earlier as concern that Europe’s debt crisis may spread stoked demand for the U.S. government debt’s safety. The 10-year note yield fell as much as 11 basis points to 2.81 percent, the lowest since Dec. 1, before trading little changed at 2.91 percent, at 11:30 a.m. in New York, Bloomberg Bond Trader prices show.
Deal This Week?
U.S. Treasury Secretary Timothy F. Geithner said the Obama administration is aiming to reach a deal on raising the debt ceiling as soon as this week.
“We want to wrap up the broad outlines of this agreement by the end of this week, certainly by the end of next week,” Geithner said today at a symposium in Washington.
Republicans have demanded at least a dollar in spending cuts over 10 years for every dollar they agree to raise the debt limit, which would have to go up more than $2 trillion to get through the elections. The Republicans last weekend lowered their objective for deficit reduction to the range of $2 trillion to $2.5 trillion.
Democratic congressional leaders also objected to the figure presented yesterday by Republicans, saying spending cuts that had been discussed in the Biden-led talks were contingent on tax-revenue increases, said a Democratic official.
Obama, Boehner
Three Republican aides said that at one point in the 90- minute talks Obama and Boehner sparred over the price that Republican House members would pay to reach a deficit deal, with the speaker arguing that supporting entitlement cuts was just as risky for his party. When Obama reminded him that Republicans already voted to cut Medicare spending earlier this year, Boehner retorted that his party was the one showing leadership.
Before yesterday’s negotiating session began, Obama argued at his news conference that negotiators should pursue his $4 trillion goal in deficit reduction, which would require both entitlement cuts and revenue increases. He said he wouldn’t agree to a short-term extension of the debt limit.
“I will not sign a 30-day or a 60-day or a 90-day extension -- that is just not an acceptable approach,” Obama told reporters.
As the elections get closer, partisan differences will only grow harder to resolve, he said. “We might as well do it now -- pull off the Band-Aid, eat our peas.”
‘Bent Over Backwards’
Obama called on Republican leaders to show flexibility, saying he has “bent over backwards” to accommodate them in deficit talks.
“I don’t see a path to a deal if they don’t budge. Period,” Obama said.
He chided Republican leaders for focusing on a smaller package of cuts, saying that posture doesn’t square with their rhetoric that casts debt reduction as “a moral imperative.”
House Majority Leader Eric Cantor said Republicans “didn’t come here to raise taxes” after Obama challenged the party to compromise on a deficit plan. Any deal “has got to be revenue- neutral,” he said, meaning that it would not result in higher income for the government.
A Republican congressional aide said one purpose the party’s leaders had in the negotiating session was to gauge Democrats’ willingness to go through with spending cuts discussed during the Biden talks if tax revenue increases were removed from the table.
China Money Supply Growth
China Money Supply Growth, New Lending Rebound Even After Cooling Measures
Vegetables and prices are displayed as a vendor waits for customers at a market in Beijing. Photographer: Adam Dean/Bloomberg
July 11 (Bloomberg) -- Steve Bernstein, chief executive officer of Oppenheimer Investments Asia Ltd., talks about the outlook for China's economy. China’s trade surplus widened more than forecast to $22.3 billion in June, the highest level in seven months, as imports grew at the slowest pace since 2009. Bernstein speaks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 11 (Bloomberg) -- Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc, talks about the outlook for inflation in China. He speaks with Linzie Janis and Owen Thomas on Bloomberg Television's "Countdowen." (Source: Bloomberg)
China’s new loans exceeded estimates in June and foreign-exchange reserves jumped by $153 billion in the second quarter, bolstering the case for more increases in bank reserve requirements.
New loans were 633.9 billion yuan ($98 billion), compared with the 622.5 billion yuan median estimate in a Bloomberg News survey of economists. M2, the broadest measure of money supply, rose by a more-than-forecast 15.9 percent, and foreign-exchange reserves climbed to $3.2 trillion. The People’s Bank of China released the data on its website today.
The central bank last week raised interest rates for the third time this year ahead of a report that showed consumer prices jumped the most in three years, indicating the government’s priority is still fighting inflation. Premier Wen Jiabao may be reluctant to ease monetary policy even amid slowing growth as state planners forecast “elevated” price levels for the rest of the year.
“This suggests more tightening on the horizon,” said Joe Lau, a Hong Kong-based economist at Societe Generale SA. “This may be more likely through further reserve ratio hikes,” he said, adding that slowdown risks and the debt burdens of local governments mean policy makers may be more reluctant to raise interest rates.
Lau said he expects one or two more increases in banks’ reserve requirements by year end. Economists at Nomura Holdings Inc. estimated in a July 8 report the ratio could rise by another 100 basis points in the second half of the year.
Record Reserve Requirements
The benchmark Shanghai Composite Index dropped 1.7 percent to 2,754.58 at the 3 p.m. local-time close, the most in seven weeks, on concerns Greece’s debt crisis may spread and higher- than-estimated new lending in China will make it difficult for the government to ease tightening policies. The yuan fell 0.1 percent to 6.4722 per dollar as of 4:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System.
The central bank has raised requirements nine times since mid-November to a record 21.5 percent for the biggest banks, with the most recent increase announced on June 14. Inflation accelerated to 6.4 percent in June from a year earlier and Mizuho Securities Ltd. estimates consumer prices could jump 6.2 percent to 6.5 percent in July.
The government will stabilize prices, curb “unreasonable” housing demand and increase supplies of hogs to promote a stable market for pork, Wen said in a statement posted on the government’s website today after meetings to discuss the country’s economic situation. The price of the meat surged 57 percent in June from a year earlier, a government report showed last week.
Slowing Growth
Policy makers are trying to cool the fastest inflation in three years without choking growth in the world’s second-largest economy. A report tomorrow may show that gross domestic product rose 9.3 percent in the second quarter from a year earlier, the least in almost two years, according to the median estimate in a Bloomberg survey. That compares with 9.7 percent in the previous quarter.
“The main contradiction in the economy is still the large pressure on price increases and the financing difficulties faced by small and medium-sized enterprises,” Wen said in today’s statement.
He said last month the government may fail to keep price gains within this year’s 4 percent target although they could be kept below 5 percent.
Not As Tight
M2 growth in June rebounded from the slowest gain since 2008 the previous month, although still within the central bank’s full year target of 16 percent. It compared with the median forecast of 15.3 percent in a Bloomberg survey of 18 economists. New local-currency lending in the first six months amounted to 4.17 trillion yuan, 10 percent lower than the same period a year ago.
“Monetary conditions in the past few months have not been as tight” as the money-supply data suggests, said Chang Jian, a Hong Kong-based economist at Barclays Capital. “M2 growth has become less accurate an indicator to measure liquidity conditions and aggregate demand in the past few months as the rapid growth of wealth management products” has shifted loans off banks’ balance sheets, she said.
Chinese banks helped arrange 320 billion yuan of loans between companies in the first quarter that weren’t recorded in the lenders’ balance sheets, central bank data show. Ningbo Bird Co., a maker of cellular phones, said April 30 it had lent 50 million yuan through an entrusted loan at a rate of 18 percent to a property company in Jiangsu province.
Selective Easing
Still, other economists say the June money supply and lending figures show central bank has already started loosening curbs at the margin.
“Some selective easing has already been in progress,” said Ken Peng, senior economist for China at BNP Paribas SA in Beijing. “If local governments don’t get financing, it will affect the normal operation of the economy and could raise the risks of a hard landing.”
Central bank governor Zhou Xiaochuan said last week inflation can’t be the government’s only policy target and that it needs to consider goals including growth, employment and the exchange rate. The PBOC also said yesterday that loans to local government financing vehicles can be contained and that only a “small portion” of loans likely to need “financial grants.”
The second-quarter rise in foreign-exchange reserves was the smallest quarterly gain in a year, according to Bloomberg data.
The growth “still points to solid demand and continued hot money inflows,” said Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong. “There may be more foreign pressure on China to speed up yuan gains but we think appreciation will slow in the second half as inflation eases.”
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
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