Bank of England, ECB slash interest rates - FRANKFURT

Bank of England, ECB slash interest rates - FRANKFURT

(FRANKFURT) The European Central Bank slashed interest rates by 50 basis points yesterday, hoping to breathe life into the eurozone economy as it faces its first recession.

The widely expected cut took the ECB’s benchmark rate to a two-year low of 3.25 per cent, reflecting the eurozone’s sharply deteriorating economic outlook and easing inflation pressures.

Shortly before the ECB’s decision, the Bank of England - faced with a slumping housing market, a decline in manufacturing and higher unemployment - astonished analysts by announcing a hefty 1.5 percentage point cut, the biggest since the bank gained independence to set rates 11 years ago and a mark of the gravity of concern over the economy.

Heavy US job losses, a sharp decline in the world services sector and bleak corporate outlook painted an increasingly dark picture this week.

Matthew Sharratt, UK economist at Bank of America, echoed widespread sentiment in calling the British cut ‘astonishing’. Jonathan Loynes of Capital Economics called it ’spectacular’.

‘There is still more to do,’ Mr Loynes said. ‘At 3 per cent, UK interest rates are still well above US ones when economic conditions suggest they should be as low if not lower . . . Our view remains that UK rates will fall to one per cent or below.’

Last month, the Bank of England joined forces with the US Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates.

All 81 economists polled by Reuters last week had expected the ECB’s 50 basis point rate cut, as easing inflation pressures mean that the ECB faces fewer problems reaching its goal of annual inflation just below 2 per cent.

The 15-nation eurozone’s economy, which had grown steadily since the bloc’s creation in 1999, contracted by 0.2 per cent in the second quarter this year and most economists expect further shrinkage in third-quarter GDP figures due on Nov 14.

However, rate cuts may be less effective than in the past, as banks are still wary of extending loans and are reluctant to pass interest rate cuts on to borrowers.

However, the sheer scale of yesterday’s cut will put pressure on British banks to conform and back smaller businesses, some of which are facing bankruptcy.

The Swiss national bank had also cut its rates by 50 basis points. — Reuters

Source : Business Times - 07 Nov 2008

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Credit crisis rolls back threat of rising US inflation: central banker

Credit crisis rolls back threat of rising US inflation: central banker

Plunging commodity prices have eased inflation pressures

(ATLANTA) A rising threat of inflation earlier this year ‘froze in its tracks’ in recent months as the credit crisis worsened, Federal Reserve Bank of Dallas president Richard Fisher said.

‘The impetus for rising prices came to a grinding halt as the credit crisis took grip and confidence evaporated,’ Mr Fisher said on Tuesday to a meeting of the Texas Cattle Feeders Association in Grapevine, Texas. ‘As the credit market congealed, inflationary momentum froze in its tracks.’

Mr Fisher and other members of the Federal Open Market Committee (FOMC) cut the benchmark interest rate last week to one per cent, trying to prevent a downturn in bank lending and consumer spending from triggering a global recession. He had dissented five times in prior meetings because of concern about inflation.

Plunging commodity prices, including a 55 per cent decline in the cost of oil since July, have eased inflation pressures. ‘I don’t believe we are likely to have sustainable deflationary impulses,’ Mr Fisher told reporters after his speech.

While cutting the main rate during the past 13 months from 5.25 per cent, Fed chairman Ben Bernanke has created six loan programmes channelling at least US$700 billion in cash and collateral into money markets as at Oct 22.

‘There are limits to what the central bank can do,’ Mr Fisher said. ‘Complementary action must now be undertaken by the fiscal authorities,’ including the new president elect.

The Fed’s efforts to unlock short-term credit markets, including buying debt directly from companies, showed signs of working, as interest rates on US commercial paper fell on Tuesday to the lowest in four years.

The Fed’s balance sheet may expand to US$3 trillion by year’s end, reflecting growth of various liquidity measures supporting banking institutions, Mr Fisher said. As at Oct 29, the Fed’s balance sheet was US$1.97 trillion.

Still, the US faces ‘an epic challenge’, Mr Fisher said. ‘We are navigating the mother of all financial storms.’

The US economy shrank at a 0.3 per cent annual rate last quarter, the most since the 2001 recession, the Commerce Department reported last week. Economists expect the slump to worsen in the fourth quarter.

A recovery in the US economy ‘will take time’, Mr Fisher said in response to an audience question. ‘I don’t see any economic growth in 2009. None.’

During the current quarter, the US is ‘likely to have negative growth’, he told reporters.

Labor Department figures are expected to show a drop of 200,000 jobs in October, according to a Bloomberg News survey of economists. — Bloomberg

Source : Business Times - 06 Nov 2008

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Racial barrier falls as change comes to America

Racial barrier falls as change comes to America

Obama sweeps to victory as markets, war, demographics produce an electoral earthquake

By LEON HADAR
WASHINGTON CORRESPONDENT

RACIAL prejudices were swept aside as Barack Obama won the White House yesterday - an event whose historic magnitude recalls the landing of the first man on the moon. The Democrat defeated Republican John McCain and will be sworn in on Jan 20 next year as the 44th US president - and the first African-American one.

Family moment: Mr Obama embracing his daughter Malia after his victory speech at a rally in Chicago. He won 349 electoral votes against Mr McCain’s 173, and will have a bigger Democrat majority in Congress
His march became a rout as he captured not only battleground states like Ohio and Florida but also scooped up traditional Republican-leaning ‘red’ states like Virginia and Colorado. With 349 electoral votes against Senator McCain’s 173, it wasn’t even close.

‘Even as we celebrate tonight, we know that the challenges that tomorrow will bring are the greatest in our lifetime,’ said the president-elect. But the change he has repeatedly promised has already signalled itself.

The election of the 47-year-old Mr Obama marks the end of the reign of Baby Boomers like Bill and Hillary Clinton and George W Bush and the coming to power of a new and young generation of Americans who are more diverse in their ethnic and cultural origin and more tolerant in terms of their cultural attitude.

At the same time, the election on Tuesday also turned out to be what political experts refer to as a ‘wave election’. It helped sweep more Democrats into both the Senate and the House of Representatives and will provide Mr Obama with a solid base of support on Capitol Hill to advance his agenda at home and abroad.

‘If there is anyone out there who still doubts that America is a place where all things are possible, who still wonders if the dream of our founders is alive in our time, who still questions the power of our democracy, tonight is your answer.’

- Barack Obama

It was symbolic perhaps that Mr Obama’s landslide victory took place on the same week that American manufacturing activity dropped to its lowest level in more than 25 years with the US auto industry facing the threat of possible extinction. Indeed, it is against the backdrop of rising economic problems - home foreclosures, a credit crunch, growing unemployment, falling consumer spending, and an economic recession that could develop into another Great Depression - that the young and inexperienced first- term Senator from Chicago succeeded in winning the support of a majority of American voters who were intent in challenging the political status-quo in Washington.

In fact, there is little doubt that it was the collapse of Lehman Brothers and other major financial institutions and the dramatic move by Washington to come to the assistance of Wall Street that demonstrated to many white middle class Americans that the economic policies pursued by the Bush Administration and the Republican Party have reached a dead-end.

Members of the new ‘investor class’ that came to being during the roaring 1990s have suddenly discovered that they lost about a third of the value of their homes and the pension plans they had invested in the stock market.

And many of them decided to vote for the Democratic candidate this week, hoping that his leadership qualities and his proposed policies will help save the American economy and prevent a re-run of the Great Depression.

That depressing economic reality explains why both yuppies who reside in the more prosperous suburbs of New York City, Washington, DC, Pennsylvania and Seattle as well as blue-collar workers who live in decaying factory towns in Michigan, Pennsylvania, Ohio, and Minnesota - many of whom have traditionally voted for Republican candidates - decided to switch to the Democratic candidate this year.

In a way, the economic problems that the US is now facing are seen by many Americans as part of the failed Republican agenda that has been pursued by President George W Bush in the last eight years and that have been backed by Senator McCain, the Republican presidential candidate, including the decision to invade Iraq, the handling of Hurricane Katrina disaster, and the mismanagement of many other domestic and foreign policies.

With close to 90 per cent of Americans telling pollsters that they believe that America is now heading on the wrong track, it was inevitable that voters would be attracted to an ‘agent of change’ like Mr Obama and the more progressive policies that the Democratic party represents.

But this week’s dramatic victory by an African-American politician with an exotic background can only be understood in the context of the major demographic changes that have taken place in America in recent years that include not only the strengthening electoral power of African-Americans and the growing population of Hispanics around the country.

Mr Obama and the Democrats are also benefiting from the rising involvement in the political process of thousands of new young voters.

Hence the fact that for the first time since the 1964 presidential election, a Democratic presidential candidate - who also happens to be an African-American - has won the southern state of Virginia, whose capital Richmond had served the capital of the Confederacy during the civil war, was a reflection of these revolutionary demographic changes.

The state has attracted many young high-tech workers and other professionals as well as Hispanic immigrants who together with the members of a large African-American community in Virginia provided Mr Obama with the margin of victory he needed.

The president-elect’s main challenge now would be to form a winning Democratic electoral majority that would bring together blue-collar workers, well-to-do and educated yuppies, Hispanics and African-Americans.

At the same time, the election’s outcome highlighted the failure of the Republican Party to adapt to the new political and demographic realities of the era.

The Republicans have been gradually transformed into a minority political party that represents the mostly shrinking population of conservative white voters in the South and a few small Western states.

The Republicans have succeeded in exploiting the cultural resentment that these ‘real Americans’ - as vice-presidential candidate Sarah Palin described them during the campaign - feel towards the ‘cosmopolitan’ and liberal ‘elites’ in the large cities. But unless the Republicans expand their electoral base beyond white evangelical Christians to include more blacks, Hispanics, and young urban voters, they would find it more difficult to return to power in the White House and Congress any time soon.

Source : Business Times - 06 Nov 2008

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Obama elected America’s president, networks projected - WASHINGTON

Obama elected America’s president, networks projected - WASHINGTON

WASHINGTON - Americans elected Democrat Barack Obama as their president Tuesday, in a transformational election which will reshape US politics and reposition the United States on the world stage.

Obama, 47, will be inaugurated the 44th US president on January 20, 2009, and inherit an economy mired in the worst financial crisis since the 1930s, two wars in Afghanistan and Iraq and a nuclear showdown with Iran.

Television networks projected his victory over Republican John McCain after Senator Obama solidified traditional Democratic states and cut deep into the Republican territory which his rival needed to control to win the White House.

Obama’s historic inauguration will complete a stunning ascent to the pinnacle of US and global politics from national obscurity just four years ago and close an eight year era of turbulence under President George W. Bush.

He will take office with Democrats holding a monopoly in power in Washington, after an epochal election which sparked a rare generational and political realignment and finally snuffed out an era of Republican control.

Obama is promising to renew bruised ties with US allies, and to engage some of the most fierce US foes like Iran and North Korea.

He has vowed to pass tackle climate change and provide health care to all Americans.

His presidency also marks a stunning cultural shift, with Obama, the son of Kenyan father and white mother from Kansas, the first African American president of a nation still riven by racial divides.

When he launched his campaign on a chilly day in Illinois in February 2007, Obama forged a mantra of change which powered him throughout the longest, most costly US presidential campaign in history.

With a stunning grassroots political movement, powered by massive multi-million dollar fundraising, Obama first beat Hillary Clinton, and the Democratic Party’s then preeminent political machine.

Obama strode towards victory on Tuesday by capturing the states of Pennsylvania, the key battleground which McCain needed to win to keep his long-shot hopes of victory alive.

In a sweet moment for Democrats, he also seized the midwestern battleground of Ohio and captured New Mexico and Iowa, two states won by Bush in 2004 to close out McCain’s possible route towards the White House.

Obama had led national and battleground polls and had capitalized on the fear of Americans pitched into the deep financial crisis, especially as he appeared to be presidential in a string of debates.

McCain had argued that Obama was too inexperienced to be US commander in chief and would pursue “socialist” redistribution policies that would leave the economy mired in recession.

McCain, 72, an Arizona senator, would have been the oldest man ever inaugurated for a first term in the White House. - AFP/vm

Source : Channel NewsAsia - 05 Nov 2008

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Americans out in force for historic vote

Americans out in force for historic vote

By Bhagyashree Garekar, US Correspondent

Mr Obama after casting his vote yesterday in Chicago, where he was greeted by dozens of reporters and photographers at a polling station in a school gym.

WASHINGTON: Tens of millions of Americans flocked to the polls yesterday, in some cases lining up before dawn to choose their next leader in the historic election.
Front-running Democrat Barack Obama was seeking to become the first black president of the United States, as his Republican rival John McCain pinned his hopes on an upset win.

Five national polls released yesterday all showed Mr Obama gaining 50 per cent or more of the popular vote - something not accomplished by a Democratic presidential candidate since Jimmy Carter in 1976.

Mr Obama’s margin over Mr McCain ranged from two points to nine points in the final polls.

Many analysts forecast the turnout to easily beat the high of 61 per cent in the 2004 presidential contest.

The results will start to emerge after 7am (Singapore time) today.

In Richmond, Virginia, the capital of a battleground state, voters stood in line through a steady drizzle, sipping coffee and reading newspapers, the New York Times reported.

Mr Obama carried the day in the two small villages in New Hampshire that traditionally open the voting.

In Dixville Notch, he won 15 votes to Mr McCain’s six, becoming the first Democrat to win there since 1968. In Hart’s Location, he won 17 votes to 10 for Mr McCain and two for Libertarian Party candidate Ron Paul.

Mr Obama, 47, led the nationwide popular vote in the final Gallup Daily tracking poll before election day with 53 per cent of the vote to 42 per cent for his Republican rival.

A CNN poll published just hours before voting started gave Mr Obama a narrower lead of 51 to 44 per cent.

But presidential elections are really 50 state-by-state elections, plus the District of Columbia here.

Thus the day was all about trying to win enough of those states to get the 270 electoral college votes needed to win the presidency.

To that end, the candidates and their running mates spent the last days and hours of the campaign making their final pushes in closely contested states from Florida and Virginia to Ohio and Colorado.

Opinion polls showed Mr Obama ahead or even with Mr McCain in at least eight states won by Mr George W. Bush in 2004, including the big prizes of Ohio and Florida. Mr Obama also led in all of the states won by Democrat John Kerry in 2004.

Mr Obama cast his ballot with his daughters, who are too young to vote, by his side at an elementary school in Chicago. His running mate, Senator Joseph Biden, followed suit soon afterwards in Wilmington, Delaware.

Mr McCain later voted in Phoenix, in his home state of Arizona, with his wife Cindy. His running mate Sarah Palin, bidding to become the first woman vice-president, flew home to Wasilla in Alaska, where she is governor, to cast her vote

Meanwhile, US stocks surged, with gains of more than 250 points on the Dow Jones in early trading, after the presidential election polls opened.

The rally came despite reports of the worst contraction in manufacturing since 1982 and forecasts that the sagging economy will reduce profits.

Perceived as better able to handle the economy facing its worst crisis since the Great Depression, Mr Obama has offered the mantra of ‘change’ at a time when 90 per cent of Americans think their country is on the wrong track.

Mr McCain has struggled to separate himself from President Bush in a difficult political environment for the Republicans, who are trying to hold on to the presidency for a third consecutive term.

The 72-year-old Mr McCain has attacked what he has described as Mr Obama’s ’socialist’ economic policies and argues that his rival is a ‘risky choice’ in the face of daunting global challenges.

The early vote - an unprecedented one-third of the electorate voted ahead of Election Day this time - suggested an advantage for Mr Obama. Official figures showed that more Democrats turned up than Republicans.

Democrats are also expected to expand majorities in both chambers of Congress. They need to gain nine Senate seats to reach a 60-seat majority that would give them the muscle to defeat Republican procedural hurdles.

That would increase pressure on Democrats to deliver on campaign promises to end the war in Iraq, eliminate Mr Bush’s tax cuts for the wealthy and overhaul a health-care system that leaves 47 million Americans uninsured.

In a traditionally Republican bastion surrounding Cincinnati, Ohio, Mr Ian Edwards, 60, the chief executive of a small technology company, told Reuters why he voted for Mr Obama.

‘Very simple,’ he said. ‘Bad war. Bad economy. Bad reputation overseas.’

For his part, the Naked Cowboy - a fixture in New York’s Times Square who plays a guitar in his underwear - told CNN that he had voted for Mr McCain because said he favoured ‘entrepreneurs’ like himself.

Source : Straits Times - 05 Nov 2008

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Making the rich poorer won’t help Americans

Making the rich poorer won’t help Americans

By ROBERT SAMUELSON

FOR years, Americans have debated rising economic inequality. On one side, liberals denounce it as unjust. Redistribute wealth to the poor and middle class, they say. On the other, conservatives minimise its importance. What matters most is overall economic growth, they retort.

Well, the conjunction of the US presidential campaign and the financial crisis is giving the debate a curious twist. Liberals have triumphed politically; soaking the rich has become more acceptable. But conservatives may have won the intellectual argument; making the rich poorer doesn’t make everyone else richer.

If Barack Obama and John McCain agreed on anything, it was this: Greed is bad. They competed in denunciations of reckless investment bankers and avaricious CEOs. Mr Obama proposed raising taxes on higher incomes (couples above US$250,000); though Mr McCain didn’t, he suggested that much recent wealth accumulation was ill-gotten. Unintentionally, perhaps, he buttressed the moral case for more redistribution. Let’s tap the gold mine of the rich.

Unfortunately, the mine has less gold. All the financial turmoil has left the wealthy - however defined - much less wealthy. Stock ownership is highly concentrated. In 2001, the richest one per cent owned 34 per cent of stocks and mutual funds, estimates economist Edward N Wolff of New York University. Let’s see. Since the market’s high in October 2007, stocks are down (through Oct 31) 38 per cent, or US$7.5 trillion, reports Wilshire Associates. That will mean lower capital gains taxes, because capital gains - profits on the sale of stocks and other assets - will plunge. In recent years, capital gains taxes have been running at US$100 billion or more. That amount could drop sharply, even if the top rate on capital gains were raised from 15 per cent to its pre-2003 level of 20 per cent.

Thousands of well-paid investment bankers, traders, portfolio managers and securities analysts are losing their jobs. Though Wall Street bonuses will continue, their total is likely to decrease. Gains in executive compensation may be similarly squeezed. Profits are down; the political climate is hostile. In 2005, the richest one per cent of Americans had 18 per cent of total income and paid 28 per cent of all federal taxes, says the Congressional Budget Office. Their income won’t grow much. Even if higher tax rates increase government revenues, the effect will be less than before.

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap - though still vast - between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn’t better off. By and large, the poor aren’t poor because the rich are rich. They’re usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.

The presumption implicit in the criticism of growing economic inequality is that society’s income is a given and, if the rich have less, others will have more. Up to a point, that’s true. The government already redistributes much income, often for the good. During the boom years, companies might have been less lavish with top executives and slightly more generous to other workers or shareholders. Some new fortunes stem from self-dealing and financial razzle-dazzle, not the creation of real economic value. It’s just desserts that some of this wealth has evaporated.

But the redistributionist argument is at best a half-truth. The larger truth is that much of the income of the rich and well-to-do comes from what they do. If they stop doing it, then the income and wealth vanish. No one gets it. It can’t be redistributed because it doesn’t exist. Everyone’s poorer.

This isn’t just theory. Last week, Governor David Paterson of New York pleaded with Congress to provide emergency aid to states. Heavily dependent on Wall Street for taxes, he testified, New York faces a US$12.5 billion budget deficit next year and expects joblessness to rise by 160,000. Wall Street bonuses will drop by 43 per cent and capital gains income by 35 per cent, he estimated. People in New York would be better off if the securities industry were still booming, even if there were more economic inequality.

Americans legitimately resent Wall Street types who profited from dubious investment strategies that aggravated today’s crisis. And government properly redistributes income to reduce hardship and poverty. But that’s different from attempting to deduce and engineer some optimal distribution of income. Government can’t do that and shouldn’t try.

Scapegoating and punishing all of the rich won’t do Americans any good if the resulting taxes dull investment and risk-taking, discouraging economic growth that benefits everyone. — The Washington Post Writers Group

Source : Business Times - 05 Nov 2008

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Obama holds on to edge but McCain soldiers on - WASHINGTON

Obama holds on to edge but McCain soldiers on - WASHINGTON

In the earliest results, two small towns go for Obama

(WASHINGTON) Democrat Barack Obama appeared close to victory in his historic bid to become the first black US president yesterday, while an undaunted Republican John McCain battled to win an upset as voting began in the epic struggle for the White House.

Making history: In pre-election balloting, more Democrats than Republicans voted in North Carolina, Colorado, Florida and Iowa, all of which voted for Mr Bush in 2004
At the climax of the historic campaign, Mr Obama continued to lead in the polls and both campaigns launched get-out-the-vote efforts expected to result in a record turnout.

Mr Obama joined the nation’s earliest voters, casting his ballot at Beulah Shoesmith Elementary School in Chicago shortly after 7.30 am CST (13.30 GMT).

Other voters cheered when he held up a validation slip, smiled and said: ‘I voted.’

‘The journey ends, but voting with my daughters, that was a big deal,’ Mr Obama told reporters later.

Mr McCain, meanwhile, acknowledged that he is the underdog but said his longshot bid for the presidency was close to victory.

‘I think these battleground states have now closed up, almost all of them,’ Mr McCain told CBS’ television’s The Early Show. Look, I know I’m still the underdog, I understand that,’ Mr McCain said. ‘You can’t imagine, you can’t imagine the excitement of an individual to be this close to the most important position in the world, and I’ll enjoy it, enjoy it. I’ll never forget it as long as I live.’

Mr Obama won the first Election Day contest, in two small New Hampshire towns where voters traditionally cast ballots shortly after midnight.

The first term Illinois senator defeated Mr McCain by a 15-6 vote in Dixville Notch, while voters in the town of Hart’s Location cast 17 votes for Mr Obama, 10 for Mr McCain and two for write-in Ron Paul.

President George W Bush carried both towns in the last two elections.

Voters in Virginia, New York and other East Coast states lined up outside polling places hours before they opened at 6 am (1100 GMT). About 29 million people have already cast ballots over the past few weeks in 30 states that allow early voting.

Mr Obama seemed to hold the edge in pre-election balloting, as officials reported that more Democrats than Republicans had voted in North Carolina, Colorado, Florida and Iowa. All four states voted for Mr Bush in 2004.

But Mr Obama had warned his supporters on Monday to take nothing for granted, as the race depended on a relative handful of states that could go for either candidate.

‘Even if it rains tomorrow, you can’t let that stop you. You’ve got to wait in line. You’ve got to vote,’ he said.

Both the 47-year-old Mr Obama, and Mr McCain, a 72-year-old veteran senator from Arizona, pledged to bring sweeping change to Washington and close the door on the two-term presidency of Mr Bush - whose approval ratings are near historic lows.

But the two candidates were divided by age, race and core political convictions. They were deeply at odds over how to fix the US’s crumbling economy and end the 5 1/2-year war in Iraq. Mr Obama has argued that Mr McCain offers little more than an extension of Mr Bush’s policies while the Republican counters that Mr Obama is too inexperienced to lead.

Democrats also sought to gain seats in both chambers of Congress, while Republicans battled to limit their losses. Many races were rated as tossups in the campaign’s final hours. — AP

Source : Business Times - 05 Nov 2008

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Govts act to breathe life into economies

Govts act to breathe life into economies

Reflation takes centre stage; Seoul joins bandwagon with S$16.4b package

By CONRAD TAN

(SINGAPORE) Central banks and governments worldwide are slashing interest rates and pumping billions of dollars into their economies to boost faltering growth. Reflation is the name of the game.

The desperate hope is that a combination of lower borrowing costs, direct government spending and tax breaks will spur business investment, create jobs and encourage people to spend, at a time when the world’s biggest economies appear to be sliding into recession.

Yesterday, South Korea said it would spend 14 trillion won (S$16.4 billion) on infrastructure development and tax benefits next year to stimulate economic activity.

Just last week, the country’s central bank cut its benchmark interest rate to 4.25 per cent from 5 per cent - the biggest-ever reduction - in a bid to spur growth.

Australia is expected to cut rates by half a percentage point to 5.5 per cent today, after official data yesterday showed that retail sales and house prices there are falling faster than expected. Central banks in the UK and euro zone - two of the biggest economies in the world - are also expected to deliver unprecedented interest-rate cuts on Thursday.

The Bank of England is facing strident calls to slash its benchmark rate by a full percentage point to 3.5 per cent, although economists are expecting a more cautious reduction of half a percentage point. Mervyn King, its governor, warned on Oct 22 that the UK - the second-largest economy in Europe after Germany - is ‘likely’ to be sliding into recession.

The European Central Bank, which sets interest rates for the 15 euro-zone economies - is expected to cut rates by half a percentage point to 3.25 per cent.

Fear of deflation - a destructive spiral of falling consumer prices and shrinking income for businesses, leading to fewer jobs and a moribund economy - has rallied support for steep interest-rate cuts in major economies such as the US and UK.

That marks a complete reversal from just a few months ago, when soaring inflation was a big worry - a sign of how quickly and drastically the global economic outlook has deteriorated.

Last Wednesday, the US Federal Reserve lowered its main interest-rate target to just one per cent - the lowest since 2004 - and signalled that it could cut rates even further. The same day, China’s central bank also cut its key lending rate.

But Kevin Scully, who heads independent research firm NetResearch Asia here, said governments in the United States and elsewhere would have to resort to aggressive fiscal measures to revive floundering economies.

With credit markets still malfunctioning and banks tightening their lending activity, ‘monetary policy is useless - even if they cut rates to zero, nothing will happen’, he said.

In his testimony to US lawmakers on Oct 20, Fed chairman Ben Bernanke said that a fiscal package would be ‘appropriate’, with the US economy ‘likely to be weak for several quarters, and with some risk of a protracted slowdown’.

At an emergency meeting last Saturday, the Reserve Bank of India, the country’s central bank, cut interest rates and reduced the amount of money that commercial banks have to hold in reserve at the central bank for every dollar they lend, to free up more money for loans to businesses and households.

Last Thursday, Hong Kong and Taiwan also cut rates, following the move by the Fed, and Japan announced a massive five trillion yen (S$75 billion) stimulus plan of public spending and tax breaks.

The next day, the Bank of Japan eased its already low benchmark rate to 0.3 per cent, from 0.5 per cent.

In normal times, cutting interest rates helps to reduce borrowing costs, encouraging businesses to invest in expansion and people to spend, creating more jobs and fuelling economic growth.

But with some of the largest banks struggling to stay afloat, healthy ones reluctant to lend, and businesses and individuals cutting back on their borrowing, economists say that the latest round of interest-rate cuts is likely to be far less effective than usual in revitalising economic growth.

Instead, governments are hoping that boosting public spending on infrastructure projects such as roads and utilities will create jobs in sectors such as construction, while tax breaks and cash handouts for businesses and individuals will encourage them to spend more on goods and services, keeping companies in business.

Source : Business Times - 04 Nov 2008

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If McCain loses: End of party’s historic rise

If McCain loses: End of party’s historic rise

How Americans vote today will also determine the fate of their parties. JONATHAN EYAL reports

SHOULD Senator John McCain lose his bid to become the United States’ 44th president, rumblings of unhappiness among Republicans are to be expected.
There will be mutterings about the style of his campaign. There will also be accusations that the Democrats ‘cheated’ by artificially boosting voters’ registration. But, on the whole, the Republicans will conclude that Mr McCain did as best as could be expected.

Republicans may not be able to return from the wilderness unless they settle their internal disputes. Religious and social conservatives are reportedly already preparing for a fight over the leadership.

The economic crash had overshadowed everything in the campaign’s closing stages. Rightly or wrongly, voters blamed the party for the mess.

Yet the Republicans will be wrong to believe that they were just the victims of a regular political swing.

For Mr McCain’s defeat would signal the end of their historic ascendancy which began in the mid-1990s, when the Republicans gained control over Congress after half a century in opposition.

For the first time since 1992, Republicans will be out of power in the House of Representatives, Senate and the White House. It is a rout, pure and simple.

More significantly, battle lines in the US are being redrawn. The old Republican slogans - babies, guns and Bibles - have played only a minor role in the last elections. Patriotism and the ‘war on terror’ are no longer their monopoly either.

Instead, sound economic management is now required and on this, the ‘Grand Old Party’ has no particular answers.

Old policies which emphasised deregulation and free markets and considered the government as the problem rather than the solution are as bust as US banks An expansion of the government’s role in financial markets is inevitable and Congress, supported by a like-minded President Obama, will move swiftly in that direction.

Regulation will spill over into other sectors, with emission curbs to address climate change and health-care reform. Mortgages, car and student loans will come under control. Credit card companies’ marketing, billing and interest rates will be reviewed.

The Republicans will have to resist the temptation to fight all these measures. The Americans’ collective sense of anger with a financial system which failed remains strong, and voters will punish any party which stands in their way.

Big government is fashionable again, big time. And the Democrats are better-placed to deliver it.

What the Republicans can do is to ask at every stage whether the regulation pendulum swings too far, and whether the inevitable budgetary cuts make sense.

Congress will have to slash US defence spending, currently at over US$500 billion (S$735 billion). Other projects will also suffer. And taxes will rise.

A comeback is not impossible. But only if the Republicans are careful to restrict their criticism to the substance of economic measures, rather than ideology. Americans want action, not theoretical debates.

The Republicans will enjoy one advantage. If the recession continues - as now seems likely - a few years from now the voters will blame a Democratic president and Congress for their pain.

But even then, the Republicans may not be able to return from the wilderness unless they settle their internal disputes. Religious and social conservatives are reportedly already preparing for a fight over the party leadership.

The GOP will also have to promote fresh national leaders. And the indications are that vice-presidential nominee Sarah Palin sees herself as one of them. With four years to go before the next presidential showdown, she has plenty of time to brush up on both domestic and foreign policy issues, and get some visa stamps in her pristine new passport.

True, she will have to use her own - rather than her party’s - money if she wishes to buy new outfits. Would she retain her trademark spectacles? You betcha!

Source : Straits Times - 04 Nov 2008

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If Obama loses: Upset could spark violence

If Obama loses: Upset could spark violence

How Americans vote today will also determine the fate of their parties. JONATHAN EYAL reports

IF SENATOR Barack Obama loses his bid for the presidency, this will be one of the most significant upsets in modern US history.
He led the polls solidly in the concluding month of the electoral campaign.

Democrats’ party machine initially supported Hillary Clinton’s candidature, and it is bound to claim that it was vindicated in its suspicions about Obama?s electability.

Furthermore, a Republican - and one of the most controversial in recent memory - held the White House for the last eight years.

Plagued by errors of its own making and quite a few crises beyond its control, the Bush administration now leaves behind the biggest economic crisis since the Depression of the 1930s.

If a young, photogenic candidate like Mr Obama failed to win under such uniquely favourable political circumstances, the Democrats would surely have to wonder how they can ever recapture the White House.

After the results are known, the Democrats will face two immediate crises. The first is the reaction of the electorate.

An Obama loss could come by the smallest of margins; indeed, he may get a plurality of votes, but fail to win a majority in the Electoral College.

The inescapable conclusion would be that racial prejudice was the decisive element in his defeat; the Southern and Midwestern states were simply not ready to accept a black commander-in-chief of the United States.

Many would also argue that rival John McCain’s personal attacks against Mr Obama fanned racial divisions. And there will be plenty of allegations about ballot rigging.

The frustration could easily turn into street violence.

The Democrats’ first major test would be to disassociate themselves from such potential clashes and accept their loss with dignity.

The slightest indication that they sympathise with or justify street violence could doom their presidential chances for years.

An Obama failure will also reopen some old internal wounds. The Democratic party machine initially supported Mrs Hillary Clinton’s candidature, and it is bound to claim that it was vindicated in its suspicions about his electability.

The Democrats will have to take a serious look at their chaotic method of conducting primaries in order to make sure that, next time around, party bosses have a bigger say in picking a ’safe’ candidate.

They will also have to revisit their ‘rainbow coalition’ electoral strategy, which sought to bond together disparate ethnic voters.

Hispanics and blacks will have to be re-embraced in a different way from the past.

Mrs Clinton will probably become their unofficial candidate for the 2012 elections, but the jockeying for power will consume the party for a long time.

The pain will be mitigated by the fact that the Democrats are guaranteed to increase their hold over Congress.

Yet controlling the purse strings during an economic recession remains a double-edged sword: it allows Democrats to put their stamp on spending programmes, but also leaves them exposed to accusations of mismanagement.

Some of the Democratic pet projects - such as health-care reform - will have to be slimmed down due to lack of resources.

Furthermore, unlike President George W. Bush, who either ignored or confronted Congress, Mr McCain will be more adept at forging ad hoc coalitions in the legislature.

The Democrats will, therefore, have to tread a fine line between working with a Republican White House which they detest, while making sure that they do not get blamed for the economic downturn.

This may be possible. But only if the Democrats become far more disciplined and united, two traits which were never their strongest assets.

And the sheer scale of their disappointment will make unity much harder to achieve.

Source : Straits Times - 04 Nov 2008

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Mindy Yong

(+65)91002985

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