Daily Digest - Dec 22

I'm trying out a new look to make the summary a little bit easier to read.

• Bank of Spain chief warns of total financial meltdown
• The IMF chief warns that 2009 may be even darker
• Money market funds unable to cope with 0% interest rates
• Shutdown in Silicon Valley
• Nationalization of the mortgage sector
• Protectionist dominoes tumble
• Questioning the Fed
• Japan exports plunge
• Cutting labor costs (without resorting to layoffs).

Economy

World faces "total" financial meltdown: Bank of Spain chief 

The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faced a "total" financial meltdown unseen since the Great Depression.
"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily. 

"The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending. 

IMF chief warns 2009 may be 'even darker' 

The head of the International Monetary Fund (IMF) warned on Sunday that the economic situation could get even worse in 2009 if governments fail to take firm enough action.
"Our forecasts are already very dark but they will be even darker if not enough fiscal stimulus is implemented," Dominique Strauss-Kahn told BBC radio. 

"We see 2009 as really being a bad year, with recession for most advanced economies and growth decreasing for emerging economies." 

Money market funds reel as yields near zero

Mr Glocke said: “Interest-rate sensitive investors will start to look for alternatives . . . the Fed is trying to force investors out of a low-risk environment.”

Christmas shut-down in Silicon Valley 

Workers at some of Silicon Valley's biggest companies will find themselves spending an uncommonly long time with their families this Christmas as the technology industry responds to the downturn with office and factory closures and enforced holidays. 

Usually limited to traditional manufacturing industries such as the ailing carmakers, the year-end shut-down is this year sweeping through the office suites and research and development labs of information-age companies.

Hewlett-Packard, Cisco Systems, Advanced Micro Devices, Texas Instruments, Dell, Adobe and CSC are among the tech industry heavyweights to be taking a break, with some closed from December 22 until January 5.

HP said: "The only workers left to keep the lights on will be those involved in "critical customer support". 

"Effective Nationalization of the Mortgage Finance Sector" 

Given those premises, the policy proposal is simple: force mortgage rates down to 4.5% (by reducing the cost of Fannie/Freddie debt relative to Treasuries), thereby propping up housing prices at a level that Hubbard and Mayer think is sustainable. ... 

Now here's the surprising part. In order for these mortgages to rejuvenate the housing market, they have to be available to everyone. This isn't a program for reducing mortgage foreclosures; this is a program for boosting housing sales and refinancings across the board.

Protectionist dominoes are beginning to tumble across the world 

We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling, and barbed wire.
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2pc of world GDP to "prevent global depression".
"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," he said. 

Following the Fed cannot save the world 

I am skeptical about the benefits of the Fed's new policy of quantitative easing. We do not have a liquidity crisis, but a solvency crisis, which expresses itself in large spreads and dysfunctional money markets. I cannot see how adding more and more liquidity to the system solves this problem. 

Instead of propping up each bank, and swamping the market with cash, we need to restructure and shrink the banking system, as a first step to a sustainable solution to this crisis. Quantitative easing without deep structural financial reform could cause lot of trouble in the long run.

I think, however, there is a case for temporary interest rate cuts in Europe, but only on condition that this policy would be forcefully reversed once credit markets start to recover, and once the economy emerges from the slump.

But we should not delude ourselves into thinking that monetary policy can save the world. It can play a useful role, especially since we do not have the stomach for an optimal fiscal policy response. But it will not prevent the worst slump of our generation. 

Japan Exports Plunge Record 27% as Recession Deepens (Update3)

Dec. 22 (Bloomberg) -- Japan's exports plunged the most on record in November as global demand for cars and electronics collapsed, signaling more factory shutdowns and job cuts are likely as the recession deepens.

Exports fell 26.7 percent from a year earlier, the Finance Ministry said today in Tokyo. That was more than the 22.3 percent decline estimated by economists and the sharpest since comparable data were made available in 1980. 

More Companies Are Cutting Labor Costs Without Layoffs 

Even as layoffs are reaching historic levels, some employers have found an alternative to slashing their work force. They're nipping and tucking it instead. 

A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor.